<PAGE> 1
As filed with the Securities and Exchange Commission on August 1, 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. 30 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 29 /x/
Armada Funds (formerly known as "NCC Funds")
(Exact Name of Registrant as Specified in Charter)
4400 Computer Drive
Westborough, Massachusetts, 01581
(Address of Principal Executive Officers)
Registrant's Telephone Number:
1-800-622-FUND
W. Bruce McConnel, III, Esq.
DRINKER BIDDLE & REATH
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Thomas F. Harvey, Esq.
National City Bank
National City Center
P.O. Box 5756
Cleveland, Ohio 44101-0756
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(i)
[ ] on date pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (b)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
<PAGE> 2
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
-2-
<PAGE> 3
The Registrant has previously filed a declaration of indefinite
registration of its shares of beneficial interest pursuant to Rule 24f-2 under
the Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice
with respect to the Money Market, Government, Treasury, Tax Exempt, Equity,
Fixed Income, Ohio Tax Exempt, Equity Income, Mid Cap Regional, Enhanced Income
and Total Return Advantage Funds for the fiscal year ended May 31, 1996 on
July 23, 1996.
-3-
<PAGE> 4
THE PURPOSE OF THIS POST-EFFECTIVE AMENDMENT IS TO EFFECT A CHANGE TO THE
INVESTMENT OBJECTIVE OF THE ENHANCED INCOME FUND AND TO ADD FUTURES CONTRACTS
AND RELATED OPTIONS AS A PERMISSIBLE INVESTMENT FOR THE EQUITY AND EQUITY INCOME
FUNDS.
THE CURRENTLY EFFECTIVE PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION
FOR REGISTRANT'S MONEY MARKET, GOVERNMENT, TREASURY, TAX EXEMPT, OHIO TAX
EXEMPT AND NATIONAL TAX EXEMPT FUNDS ARE CONTAINED IN POST-EFFECTIVE AMENDMENT
NO. 24 AS FILED ON SEPTEMBER 21, 1995. THE CURRENTLY EFFECTIVE PROSPECTUSES AND
STATEMENTS OF ADDITIONAL INFORMATION OF THE PENNSYLVANIA TAX EXEMPT AND
PENNSYLVANIA MUNICIPAL FUNDS ARE CONTAINED IN POST-EFFECTIVE AMENDMENT NO. 29 AS
FILED ON JULY 10, 1996.
-4-
<PAGE> 5
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>
-5-
<PAGE> 6
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- Information Caption
-----------------------
<S> <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
of Securities Being Offered........................................ and Redemption
Information
20. Tax Status......................................................... Additional Information
Concerning Taxes
21. Underwriters....................................................... Not Applicable
22. Calculation of Performance Data.................................... Yield and Performance
Information
23. Financial Statements............................................... Auditors
</TABLE>
-6-
<PAGE> 7
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.
-7-
<PAGE> 8
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 three investment
funds (the "Funds") of Armada Funds (the "Trust"), each having its own
investment objective and policies:
EQUITY FUND'S investment objective is to seek a high level of total
return arising out of capital appreciation and income. The Fund invests in
common stocks and securities convertible into common stocks.
EQUITY INCOME FUND'S investment objective is to seek a competitive
total rate of return through investments in equity and equity equivalent
securities which carry premium current yields.
MID CAP REGIONAL FUND'S investment objective is to seek capital
appreciation by investing in a diversified fund of publicly traded equity
securities of issuers which are domiciled primarily in Ohio, Indiana , Kentucky
and Pennsylvania and contiguous states and other states in which National City
Corporation affiliates are located.
-1-
<PAGE> 9
The net asset value per share of each Fund will fluctuate as the value
of its investment portfolio changes in response to changing market prices and
other factors.
National City Bank ("National City"), National City Bank, Columbus
("National City Columbus") and National City Bank, Kentucky ("National City
Kentucky") serve as investment advisers to the Equity Fund and the Equity Income
Fund; National City individually serves as investment adviser to the Mid Cap
Regional Fund (each, an "adviser" and collectively, the "advisers").
440 Financial Distributors, Inc., a wholly-owned subsidiary of First
Data Corp. (the "Distributor"), serves as the Trust's sponsor and distributor.
Each Fund pays a fee to the Distributor for distributing its shares. See
"Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL
CITY BANK, COLUMBUS, NATIONAL CITY BANK, KENTUCKY, THEIR PARENT COMPANY OR ANY
OF THEIR AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR
STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-2-
<PAGE> 10
September 30, 1996
-3-
<PAGE> 11
The classes or series which represent interests in the Funds
are described in this Prospectus. Class H, Class M and Class N shares constitute
the Institutional class or series of shares (herein referred to as the
"Institutional shares") of the Equity Fund, Equity Income Fund and Mid Cap
Regional Fund, respectively. Class H - Special Series 1, Class M - Special
Series 1 and Class N - Special Series 1 shares constitute the Retail class or
series of shares (herein referred to as the "Retail shares") of the Equity Fund,
Equity Income Fund and Mid Cap Regional Fund, respectively.
Institutional shares are sold primarily to Banks and customers
of National Asset Management Corporation ("NAM") . Retail shares are sold to
the public primarily through financial institutions such as banks, brokers and
dealers.
EXPENSE TABLE
<TABLE>
<CAPTION>
EQUITY EQUITY MID CAP MID CAP
EQUITY EQUITY INCOME INCOME REGIONAL REGIONAL
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES SHARES(1) SHARES SHARES(1) SHARES
--------- ------ --------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases............... 3.75% None 3.75% None 3.75% None
Sales Charge Imposed
on Reinvested Dividends............ None None None None None None
Deferred Sales Charge................ None None None None None None
Redemption Fee....................... None None None None None None
Exchange Fee......................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees...................... .75% .75% .75% .75% .75% .75%
12b-1 Fees(2) (after fee waivers).... .05%(2) .05%(2) .05%(2) .05%(2) .05%(2) .05%(2)
Other Expenses....................... .45%(3) .20%(3) .50%(3) .25%(3) .50%(3) .25%(3)
----- ----- ----- ----- ----- -----
TOTAL FUND OPERATING
EXPENSES(3) (after fee waivers).. 1.25%(3) 1.00%(3) 1.30%(3) 1.05%(3) 1.30%(3) 1.05%(3)
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------------------
(1) The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in each of the Funds. Pursuant to
the Services Plan, the Trust enters into shareholder servicing
agreements with certain financial institutions under which they agree
to provide shareholder administrative services to their customers who
beneficially own Retail shares in consideration for the payment of up
to .25% (on an annualized basis) of the net asset value of such shares.
For further information concerning the Services Plan, see "Shareholder
Services Plan."
(2) The Armada Equity, Equity Income and Mid Cap Regional Funds have in
effect 12b-1 Plans pursuant to which each Fund may bear fees in an
amount of up to .10% of average daily net assets. As a result of the
payment of sales charges and 12b-1 and certain other related fees,
long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which
generally limit the aggregate sales charges and payments under the
Trust's Service and Distribution Plan ("Distribution Plan") and
Services Plan to a certain percentage of total new gross share sales,
plus interest. The Trust would stop accruing 12b-1 and related fees if,
to the extent, and for as long as, such limit would otherwise be
exceeded.
(3) The expense information in the table relating to each Fund has been
restated to reflect current fees. If the maximum distribution fee
permitted under the 12b-1 Plan were imposed, Total Fund Operating
Expenses would be 1.05% and 1.30%, 1.10% and 1.35% and 1.10% and 1.35%
for the Institutional and Retail shares of the Equity Fund, Equity
Income Fund and Mid Cap Regional Fund, respectively.
-4-
<PAGE> 12
- ----------------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Retail Shares............................... $50 $76 $104 $183
Equity Institutional Shares........................ $10 $32 $ 43 $122
Equity Income Retail Shares........................ $50 $77 $106 $188
Equity Income Institutional Shares................. $11 $33 $ 58 $128
Mid Cap Regional Retail Shares..................... $50 $77 $106 $188
Mid Cap Regional Institutional Shares.............. $11 $33 $ 58 $128
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Funds will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Funds. Any fees that are charged by affiliates of the
adviser or other institutions directly to their customer accounts for services
related to investments in Retail shares of the Funds are in addition to and not
reflected in the fees and expenses described above.
-5-
<PAGE> 13
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
EQUITY FUND
The following table has been audited by Ernst & Young LLP,
independent auditors, whose report is incorporated by reference in the Statement
of Additional Information. It should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Statement of Additional Information. Additional information about the
performance of the Equity Fund is contained in the Trust's Annual Report to
Shareholders, which may be obtained without charge by contacting the Trust at
its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1995 1994 1994
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.77 $14.79 $ 13.66 $13.68 $ 13.78 $13.80
--------- ------ -------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ .14 .10 .21 .18 .18 .15
Net Gains on Securities.............. 3.46 3.47 1.21 1.21 .01 .00
--------- ------ -------- ------ ------- ------
Total Income from Investment Operations 3.60 3.57 1.42 1.39 .19 .15
--------- ------ -------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income. (.14) (.10) (.20) (.17) (.18) (.15)
Dividends in Excess of Net Investment
Income ............................ (.02) (.02) (.00) (.00) (.01) (.00)
Dividends from Net Realized Capital
Gains ............................ (.19) (.19) (.00) (.00) (.11) (.11)
Dividends in excess of Net Realized
Capital Gains...................... (.00) (.00) (.11) (.11) (.01) (.01)
----- ------ --------- ------- -------- ------
Total Distributions.................. (.35) (.31) (.31) (.28) (.31) (.27)
--------- ------ --------- ------- -------- ------
Net Asset Value, End of Period......... $ 18.02 $18.05 $ 14.77 $14.79 $ 13.66 $13.68
========= ====== ======== ====== ======= ======
Total Return........................... 24.61% 24.34%(3) 10.62%(3) 10.35%(3) 1.41% 1.12%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)..... $166,671 $6,013 $119,634 $5,974 $90,446 $7,521
Ratio of Expenses to Average
Net Assets
(after fee waivers)................ 1.01%(4) 1.26%(5) 1.01%(4) 1.27%(5) 1.07%(4) 1.32%(5)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) ............... 0.85%(4) .60%(5) 1.53%(4) 1.23%(5) 1.33%(4) 1.08%(5)
Portfolio Turnover Rate.............. 74% 74% 17% 17% 15% 15%
Average Commission Rate............. $ 0.06 $0.06 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1993 1993 1992 1992 1991
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.13 $13.13 $ 12.35 $12.35 $ 10.77
------- ------ ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ .27 .23 .30 .25 .31
Net Gains on Securities.............. .67 .68 .78 .78 1.58
------- ------ ------- ------ -------
Total Income from Investment Operations .94 .91 1.08 1.03 1.89
------- ------ ------- ------ -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income. (.27) (.23) (.30) (.25) (.31)
Dividends in Excess of Net Investment
Income ............................ (.02) (.01) (.00) (.00) (.00)
Dividends from Net Realized Capital
Gains ............................ (.00) (.00) (.00) (.00) (.00)
Dividends in excess of Net Realized
Capital Gains...................... (.00) (.00) (.00) (.00) (.00)
------- ------ ------- ------ -------
Total Distributions.................. (.29) (.24) (.30) (.25) (.31)
------- ------ ------- ------ -------
Net Asset Value, End of Period......... $ 13.78 $13.80 $ 13.13 $13.13 $ 12.35
======= ====== ======= ====== =======
Total Return........................... 7.20% 7.00%(3) 8.90% 8.48%(3) 18.10%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)..... $85,256 $7,707 $48,673 $2,767 $42,112
Ratio of Expenses to Average
Net Assets
(after fee waivers)................ .34%(4) .59%(5) .26%(4) .51%(5) .31%(4)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) ............... 2.13%(4) 1.88%(5) 2.36%(4) 2.15%(5) 2.90%(4)
Portfolio Turnover Rate.............. 15% 15% 9% 9% 11%
Average Commission Rate............. N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED DECEMBER 20, 1989
MAY 31, (COMMENCEMENT OF
1991 OPERATIONS) TO
RETAIL(1) MAY 31, 1990
--------- ------------
<S> <C> <C>
Net Asset Value, Beginning of Period $12.04 $ 10.00
------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ .04 .13
Net Gains on Securities.............. .27 .71
------ -------
Total Income from Investment Operations .31 .84
------ -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income. (.00) (.07)
Dividends in Excess of Net Investment
Income ............................ (.00) (.00)
Dividends from Net Realized Capital
Gains ............................ (.00) (.00)
Dividends in excess of Net Realized
Capital Gains...................... (.00) (.00)
------ -------
Total Distributions.................. (.00) (.07)
------ -------
Net Asset Value, End of Period......... $12.35 $ 10.77
====== =======
Total Return........................... 21.82%(1),(2) 20.09%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)..... $1,389 $34,034
Ratio of Expenses to Average
Net Assets
(after fee waivers)................ .53%(2),(5) .36%(2),(4)
Ratio of Net Investment Income
to Average Net Assets
(after fee waivers) ............... 2.94%(2),(5) 3.30%(2),(4)
Portfolio Turnover Rate.............. 11% 5%
Average Commission Rate............. N/A N/A
</TABLE>
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales load.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Institutional class for the years ended
May 31, 1996 and 1995 would have been 1.03% and .83% and 1.02% and 1.51%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Advisers for the Institutional
class for the years ended May 31, 1993, 1992 and 1991 would have been 1.01%
and 1.46%, 1.01% and 1.61%, and 1.06% and 2.15%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the years ended May 31,
1996 and 1995 would have been 1.28% and .58% and 1.28% and 1.22%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Advisers for the Retail class
for the years ended May 31, 1993 and 1992 and for the period ended May 31,
1991 would have been 1.26% and 1.21%, 1.27% and 1.40%, and 1.28% and 2.19%,
respectively.
-6-
<PAGE> 14
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
EQUITY INCOME FUND
The following table has been audited by Ernst & Young LLP,
independent auditors, whose report is incorporated by reference in the Statement
of Additional Information. It should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Statement of Additional Information. Additional information about the
performance of the Equity Income Fund is contained in the Trust's Annual Report
to Shareholders, which may be obtained without charge by contacting the Trust at
its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, May 31, For the Period
1996 1996 Ended May 31, 1995
Institutional Retail Institutional(1) Retail(1)
------------- ---------- ---------------- ---------
<S> <C> <C> <C> <C>
Net asset value beginning of period........................ $11.01 $11.01 $10.00 $10.26
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... .34 .33 .34 .26
Net gains on securities
(realized and unrealized).............................. 1.79 1.77 .94 .75
---- ---- --- ---
Total from investment operations......................... 2.13 2.10 1.28 1.01
---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends from net investment income.................. (.34) (.32) (.27) (.26)
----- -----
Dividends from net realized capital gains............. (.14) (.14) (.00) (.00)
----- ----- ----- -----
Total distributions...................................... (.48) (.46) (.27) (.26)
----- ----- ----- -----
Net asset value, end of period............................. $12.66 $12.65 $11.01 $11.01
====== ====== ====== ======
TOTAL RETURN............................................... 19.72% 19.37% 14.34%(2) 13.18%(2),(3)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)..................... $61,978 $263 $36,194 $125
Ratio of expenses to average net assets
(after fee waivers)................................... 1.06%(4) 1.31%(5) .99%(2),(4) 1.41%(2),(5)
Ratio of net investment income to
average net assets (after fee waivers)................ 3.02%(4) 2.75%(5) 3.87%(2),(4) 3.45%(2),(5)
Portfolio Turnover Rate.................................. 53% 53% 12% 12%
Average Commission Rate................................ $0.07 $0.07 N/A N/A
</TABLE>
(1) Institutional and Retail classes commenced operations on July 1, 1994 and
August 22, 1994, respectively.
(2) Annualized.
(3) Total Return excludes sales load.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Institutional class for the year ended May
31, 1996 would have been 1.08% and 3.00%, respectively. The operating
expense ratio and the net investment income ratio before fee waivers by the
Investment Advisers, Administrator, and Custodian for the Institutional
class for the period ended May 31, 1995 would have been 1.21% and 3.66%,
respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the year ended May 31,
1996 would have been 1.32% and 2.74%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the
Investment
-7-
<PAGE> 15
Advisers, Administrator, and Custodian for the Retail class for the period
ended May 31, 1995 would have been 1.45% and 3.40%, respectively.
-8-
<PAGE> 16
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MID CAP REGIONAL FUND
The following table has been audited by Ernst &
Young LLP, independent auditors, whose report is incorporated by reference in
the Statement of Additional Information. It should be read in conjunction with
the financial statements and related notes which are incorporated by reference
in the Statement of Additional Information. Additional information about the
performance of the Mid Cap Regional Fund is contained in the Trust's Annual
Report to Shareholders, which may be obtained without charge by contacting the
Trust at its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, May 31, For the Period
1996 1996 Ended May 31, 1995
Institutional Retail Institutional(1) Retail(1)
------------- ---------- ---------------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period....................... $11.38 $11.26 $10.00 $10.16
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................... .08 .06 .10 .07
Net gains on securities
(realized and unrealized)............................. 2.41 2.37 1.36 1.11
---- ---- ------- -----
Total from investment operations.................... 2.49 2.43 1.46 1.18
---- ---- ------ -----
LESS DISTRIBUTIONS
Dividends from net investment income.................... (0.08) (0.06) (.04) (.04)
Dividends in excess of net investment
income................................................ (0.02) (0.02) (.00) (.00)
Dividends from net realized capital gains............... (.67) (.67) (.04) (.04)
----- ----- ------ -------
Total distributions................................... (.77) (.75) (.08) (.08)
----- ----- ------ -------
Net asset value, end of period............................ $13.10 $12.94 $11.38 $11.26
====== ====== ====== ======
TOTAL RETURN.............................................. 22.64% 22.28% 17.42%(2) 14.80%(2),(3)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's).................... $99,294 $4,072 $50,993 $3,567
Ratio of expenses to average net assets
(after fee waivers).................................. 1.05% 1.30% 1.01%(2),(4) 1.34%(2),(5)
Ratio of net investment income to
average net assets (after fee waivers).............. .83% .58% 1.31%(2),(4) 1.09%(2),(5)
Portfolio Turnover Rate................................. 106% 106% 69% 69%
Average Commission Rate............................... $0.06 $0.06 N/A N/A
</TABLE>
(1) Institutional and Retail classes commenced operations on July 26, 1994 and
August 15, 1994, respectively.
(2) Annualized.
(3) Total Return excludes sales load.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Institutional class for the year ended May
31, 1996 would have been 1.06% and .82%, respectively. The operating
expense ratio and the net
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<PAGE> 17
investment income ratio before fee waivers by the Investment Adviser,
Administrator, and Custodian for the Institutional class for the period
ended May 31, 1995 would have been 1.15% and 1.17%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the year ended May 31,
1996 would have been 1.32% and .56%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the
Investment Adviser, Administrator, and Custodian for the Retail class for
the period May 31, 1995 would have been 1.38% and 1.05%, respectively.
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<PAGE> 18
INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act").
Each Fund consists of a separate pool of assets with separate investment
objectives and policies, as described below under "Investment Objectives and
Policies." Each Fund is classified as a diversified investment fund under the
1940 Act.
Shares of each Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in a Fund except that,
as described more fully below under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares in the Funds. Under
the Services Plan, only the beneficial owners of Retail shares bear the expenses
of shareholder administrative services which are provided by financial
institutions for their benefit (not to exceed .25% annually). See "Shareholder
Services Plan," "Dividends and Distributions" and "Description of the Trust and
Its Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve a Fund's investment objective. The investments
and investment techniques utilized by the Funds are described below. Prior to
making an investment decision, an investor should consider which Fund or Funds
best meet an investor's investment objectives and review carefully the risks
involved in Fund investments as described below.
The investment objective of a Fund may not be changed without
the vote of the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Except as noted below under "Investment Limitations," a Fund's
investment policies, however, may be changed without a vote of shareholders. In
addition, each Fund may sell portfolio securities shortly after they are
purchased, which may result in higher transaction costs and taxable gains for
the Fund. There can be no assurance that a Fund will achieve its objective.
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<PAGE> 19
EQUITY FUND
The investment objective of the Equity Fund is to seek a high
level of total return arising out of capital appreciation and income. The Fund
seeks to achieve its objective by investing substantially all of its assets in a
diversified portfolio of common stocks and securities convertible into common
stocks. Under normal conditions, at least 80% of the Fund's total assets will be
invested in common stocks and securities convertible into common stocks. The
Fund's advisers select common stocks based on a number of factors, including
historical and projected earnings growth, earnings quality and liquidity, each
in relation to the market price of the stock. Stocks purchased for the Fund
generally will be listed on a national securities exchange or will be unlisted
securities with an established over-the-counter market. The Fund may also invest
up to 20% of its total assets at the time of purchase in American Depository
Receipts ("ADRs") and securities issued by foreign issuers.
During temporary defensive periods the Fund may invest in
various short term obligations described below under "Common Investment Policies
of the Funds."
EQUITY INCOME FUND
The investment objective of the Equity Income Fund is to seek
a competitive total rate of return through investments in equity and equity
equivalent securities which carry premium current yields. Under normal
conditions, at least 65% of the value of the Fund's total assets will be
invested in common stocks and securities convertible into common stocks.
The Fund's advisers will generally try to select securities
that provide a higher yield than the general market and will generally dispose
of those securities as their yield approaches a market yield or they no longer
meet purchase criteria in other respects.
Exchange Rate-Related Securities. The Equity Income Fund may
invest in securities for which the principal repayment at maturity, while paid
in U.S. dollars, is determined by reference to the exchange rate between the
U.S. dollar and the currency of one or more foreign countries ("Exchange
Rate-Related
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<PAGE> 20
Securities"). The interest payable on these securities is denominated in U.S.
dollars and is not subject to foreign currency risk and, in most cases, is paid
at rates higher than most other similarly rated securities in recognition of the
foreign currency risk component of Exchange Rate-Related Securities.
Investments in Exchange Rate-Related Securities entail certain
risks. There is the possibility of significant changes in rates of exchange
between the U.S. dollar and any foreign currency to which an Exchange
Rate-Related Security is linked. In addition, there is no assurance that
sufficient trading interest to create a liquid secondary market will exist for a
particular Exchange Rate-Related Security due to conditions in the debt and
foreign currency markets. Illiquidity in the forward foreign exchange market and
the high volatility of the foreign exchange market may from time to time combine
to make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
Forward Currency Exchange Contracts. The Equity Income Fund
may enter into forward currency exchange contracts in an effort to reduce the
level of volatility caused by changes in foreign currency exchange rates or
where such transactions are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund. The Fund may not enter into such
contracts for speculative purposes. A forward currency exchange contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of contract. Although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might be realized
should the value of such currency increase. Consequently, the Fund may choose to
refrain from entering into such contracts. In connection with forward currency
exchange contracts, the Fund will create a segregated account of liquid assets,
such as cash, U.S. Government securities or other liquid high grade debt
obligations, or will otherwise cover its position in accordance with applicable
requirements of the SEC.
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<PAGE> 21
During temporary defensive periods the Fund may invest in
various short term obligations described below under "Common Investment Policies
of the Funds."
MID CAP REGIONAL FUND
The investment objective of the Mid Cap Regional Fund is to
seek capital appreciation by investing in a diversified portfolio of publicly
traded equity securities of issuers which are domiciled primarily in Ohio,
Indiana , Kentucky and Pennsylvania and contiguous states and other states in
which National City Corporation affiliates are located. Under normal conditions,
at least 65% of the value of the Fund's total assets will be invested in equity
securities. In addition, under normal conditions, the Fund will invest at least
60% of the value of its total assets in equity securities of companies with
market capitalization ranging from $100 million to $2 billion.
Options. The Mid Cap Regional Fund may write covered call
options, buy put options, buy call options and sell or "write" secured put
options on a national securities exchange and issued by the Options Clearing
Corporation for hedging purposes. Such transactions may be effected on a
principal basis with primary reporting dealers in U.S. Government securities in
an amount not exceeding 5% of a Fund's net assets, as described further in the
Statement of Additional Information. Such options may relate to particular
securities or to various stock indices or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the writer of the option.
A call option for a particular security gives the purchaser of
the option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is the consideration for undertaking the obligations under the option
contract. A put option for a particular security gives the purchaser the right
to sell the underlying security at the stated exercise price at any time prior
to the expiration date of the option, regardless of the market price of the
security. In contrast to an option on a particular security, an option on a
securities index provides the
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<PAGE> 22
holder with the right to make or receive a cash settlement upon exercise of the
option.
The Mid Cap Regional Fund may purchase and sell put options on
portfolio securities at or about the same time that it purchases the underlying
security or at a later time. By buying a put, the Fund limits its risk of loss
from a decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by the Fund in order to acquire the underlying security at a later
date at a price that avoids any additional cost that would result from an
increase in the market value of the security. The Fund may also purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.
Prior to its expiration, a purchased put or call option may be sold in a closing
sale transaction (a sale by the Fund, prior to the exercise of an option that it
has purchased, of an option of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the option plus the related transaction costs.
In addition, the Mid Cap Regional Fund may write covered call
and secured put options. A covered call option means that the Fund owns or has
the right to acquire the underlying security subject to call at all times during
the option period. A secured put option means that the Fund maintains in a
segregated account with its custodian cash or U.S. Government securities in an
amount not less than the exercise price of the option at all times during the
option period. Such options will be listed on a national securities exchange and
issued by the Options Clearing Corporation and may be effected on a principal
basis with primary reporting dealers in U.S.
The aggregate value of the securities subject to options
written by the Fund will not exceed 25% of the value of its net assets. In order
to close out an option position prior to maturity, the Fund may enter into a
"closing purchase transaction" by purchasing a call or put option (depending
upon
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<PAGE> 23
the position being closed out) on the same security with the same exercise
price and expiration date as the option which it previously wrote.
Options trading is a highly specialized activity and carries
greater than ordinary investment risk. Purchasing options may result in the
complete loss of the amounts paid as premiums to the writer of the option. In
writing a covered call option, the Fund gives up the opportunity to profit from
an increase in the market price of the underlying security above the exercise
price (except to the extent the premium represents such a profit). Moreover, it
will not be able to sell the underlying security until the covered call option
expires or is exercised or the Fund closes out the option. In writing a secured
put option, the Fund assumes the risk that the market value of the security will
decline below the exercise price of the option. The use of covered call and
secured put options will not be a primary investment technique of the Fund.
COMMON INVESTMENT POLICIES OF THE FUNDS
Futures Contracts and Related Options
Each Fund may invest in futures contracts and options on
futures contracts for hedging purposes or to maintain liquidity.
Futures contracts obligate the Funds, at maturity, to take
or make delivery of certain securities or the cash value of a securities index.
A Fund may sell a futures contract in order to offset a decrease in the market
value of its portfolio securities that might otherwise result from a market
decline. The Funds may do so either to hedge the value of its portfolio of
securities as a whole or to protect against declines occurring prior to sales of
securities in the value of the securities to be sold. Conversely, the Funds
may purchase a futures contract in anticipation of purchases of securities. In
addition, the Funds may utilize futures contracts in anticipation of changes
in the composition of its holdings.
Each Fund may purchase and sell call and put options on
futures contracts traded on an exchange or board of trade. When a Fund purchases
an option on a futures contract, it has
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<PAGE> 24
the right to assume a position as a purchaser or seller of a futures contract at
a specified exercise price at any time during the option period. When the Fund
sells an option on a futures contract, it becomes obligated to purchase or sell
a futures contract if the option is exercised. In anticipation of a market
advance, the Fund may purchase call options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund intends to purchase. Similarly, if the
value of the Fund's securities is expected to decline, the Fund might purchase
put options or sell call options on futures contracts rather than sell futures
contracts.
Each Fund intends to comply with the regulations of the
Commodity Futures Trading Commission ("CFTC") exempting it from registration as
a "commodity pool operator." The Funds' commodities transactions must
constitute bona fide hedging or other permissible transactions pursuant to such
regulations. In addition, the Funds may not engage in such transactions if the
sum of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5% of the liquidation value of its assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the percentage
limitation. In connection with a Fund's position in a futures contract or
option thereon, it will create a segregated account of liquid assets, such as
cash, U.S. Government securities or other liquid high grade debt obligations, or
will otherwise cover its position in accordance with applicable requirements of
the SEC.
The primary risks associated with the use of futures contracts
and options are: (i) an imperfect correlation between the change in market value
of the securities held by the Funds and the price of the futures contracts and
options; (ii) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (iii)
losses due to unanticipated market movements which are potentially unlimited;
and (iv) the adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. For further information, see
"Risk
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<PAGE> 25
Factors, Investment Objectives and Policies -- Futures Contracts and Options"
and Appendix B in the Statement of Additional Information.
During temporary defensive periods the Fund may invest
in various short term obligations described below.
Foreign Securities and American Depository Receipts
Each Fund may invest in securities issued by foreign issuers
either directly or indirectly through investments in ADRs. ADRs are receipts
issued by an American bank or trust company evidencing ownership of underlying
securities issued by foreign issuers. ADRs may be listed on a national
securities exchange or may be traded in the over-the-counter market. ADR prices
are denominated in U.S. dollars; the underlying security may be denominated in a
foreign currency.
Investments in foreign securities involve certain inherent
risks, such as political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns, changes in
exchange rates of foreign currencies and the possibility of adverse changes in
investment or exchange control regulations. There may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. Further, foreign stock markets are generally not as developed or
efficient as those in the U.S., and in most foreign markets volume and liquidity
are less than in the U.S. Fixed commissions on foreign stock exchanges are
generally higher than the negotiated commissions on U.S. exchanges, and there is
generally less government supervision and regulation of foreign stock exchanges,
brokers and companies than in the U.S. With respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, or diplomatic developments
that could affect investment within those countries. Because of these and other
factors, securities of foreign companies acquired by the Funds may be subject to
greater fluctuation in price than securities of domestic companies. For further
information, see "Risk Factors,
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<PAGE> 26
Investment Objectives and Policies" in the Statement of Additional Information.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or
delayed delivery basis. These transactions are arrangements in which a Fund
purchases securities with payment and delivery scheduled for a future time.
These transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when delivery takes place. Each Fund
expects that commitments to purchase when-issued securities will not exceed 25%
of the value of its total assets under normal market conditions. The Funds do
not intend to purchase when-issued securities for speculative purposes but only
for the purpose of acquiring portfolio securities. In when-issued and delayed
delivery transactions, a Fund relies on the seller to complete the transaction;
its failure to do so may cause the Fund to miss a price or yield considered to
be attractive. For further information, see "Risk Factors, Investment Objectives
and Policies" in the Statement of Additional Information.
Short Term Obligations
During temporary defensive periods each Fund may hold some
short term obligations (with maturities of 18 months or less) such as domestic
and foreign commercial paper, bankers' acceptances, certificates of deposit and
demand and time deposits of domestic and foreign branches of U.S. banks and
foreign banks, U.S. Government securities, repurchase agreements, reverse
repurchase agreements and guaranteed investment contracts ("GICs"). In the case
of repurchase agreements, default or bankruptcy of the seller may expose a Fund
to possible loss because of adverse market action or delays connected with the
disposition of the underlying obligations. Further, it is uncertain whether the
Fund would be entitled, as against a claim by such seller or its receiver or
trustee in bankruptcy, to retain the underlying securities. Reverse repurchase
agreements involve the risk that the market value of the securities held by a
Fund may decline below the price of the securities it is obligated to
repurchase. For further information, see "Risk Factors, Investment Objectives
and Policies" in the Statement of Additional Information.
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<PAGE> 27
Lending Portfolio Securities
In order to generate additional income, each Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. A Fund must receive 100% collateral in the form of cash
or U.S. Government securities. This collateral must be valued daily by the
Fund's adviser or advisers and the borrower will be required to provide
additional collateral should the market value of the loaned securities increase.
During the time portfolio securities are on loan, the borrower pays the Fund
involved any dividends or interest paid on such securities. Loans are subject to
termination by the Fund or the borrower at any time. While a Fund does not have
the right to vote securities on loan, it intends to terminate the loan and
regain the right to vote if this is considered important with respect to the
investment. A Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which its adviser or advisers have determined are
creditworthy under guidelines established by the Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the advisers) which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which a Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
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<PAGE> 28
Illiquid Securities
The Equity Fund will not knowingly invest more than 10% of its
net assets and the Equity Income and Mid Cap Regional Funds will not knowingly
invest more than 15% of their respective net assets in securities that are
illiquid. Illiquid securities would generally include repurchase agreements and
GICs with notice/termination dates in excess of seven days and certain
securities which are subject to trading restrictions because they are not
registered under the Securities Act of 1933, as amended (the "1933 Act").
Each Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser or advisers, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities. The ability to sell to
qualified institutional buyers under Rule 144A is a recent development, and it
is not possible to predict how this market will develop. The Board will
carefully monitor any investment by a Fund in these securities.
Risk Factors Associated with Derivative Instruments
The Mid Cap Regional Fund may purchase certain "derivative"
instruments. Derivative instruments are instruments that derive value from the
performance of underlying securities, interest or currency exchange rates, or
indices, and include (but are not limited to) futures contracts.
Like all investments, derivative instruments involve several
basic types of risks which must be managed in order to meet investment
objectives. The specific risks presented by derivatives include, to varying
degrees, market risk in the form of underperformance of the underlying
securities, exchange rates or indices; credit risk that the dealer or other
counterparty to the transaction will fail to pay its obligations; volatility and
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<PAGE> 29
leveraging risk that, if interest or exchange rates change adversely, the value
of the derivative instrument will decline more than the securities, rates or
indices on which it is based; liquidity risk that the Fund will be unable to
sell a derivative instrument when it wants because of lack of market depth or
market disruption; pricing risk that the value of a derivative instrument (such
as an option) will not correlate exactly to the value of the underlying
securities, rates or indices on which it is based; and operations risk that loss
will occur as a result of inadequate systems and controls, human error or
otherwise. Some derivative instruments are more complex than others, and for
those instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The adviser will evaluate the risks presented by the
derivative instruments purchased by the Fund, and will determine, in connection
with its day-to-day management of the Fund, how they will be used in furtherance
of the Fund's investment objective.
Portfolio Turnover
Portfolio turnover will tend to rise during periods of
economic turbulence and decline during periods of stable growth. Each Fund's
annual portfolio turnover is not expected to exceed 100% under normal market
conditions. For further information, see "Risk Factors, Investment Objective and
Policies" in the Statement of Additional Information. Higher portfolio turnover
may result in increased taxable gains to shareholders (see "Taxes" below) and
increased expenses paid by the Fund due to transaction costs.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations.
The following investment limitations are matters of fundamental policy and may
not be changed with respect to a particular Fund without the affirmative vote of
the Fund's outstanding shares (as defined under "Miscellaneous"). (Other
investment limitations that also cannot be changed without a vote of
shareholders are contained in the Statement of Additional
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<PAGE> 30
Information under "Risk Factors, Investment Objectives and Policies.")
No Fund may:
1. Make loans, except that each Fund may purchase or hold debt
instruments, lend portfolio securities and enter into repurchase agreements in
accordance with its investment objective and policies.
2. Borrow money or issue senior securities, except that each
Fund may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing and in amounts not in excess
of the lesser of the dollar amounts borrowed or 10% of the value of the Fund's
total assets at the time of such borrowing. A Fund will not purchase securities
while borrowings (including reverse repurchase agreements) in excess of 5% of
its total assets are outstanding.
3. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured by such obligations, (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents, and (c) utilities will be classified according to
their services, for example, gas, gas transmission, electric and gas, electric,
and telephone will each be considered a separate industry.
4. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of
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<PAGE> 31
the outstanding voting securities of the issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to such
limitations.
Additional investment limitations which are matters of
fundamental policy are as follows:
5. The Equity Fund may invest no more than 10% of the value of
its net assets in illiquid securities, including repurchase agreements with
remaining maturities in excess of seven days, non-negotiable time deposits,
certificates of participation without corresponding remarketing agreements, and
other securities which are not readily marketable.
6. Neither the Equity Income Fund nor the Mid Cap Regional
Fund may invest more than 15% of the value of its net assets in illiquid
securities. See "Illiquid Securities" under "Investment Objectives and Policies
- -- Common Investment Policies of the Funds."
For purposes of investment limitation No. 4, a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of a Fund's securities will not constitute a violation of such
limitation for purposes of the 1940 Act. If a Fund exceeds the limitation on the
holding of illiquid securities, it will sell illiquid securities as necessary to
maintain the required liquidity when the advisers believe that it is in the best
interests of the Fund to do so.
In order to permit the sale of the Funds' shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in a Fund's best interests, it will revoke the
commitment by terminating sales of the Fund's shares to investors residing in
the state involved.
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<PAGE> 32
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders each Fund's total return data for its Institutional
shares and Retail shares. The Funds calculate their total returns for each class
of shares on an "average annual total return" basis for various periods from the
date they commenced investment operations and for other periods as permitted
under the rules of the SEC. Average annual total return reflects the average
annual percentage change in value of an investment in the class over the
measuring period. Total returns for each class of shares may also be calculated
on an "aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by a Fund with
respect to a class during the period are reinvested in shares of that class.
When considering average total return figures for periods longer than one year,
it is important to note that the annual total return of a class for any one year
in the period might have been greater or less than the average for the entire
period. The Funds may also advertise, from time to time, the total returns of
one or more classes of shares on a year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
The "yield" quoted in advertisements of the Equity Income Fund
refers to the income generated by an investment in a class of shares of over a
30-day period identified in the advertisement. This income is then "annualized."
The amount of income so generated by the investment during the 30-day period is
assumed to be earned and reinvested at a constant rate and compounded
semi-annually; the annualized income is then shown as a percentage of the
investment.
Shareholders should note that the total return and yield of
Retail shares will be reduced by the amount of shareholder servicing fees that
are payable under the Services Plan. See "Shareholder Services Plan."
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<PAGE> 33
Investors may compare the performance of each class of shares
of a Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices and to data or rankings
prepared by independent services such as Lipper Analytical Services, Inc. or
other financial or industry publications that monitor the performance of mutual
funds. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar,
Incorporated and other publications of a local, regional or financial industry
nature.
The performance of each class of shares of the Funds is based
on historical earnings and will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in net asset value of a class should
be considered in ascertaining the total return to shareholders for a given
period. Total return data should also be considered in light of the risks
associated with a Fund's composition, quality, maturity, operating expenses and
market conditions. Any fees charged by financial institutions (as described in
"How to Purchase and Redeem Shares") are not included in the computation of
performance data but will reduce a shareholder's net return on an investment in
a Fund.
Further information about the performance of the Funds is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling
1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchase and redemption orders, the
net asset value per share of each Fund is calculated as of the close of trading
on the New York Stock Exchange (the "Exchange") (generally, 4:00 p.m., Eastern
Time) on each Business
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<PAGE> 34
Day as described below. Net asset value per share is determined on each Business
Day, except those holidays which the Exchange, or banks and trust companies
which are affiliated with National City Corporation (the "Banks"), observe
(currently New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans'
Day, Thanksgiving Day, and Christmas Day) ("Business Day"). Net asset value per
share of a particular class in a Fund is calculated by dividing the value of all
securities and other assets belonging to the Fund allocable to such class, less
the liabilities charged to that class, by the number of the outstanding shares
of that class.
With respect to each Fund, investments in securities traded on
an exchange are valued at the last quoted sale price for a given day, or if a
sale is not reported for that day, at the mean between the most recent quoted
bid and asked prices. Unlisted securities and securities traded on a national
securities market for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Board of Trustees' guidelines. The net asset value per share
of each class of shares of each Fund will fluctuate as the value of its
investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located at 4400 Computer Drive, Westborough,
Massachusetts 01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives, including trips and
monetary awards, to National City Investments Corporation.
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<PAGE> 35
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. (For information on such fees, the Investor should review his
agreement with the institution or contact it directly.) In addition, certain
financial institutions may enter into shareholder servicing agreements with the
Trust whereby a financial institution would perform various administrative
support services for its customers who are the beneficial owners of Retail
shares and would receive fees from the Funds for such services of up to .25% (on
an annualized basis) of the average daily net asset value of such shares. See
"Shareholder Services Plan." To purchase shares, Investors should call
1-800-622-FUND(3863) or visit their local 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 is $2,500 for the initial purchase of
Retail shares in a Fund, except for purchases for an IRA or other retirement
plan in which event the minimum initial investment is $500. All subsequent
investments for Retail shares and IRAs are subject to a minimum investment of
$250. Investments made in Retail shares through a monthly savings
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<PAGE> 36
program described below are not subject to the minimum initial and subsequent
investment requirements or any minimum account balance requirements described in
"Other Redemption Information" below. Purchases for an IRA through the monthly
savings program will be considered as contributions for the year in which the
purchases are made.
Under a monthly savings program, Investors may add to their
investment in the Retail shares of a Fund, in a consistent manner each month,
with a minimum amount of $50. Monies may be automatically withdrawn from a
shareholder's checking or savings account available through an investor's
financial institution and invested in additional Retail shares at the Public
Offering Price next determined after an order is received by the Trust. An
Investor may apply for participation in a monthly program through a financial
institution, such as banks, brokers, or dealers selling Retail shares of the
Funds, by completing an application. The program may be modified or terminated
by an Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share
purchases and redemptions. Financial institutions will be responsible for
transmitting purchase and redemption orders to the Trust's transfer agent,
First Data Investor Services Group, Inc. (formerly The Shareholder Services
Group, Inc., d/b/a 440 Financial) (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of each Fund is
the sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, per Fund, which is assessed as follows:
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<PAGE> 37
<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 a Fund by
way of a direct transfer or a rollover from a qualified plan distribution and
subsequent transactions into the same account where affiliates of National City
Corporation are serving as a trustee or agent; and (f) investors purchasing Fund
shares through a payroll deduction plan.
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<PAGE> 38
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of each Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions at the time of purchase. Reduced
sales charges may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings.
Right of Accumulation. Investors may use their aggregate
investments in Retail shares in determining the applicable sales charge. An
Investor's aggregate investment in Retail shares is the total value (based on
the higher of current net asset value or any Public Offering Price originally
paid) of: (a) current purchases; (b) Retail shares that are already beneficially
owned by the Investor for which a sales charge has been paid; (c) Retail shares
that are already beneficially owned by the Investor which were purchased prior
to July 22, 1990; and (d) Retail shares purchased by dividends or capital gains
that are reinvested. If, for example, an Investor beneficially owns Retail
shares of a Fund with an aggregate current value of $90,000 and subsequently
purchases Retail shares of that Fund having a current value of $10,000, the
sales charge applicable to the subsequent purchase would be reduced to 2.75% of
the Public Offering Price.
Letter of Intent. An Investor may qualify for a reduced sales
charge immediately upon signing a nonbinding Letter of Intent stating the
Investor's intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge. A Letter
of Intent form may be obtained from the Investor's financial institution. If an
Investor so elects, the 13 month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the Letter
of Intent must be equal to at least 4.0% of the amount indicated in the Letter
of Intent. During the term of a Letter of Intent, the Transfer Agent will hold
Retail shares representing 4.0% of the amount indicated in the Letter of Intent
in escrow for payment of a higher sales charge if the entire amount is not
purchased. Upon completing the purchase of the entire amount indicated in the
Letter of Intent, the escrowed shares will be released. If the entire
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<PAGE> 39
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 a Fund. There is no
minimum investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of a Fund. Customers should obtain
information relating to the requirements of such accounts from their Banks.
If participating in an Asset Diversification Account,
Customers may purchase Institutional shares under a monthly savings program.
Customers may add to their investment in the Institutional shares of a Fund, in
a consistent manner each month, with a minimum amount of $50. Monies may be
automatically withdrawn from a shareholder's checking or savings account
available through a Customer's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. A Customer may apply for participation in a monthly
program through a financial institution, such as banks or brokers, by completing
an application. The program may be modified or terminated by an Investor on 30
days written notice or by the Trust at any time.
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<PAGE> 40
It is the responsibility of the Banks to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will normally be held of record by the Banks. Confirmations of share
purchases and redemptions will be sent to the Banks. Beneficial ownership of
Institutional shares will be recorded by the Banks and reflected in the account
statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Funds which are received by
the Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are
priced according to the net asset value per share determined on that day plus
any applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third Business Day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to
the same financial institution that placed the original purchase order. It is
the responsibility of the financial institutions to transmit redemption orders
to the Transfer Agent. Investors who purchased shares directly from the Trust
may redeem shares in any amount by calling 1-800-628-0523. Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
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<PAGE> 41
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares
in accordance with instructions and limitations pertaining to their accounts at
the Banks. It is the responsibility of the Banks to transmit redemption orders
to the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a
minimum balance in his account at the Bank and the balance in such account falls
below that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by
sending a written request to Armada Funds, P.O. Box 5109, Westborough,
Massachusetts 01581-5109. Redemption requests must be signed by each
shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $5,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $5,000, no signature
guarantee is needed. The Trust may require additional supporting documents for
redemptions made by corporations, fiduciaries, executors, administrators,
trustees, guardians and institutional investors.
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<PAGE> 42
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).
During periods of unusual economic or market changes,
telephone redemptions may be difficult to implement. In such event, shareholders
should mail their redemption requests to their financial institutions or Armada
Funds at the address shown above. Neither the Trust nor its Transfer Agent will
be responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming Retail Shares by telephone may be modified or terminated at any time
by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of any Fund held on the Fund transfer
agent's system. The Plan allows the shareholder to have a fixed minimum sum of
$250 distributed at regular intervals. The shareholder's account must have a
minimum value of $5,000 to be eligible for the Plan. Additional information
regarding this service may be obtained from an investor's financial institution
or the Transfer Agent at 1-800- 622-FUND(3863).
OTHER REDEMPTION INFORMATION
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<PAGE> 43
Due to the relatively high cost of maintaining small accounts,
the Trust reserves the right to redeem, at net asset value, any account
maintained by a shareholder that has a value of less than $1,000 due to
redemptions where the shareholder does not increase the amount in the account to
at least $1,000 upon 60 days' notice.
If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay payment
of the redemption proceeds until the Transfer Agent is reasonably satisfied that
the check has been collected, which could take up to 10 days from the date of
purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by Federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds.
Payment to Shareholders for shares redeemed will be made
within seven days after receipt of the request for redemption, or such shorter
time period as may be required by the Securities Exchange Act of 1934.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who
have paid a sales charge to purchase Retail shares of one or more of the Funds
(each a "load Fund") may exchange those Retail shares for Retail shares of
another load Fund, or another investment fund offered by the Trust without the
imposition of a sales charge (each a "no load Fund") at the net asset value per
share on the date of exchange, provided that such other Retail shares may be
legally sold in the state of the shareholder's residence. As a result, no
additional sales charge will be incurred with respect to such an exchange.
Shareholders may also exchange Retail shares of a no load Fund for Retail shares
of another no load Fund at the net asset value per share without payment of a
sales charge. In addition, shareholders of a no load Fund may exchange Retail
shares for Retail shares of a load Fund subject to payment of the applicable
sales load. However, shareholders exchanging Retail shares of a no load Fund
which
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<PAGE> 44
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 1-800-628-0523.
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
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<PAGE> 45
monthly and accrued daily among the investment Funds with respect to which the
Distributor is distributing shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to
Retail shares in each of the Funds. Pursuant to the Services Plan, the Trust
enters into shareholder servicing agreements with certain financial institutions
pursuant to which the institutions render shareholder administrative services to
their customers who are the beneficial owners of Retail shares in consideration
for the payment of up to .25% (on an annualized basis) of the average daily net
asset value of such shares. Persons entitled to receive compensation for
servicing Retail shares may receive different compensation with respect to those
shares than with respect to Institutional shares in the same Fund. Shareholder
administrative services may include aggregating and processing purchase and
redemption orders, processing dividend payments from the Fund on behalf of
customers, providing information periodically to customers showing their
position in Retail shares, and providing sub-transfer agent services or the
information necessary for sub-transfer agent services, with respect to Retail
shares beneficially owned by customers. Since financial institutions may charge
their customers fees depending on the type of customer account the Investor has
established, beneficial owners of Retail shares should read this Prospectus in
light of the terms and fees governing their accounts with financial
institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Equity and
Equity Income Funds are declared and paid quarterly; dividends from the net
investment income of the Mid Cap Regional Fund are declared and paid annually.
With respect to each Fund, net income for dividend purposes consists of
dividends, distributions and other income on the Fund's assets, less the accrued
expenses of the Fund. Any net realized capital gains will be distributed at
least annually. Dividends and distributions will reduce the Funds' net asset
value per share by the per share amount thereof.
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<PAGE> 46
Shareholders may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class or series at the
net asset value of such shares on the payment date. Shareholders must make such
election, or any revocation thereof, in writing to his Bank or financial
institution. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of each Fund's net
investment income available for distribution to the holders of Retail shares is
reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
Each of the Funds intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification relieves a Fund of liability for federal income
taxes to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income (if any) net of
certain deductions for such year. In general, a Fund's investment company
taxable income will be its taxable income (including dividends, 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. Each Fund intends to distribute
substantially all of its investment company taxable income and net tax-exempt
income each taxable year. Such distributions by the Fund will be taxable as
ordinary income to their respective shareholders who are not currently exempt
from federal income taxes, whether such income is received in cash or reinvested
in additional shares. (Federal income taxes for distributions to an IRA or to a
qualified retirement plan are deferred under the Code.) The dividends received
deduction for corporations will apply to such distributions to the extent of the
total qualifying dividends received by the distributing Fund from domestic
corporations for the taxable year.
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<PAGE> 47
Substantially all of each Fund's net realized long-term
capital gains, if any, will be distributed at least annually to Fund
shareholders. A Fund will generally have no tax liability with respect to such
gains and the distributions will be taxable to Fund shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held Fund shares and whether such
gains are received in cash or reinvested in additional shares.
Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by a Fund on December
31 of such year in the event such dividends are actually paid during January of
the following year.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after a purchase of shares prior to the record date will have the effect
of reducing the per share net asset value by the per share amount of the
dividend or distribution. All or a portion of such dividend or distribution,
although in effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon
his redemption, transfer or exchange of Fund shares depending upon the tax basis
of such shares and their price at the time of redemption, transfer or exchange.
If a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares 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
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<PAGE> 48
the shareholder's exchanged shares but may be included (subject to this
limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as
to the federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors should consult their
tax advisers with specific reference to their own tax situation.
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<PAGE> 49
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:
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- --------------------------------------------------------------------------------
Richard B. Tullis Chairman of the Chairman Emeritus,
5150 Three Village Drive Board Harris Corporation
Lyndhurst, Ohio 44124 (electronic
Age 82 communication and
information processing
equipment), since
October 1985; Director,
NACCO Materials Handling
Group, Inc.
(manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex,
Inc. (manufacturer of
household appliances),
since 1990; Director,
Waste-Quip, Inc. (waste
handling equipment),
since 1989.
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<PAGE> 50
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- --------------------------------------------------------------------------------
Thomas R. Benua, Jr. Trustee President, EBCO
564 Hackberry Drive Manufacturing Company
Westerville, OH 43081 and subsidiaries
Age 51 (manufacture, sale and
financing of water coolers
and dehumidifiers), since
January 1987 to January 1996;
Vice President and Executive
Committee Member of Ebtech
Corp. (market and sell
bottled and point-of-use
water coolers), since March
1991.
Leigh Carter* Trustee, President Retired President and
13901 Shaker Blvd., #6B and Treasurer Chief Operating Officer,
Cleveland, OH 44120 BFGoodrich Company,
Age 70 August 1986 to September
1990; Director, Adams
Express Company (closed-end
investment company), since
April 1982;
Director, Lamson & Sessions
Co. (producer of electrical
supplies for construction,
consumer power and
communications industry),
since April 1991; Director,
Petroleum & Resources Corp.,
since April 1987;
Director, Morrison Products
(manufacturer of blower fans
and air moving equipment),
since April 1983.
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<PAGE> 51
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- --------------------------------------------------------------------------------
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home
Age 51 Furnishings Center,
Inc., since January 1982;
partner, Kittles Bloomington
Property Company, since
January 1981; partner, KK&D
(Affiliated Real Estate
Companies of Kittles Home
Furnishing Center), since
January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and
Carol Martin Gatton Dean, Carol Martin
College of Business and Gatton, College of
Economics Business and Economics,
University of Kentucky University of Kentucky,
Lexington, KY 40506-0034 since 1981; Director,
Age 57 Studio Plus Hotels,
Inc., since 1994.
Robert D. Neary Trustee Retired; Co-Chairman of
2000 National City Center Ernst & Young, April
1900 E. 9th Street 1984-September 1993;
Cleveland, OH 44114 Director, Cold Metal
Age 62 Products, Inc., since
March 1994; Director, Zurn
Industries, Inc.,
(environmental systems and
engineering and construction
services) since June 1995.
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer,
1400 Cecil Avenue Whayne Supply Co.
P.O. Box 35900 (engine and heavy
Louisville, KY 40232-5900 equipment distribution),
Age 57 since 1986; President
and Chief Executive
Officer, American
Contractors Rentals &
Sales (rental subsidiary
of Whayne Supply Co.),
since 1988.
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* 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 ADVISERS
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Equity and Equity Income Funds and
National City serves as the investment adviser to the Mid Cap Regional Fund. The
advisers are wholly owned subsidiaries of National City Corporation. The
advisers provide trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. The advisers are member banks of
the Federal Reserve System and the Federal Deposit Insurance Corporation.
On June 30, 1996, the Trust Departments of National City,
National City Columbus and National City Kentucky had approximately $___
billion, $___ billion and $___ billion, respectively, in assets under
management, and National City, National City Columbus and National City Kentucky
had approximately $____ billion, $____ billion and $____ billion,
respectively, in total assets. National City has its principal offices at 1900
East Ninth Street, Cleveland, Ohio 44114; National City Columbus has its
principal offices at 155 East Broad Street, Columbus, Ohio 43251; and National
City Kentucky has its principal offices at National City Tower, 101 South Fifth
Street, Louisville, Kentucky 40202.
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Equity, Equity Income and Mid Cap Regional
Funds' investment policies, the advisers have agreed to manage such Funds, make
decisions with respect to and place orders for all purchases and sales of such
Funds' securities, and maintain such Funds' records relating to such purchases
and sales. Robert M. Leggett is the person primarily responsible for the day to
day management of the Equity Fund. Mr. Leggett has been employed by National
City as Vice President and Equity Team Leader since September 1995. Previously,
Mr.
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<PAGE> 53
Leggett was the Director of Investments at the Ohio Bureau of Workers
Compensation and the head of equities at The State Teachers Retirement System of
Ohio. Mr. Leggett has been the Asset Manager of the Equity Fund since September
28, 1995. James R. Kirk is the person primarily responsible for the day to day
management of the Equity Income Fund. Mr. Kirk has been employed by National
City as Vice President and Investment Strategist since August 1995. Mr. Kirk has
been the Asset Manager of the Equity Income Fund since September 28, 1995.
Previously, Mr. Kirk was employed by KeyCorp and served in various capacities
including chief investment officer, head of equity investments and director of
research. Lawrence E. Baumgartner is the person primarily responsible for the
day to day management of the Mid Cap Regional Fund. Mr. Baumgartner employed by
National City as President of Broad Street Asset Management Co. since July 1994,
had been managing assets for The State Teachers Retirement System of Ohio since
1987 and has been the Asset Manager of the Mid Cap Regional Fund since its
inception.
For the services provided and expenses assumed pursuant to the
Advisory Agreements relating to the Equity, Equity Income and Mid Cap Regional
Funds, the advisers are entitled to receive an advisory fee, computed daily and
payable monthly, at the annual rate of .75% of the average net assets of each of
these Funds. Shareholders should note that these fees are higher than those
payable by other investment companies. However, the Trust believes that the fees
are within the range of fees payable by investment funds with comparable
investment objectives and policies. The advisers may from time to time waive all
or a portion of their advisory fees to increase the net income of the Funds
available for distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass- Steagall
Act as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
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
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<PAGE> 54
investment company. The advisers believe that they may perform the services for
the Funds contemplated by their Advisory Agreements with the Trust as described
in such agreements and this Prospectus without violation of applicable banking
laws or regulations. However, there are no controlling judicial precedents and
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the advisers from continuing to perform services for
the Trust. If the advisers were prohibited from providing services to the Funds,
the Board of Trustees would consider selecting another qualified firm. Any new
investment advisory agreement would be subject to shareholder approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the advisers, or their
affiliated and correspondent banks in connection with shareholder purchases of
Fund shares, the advisers and their affiliated and correspondent banks might be
required to alter materially or discontinue the services offered by them to
shareholders. It is not anticipated, however, that any resulting change in the
Trust's method of operations would affect its net asset value per share or
result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the Funds. PFPC is an
indirect, wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding
company.
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<PAGE> 55
Under its Administration and Accounting Services Agreement
with the Trust, PFPC has agreed to provide the following services with respect
to the Funds: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation of
the Trust's registration statement; maintain the required fidelity bond
coverage; calculate each Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Funds with respect to
all aspects of their administration and operation. PFPC is entitled to receive
with respect to each Fund an administrative fee, computed daily and paid
monthly, at the annual rate of .10% of the first $200,000,000 of its net assets,
.075% of the next $200,000,000 of its net assets, .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 each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on
January 28, 1986. The Trust is a series fund authorized to issue 36 separate
classes or series of shares of beneficial interest ("shares"). Six of these
classes or series, which represent interests in the Equity Fund (Class H and
Class H Special Series 1), Equity Income Fund (Class M and Class M Special
Series 1) and Mid Cap Regional Fund (Class N and Class N - Special Series 1) are
described in this Prospectus. Class H, Class M, and Class N shares constitute
the Institutional class or series of shares; and Class H - Special Series 1,
Class M Special Series 1, and Class N - Special Series 1 shares constitute the
Retail class or series of shares. The other Funds of the Trust are: Money Market
Fund (Class A and Class A -Special Series 1), Government Fund (Class B and Class
B - Special Series 1), Treasury Fund (Class C and Class C - Special Series 1),
Tax Exempt Fund (Class D and Class D - Special Series 1), Fixed Income Fund
(Class I and Class I - Special Series 1), Ohio Tax Exempt Fund (Class K and
Class K - Special Series 1), National Tax Exempt Fund (Class L and Class L -
Special Series 1), Enhanced Income Fund (Class O and Class O - Special Series
1), Total Return Advantage Fund (Class P and Class P -Special Series 1),
Pennsylvania Tax Exempt Fund (Class Q and Class Q - Special
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<PAGE> 56
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders shall
be called at the written request of shareholders entitled to cast at least 10%
of the votes entitled to be cast at such meeting. Such meeting may be called by
shareholders to consider the removal of one or more trustees. Shareholders will
receive shareholder communication assistance with respect to such matter as
required by the 1940 Act.
As of ___________, 1996, National City, National City
Columbus, and National City Kentucky held beneficially or of record
approximately ____%, ____% and _____%, respectively, of the outstanding
Institutional shares of the Equity Fund. As of the same date, National City,
National City Columbus and National City Kentucky held beneficially or of record
approximately _____%, ____% and ____%, respectively, of the outstanding
Institutional shares of the Equity Income Fund and approximately _____%, _____%
and ____%, respectively, of the outstanding Institutional shares of the Mid Cap
Regional Fund.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's
assets. First Data Investor Services Group, Inc. (formerly The Shareholder
Services Group, Inc., d/b/a 440 Financial), a wholly-owned subsidiary of First
Data Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P.O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's advisers bear all expenses
in connection with the performance of their services. Each Fund of the Trust
bears its own expenses incurred in its operations including: taxes; interest;
fees (including fees paid to its trustees and officers); SEC fees; state
securities
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<PAGE> 57
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. Each Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Funds also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent accountants.
Pursuant to Rule 17f-2, as National City Bank serves the Trust
as both the custodian and an investment adviser, a procedure has been
established requiring three annual verifications, two of which are to be
unannounced, of all investments held pursuant to the Custodian Services
Agreement, to be conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or a particular investment fund
means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
the Trust or such fund or (b) 67% or more of the shares of the Trust or such
fund present at a meeting if more than 50% of the outstanding shares of the
Trust or such fund are represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds
may be directed to 1-800-622-FUND(3863).
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<PAGE> 58
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF NATIONAL
CITY CORPORATION
National City Bank, 1900 East Ninth Street, Cleveland, Ohio 44114
National City Bank, Columbus, 155 East Broad Street, Columbus,
Ohio 43251
National City Bank, Kentucky, 101 South Fifth Street, Louisville,
Kentucky 40202
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
EXPENSE TABLE ............................................................ 3
FINANCIAL HIGHLIGHTS ..................................................... 5
INTRODUCTION ............................................................. 8
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES ......................... 8
INVESTMENT LIMITATIONS ................................................... 17
YIELD AND PERFORMANCE INFORMATION ........................................ 19
PRICING OF SHARES ........................................................ 21
HOW TO PURCHASE AND REDEEM SHARES ........................................ 21
DISTRIBUTION AGREEMENT ................................................... 30
SHAREHOLDER SERVICES PLAN ................................................ 30
DIVIDENDS AND DISTRIBUTIONS .............................................. 30
TAXES .................................................................... 31
MANAGEMENT OF THE TRUST .................................................. 33
DESCRIPTION OF THE TRUST AND ITS SHARES .................................. 38
CUSTODIAN AND TRANSFER AGENT ............................................. 39
EXPENSES ................................................................. 40
MISCELLANEOUS ............................................................ 40
</TABLE>
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<PAGE> 59
ARMADA FUNDS
PROSPECTUS
September 30, 1996
Equity Fund
Equity Income Fund
Mid Cap Regional Fund
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<PAGE> 60
- --------------------------------------------------------------------------------
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK; NATIONAL
CITY BANK, COLUMBUS; NATIONAL CITY BANK, KENTUCKY; NATIONAL ASSET MANAGEMENT
CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and certain of its affiliates serve as investment advisers
to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Trust
or its Distributor. This Prospectus does not constitute an offering by the Trust
or by the Distributor in any jurisdiction in which such offering may not
lawfully be made.
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<PAGE> 61
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1996
EQUITY FUND
EQUITY INCOME FUND
MID CAP REGIONAL FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 30, 1996 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at 1-800-622-FUND,
4400 Computer Drive, Westborough, Massachusetts 01581.
<PAGE> 62
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION......................................
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES.........................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...........................
DESCRIPTION OF SHARES....................................................
ADDITIONAL INFORMATION CONCERNING TAXES..................................
TRUSTEES AND OFFICERS....................................................
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES AND
TRANSFER AGENCY AGREEMENTS .........................................
SHAREHOLDER SERVICES PLAN................................................
PORTFOLIO TRANSACTIONS...................................................
AUDITORS.................................................................
COUNSEL..................................................................
YIELD AND PERFORMANCE INFORMATION........................................
MISCELLANEOUS............................................................
FINANCIAL STATEMENTS.....................................................
APPENDIX A...............................................................
APPENDIX B...............................................................
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Equity, Equity Income and Mid Cap Regional Funds. The information contained in
this Statement of Additional Information expands upon matters discussed in the
Prospectus. No investment in shares of a Fund should be made without first
reading the Prospectus.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the advisers' investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Performance Information" below.
Attached to this Statement of Additional Information is Appendix
A which contains descriptions of the rating symbols used by S&P, Fitch, Duff,
IBCA and Moody's for securities which may be held by the Funds.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments
resulting from a decline or appreciation in the value of a particular foreign
currency against the U.S. dollar or another foreign currency or for other
reasons, the Equity Income Fund is authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather allow the Fund to establish a rate of exchange
for a future point in time.
When entering into a contract for the purchase or sale of a
security, the Fund may enter into a forward foreign currency exchange contract
for the amount of the purchase or sale price to
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<PAGE> 64
protect against variations, between the date the security is purchased or sold
and the date on which payment is made or received, in the value of the foreign
currency relative to the U.S. dollar or other foreign currency.
When the advisers anticipate that a particular foreign currency
may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the Equity Income Fund may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. Similarly, when the obligations held by the Fund create a
short position in a foreign currency, the Fund may enter into a forward contract
to buy, for a fixed amount, an amount of foreign currency approximating the
short position. With respect to any forward foreign currency contract, it will
not generally be possible to match precisely the amount covered by that contract
and the value of the securities involved due to the changes in the values of
such securities resulting from market movements between the date the forward
contract is entered into and the date it matures. In addition, while forward
contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency.
The Fund will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
A separate account consisting of liquid assets, such as cash,
U.S. Government securities or other liquid high grade debt obligations equal to
the amount of the Equity Income Fund's assets that could be required to
consummate forward contracts will be established with the Fund's custodian
except to the extent the contracts are otherwise "covered." For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional liquid securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. A forward contract to sell a foreign currency is
"covered" if the Fund owns the currency (or securities denominated in the
currency) underlying the contract, or holds a forward contract (or call option)
permitting the Fund to buy the same currency at a price no
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<PAGE> 65
higher than the Fund's price to sell the currency. A forward contract to buy a
foreign currency is "covered" if the Fund holds a forward contract (or call
option) permitting the Fund to sell the same currency at a price as high as or
higher than the Fund's price to buy the currency.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a "when-issued" basis (i.e.,
for delivery beyond the normal settlement date at a stated price and yield).
When a Fund agrees to purchase when-issued securities, the custodian sets aside
cash or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment, and in such a case a Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitment, marked to market daily. It is likely that a Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. Because a Fund will set
aside cash or liquid assets to satisfy its purchase commitments in the manner
described, the Fund's liquidity and ability to manage its fund might be affected
in the event its commitments to purchase when-issued securities ever exceeded
25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between the Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate
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<PAGE> 66
obligations, may have a more active secondary market because they are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. Even
though there may be no active secondary market in such instruments, a Fund may
demand payment of principal and accrued interest at a time specified in the
instrument or may resell them to a third party. Such obligations may be backed
by bank letters of credit or guarantees issued by banks, other financial
institutions or the U.S. Government, its agencies or instrumentalities. The
quality of any letter of credit or guarantee will be rated high quality or, if
unrated, will be determined to be of comparable quality by the advisers. In the
event an issuer of a variable or floating rate obligation defaulted on its
payment obligation, a Fund might be unable to dispose of the instrument because
of the absence of a secondary market and could, for this or other reasons,
suffer a loss to the extent of the default.
SHORT TERM OBLIGATIONS
Each Fund may invest in various short term obligations including
those described below.
Investments include commercial paper and other short term
promissory notes issued by corporations (including variable and floating rate
instruments). In addition, each Fund may invest in Canadian Commercial Paper
("CCP"), which is commercial paper issued by a Canadian corporation or a
Canadian counterpart of a U.S. corporation, and in Europaper, which is U.S.
dollar denominated commercial paper of a foreign issuer. Each Fund may also
acquire zero coupon obligations, which have greater price volatility than coupon
obligations and which will not result in the payment of interest until maturity.
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which is
a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances, certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. Each Fund
may also make interest bearing
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<PAGE> 67
savings deposits in commercial and savings banks not in excess of 5% of its
total assets. Investment in non-negotiable time deposits is limited to no more
than 5% of a Fund's total assets at the time of purchase.
Each Fund may also make limited investments in "GICs" issued by
U.S. insurance companies. When investing in GICs, a Fund makes cash
contributions to a deposit fund or an insurance company's general account. The
insurance company then credits to the Fund monthly a guaranteed minimum interest
which is based on an index. The insurance company may assess periodic charges
against a GIC for expense and service costs allocable to it, and the charges
will be deducted from the value of the deposit fund. A Fund will purchase a GIC
only when its advisers have determined, under guidelines established by the
Board of Trustees, that the GIC presents minimal credit risks to the Fund and is
of comparable quality to instruments that are rated high quality by one or more
rating agencies.
REPURCHASE AGREEMENTS
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's advisers deem creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
its repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that 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
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<PAGE> 68
Trustees of the Trust believes that, under the regular procedures normally in
effect for custody of a Fund's securities subject to repurchase agreements and
under Federal laws, a court of competent jurisdiction would rule in favor of the
Trust if presented with the question. Securities subject to repurchase
agreements will be held by the Trust's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering
into reverse repurchase agreements in accordance with its investment
restrictions. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed-upon date and price. A Fund intends to
enter into reverse repurchase agreements only to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. At the time
a Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid,
high grade debt securities consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will subsequently monitor the account to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by a Fund may decline below the price at which it is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by the Fund under the Investment Company Act of
1940.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase
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<PAGE> 69
the agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality issuing the obligation. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. The Funds will
invest in the obligations of such agencies or instrumentalities only when the
advisers believe that the credit risk with respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Fund to receive certain favorable tax treatment. Portfolio turnover will not
be a limiting factor in making fund decisions.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's
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outstanding shares (as defined under "Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of securities,
or maintain a short position, except that each Fund may purchase and sell
futures contracts and options on futures contracts in accordance with its
investment objective.
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of certain portfolio securities acquired within the limitation
on purchases of restricted securities.
3. Purchase or sell real estate, except that each Fund may invest
in securities secured by real estate or interests therein or issued by companies
or investment trusts which invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts or invest
in oil, gas, or other mineral exploration or development programs, except that a
Fund may: (a) to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs; and (b) purchase and sell futures
contracts and options on futures contracts in accordance with its investment
objective. In addition, each Fund may enter into forward currency contracts and
other financial instruments in accordance with its investment objective and
policies.
5. Invest in any issuer for the purpose of exercising control or
management.
6. Purchase or retain securities of any issuer if the officers or
trustees of the Trust or the officers or directors of its investment advisers
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.
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In addition, the Equity Fund may not write or purchase put
options, call options, straddles, spreads, or any combination thereof, except
that the Fund may purchase and sell futures contracts and options on futures
contracts in accordance with its investment objective.
The Equity Income Fund and Mid Cap Regional Fund may not write
puts, calls or combinations thereof, except for transactions in: options on
securities, financial instruments, currencies and indices of securities; futures
contracts; options on futures contracts; forward currency contracts; interest
rate swaps; and similar instruments.
* * * * *
In addition, so long as a Fund is offering and selling its shares
in the state of Texas the Fund may not (i) invest more than 5% of its net assets
in warrants (included within that amount, but not to exceed 2%, may be warrants
which are not listed on the New York or American Stock Exchange), (ii) invest in
oil, gas or other mineral leases, or (iii) invest in real estate limited
partnership interests.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Trust are sold on a continuous basis by 440
Financial Distributors, Inc. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must be
signed by each shareholder, with each signature guaranteed by a U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
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The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended May 31, 1996, sales loads paid by
shareholders of the Equity, Equity Income and Mid Cap Regional Funds totalled
$9,792, $4,477 and $9,968, respectively.
Automatic investment programs such as the monthly savings program
("Program") described in the Prospectus offered by the Funds permit an investor
to use "dollar cost averaging" in making investments. Under this Program, an
agreed upon fixed dollar amount is invested in Fund shares at predetermined
intervals. This may help investors to reduce their average cost per share
because the Program results in more shares being purchased during periods of
lower share prices and fewer shares during periods of higher share prices. In
order to be effective, dollar cost averaging should usually be followed on a
sustained, consistent basis. Investors should be aware, however, that dollar
cost averaging results in purchases of shares regardless of their price on the
day of investment or market trends and does not ensure a profit, protect against
losses in a declining market, or prevent a loss if an investor ultimately
redeems his shares at a price which is lower than their purchase price. An
investor may want to consider his financial ability to continue purchases
through periods of low price levels. From time to time, in advertisements, sales
literature, communications to shareholders and other materials ("Materials"),
the Trust may illustrate the effects of dollar cost averaging through use of or
comparison to an index such as the S&P 500 Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
Illustrations of the computation of the offering price
per Retail share of the Funds, based on the value of the Funds' net
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assets and number of outstanding shares on May 31, 1996 are as follows:
TABLE
EQUITY FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares ................................... $6,012,523
Outstanding Retail Shares ..................................... 333,129
Net Asset Value Per Share
($6,012,523 / 333,129) ....................................... $ 18.05
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) .................................... $ 0.70
Offering to Public ............................................ $ 18.75
EQUITY INCOME FUND
Net Assets of Retail Shares ................................... $ 263,139
Outstanding Retail Shares ..................................... 20,796
Net Asset Value Per Share
($263,139 / 20,796) .......................................... $ 12.65
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) .................................... $ 0.49
Offering to Public ............................................ $ 13.14
</TABLE>
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<TABLE>
<S> <C>
Net Assets of Retail Shares ................................... $4,701,642
Outstanding Retail Shares ..................................... 363,255
Net Asset Value Per Share
($4,701,642 / 363,255) ....................................... $ 12.94
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) .................................... $ 0.50
Offering to Public ............................................ $ 13.44
</TABLE>
EXCHANGE PRIVILEGE
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived) to
reduce the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other
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rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption. Pursuant to such
authority, the Board of Trustees has authorized the issuance of 36 classes or
series of shares. Six of these classes or series, which represent interests in
the Equity Fund (Class H and Class H - Special Series 1), Equity Income Fund
(Class M and Class M - Special Series 1) and Mid Cap Regional Fund (Class N and
Class N - Special Series 1), are described in this Statement of Additional
Information and the related Prospectus.
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
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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
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substitute for careful tax planning. Potential investors should consult their
tax advisers with specific reference to their own tax situation.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Fund's gross income for a
taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act; (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Fund's principal business
of investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and, with
respect to taxable debt securities and non taxable debt securities acquired
after April 30, 1993, accrued market discount) received by a Fund upon maturity
or disposition of a security held for less than three
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months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of this requirement. However,
any other income which is attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose.
Some investments held by a Fund may be subject to special rules
which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. The Treasury Department has issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" are not subject to the mark-to-market or loss deferral
rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by a Fund which are not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
The Trust will designate any distribution of long-term capital
gains of a Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for at least six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.
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A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
If for any taxable year a Fund does not qualify for federal tax
treatment as a regulated investment company, all of such Fund's taxable income
will be subject to federal income tax at regular corporate rates without any
deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits, and would be eligible for
the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon
sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients".
TRUSTEES AND OFFICERS
The 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.
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Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1996, the
Trust's trustees and officers as a group received aggregate fees of $69,875. The
trustees and officers of the Trust own less than 1% of the shares of the Trust.
The following table summarizes the compensation for each of the
Trustees of the Trust for the fiscal year ended May 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Approval Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Richard B. Tullis, 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
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reason of his being or having been a shareholder and not because of his acts or
omissions or some other reason. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
The Declaration of Trust states further that no trustee, officer,
or agent of the Trust shall be personally liable for or on account of any
contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AGREEMENTS
As described in the Prospectus, National City, National City
Columbus and National City Kentucky serve as investment advisers to the Equity
Fund, Equity Income Fund, and National City Bank alone serves as investment
adviser to the Mid Cap Regional Fund. Prior to September 26, 1990, only National
City and National City Columbus served as advisers to the Equity Fund. The
advisers are affiliates of National City Corporation, a bank holding company
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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 $32 billion in assets. From time to time, the advisers
may voluntarily waive fees or reimburse the Trust for expenses.
Pursuant to the Advisory Agreement, the Trust incurred advisory
fees in the following amounts for (i) the fiscal years ended May 31, 1996, 1995
and 1994 : $1,114,914, $814,885 and $724,220 respectively, for the Equity Fund;
(ii) the fiscal years ended May 31, 1996 and 1995: $370,633 and $131,109 (after
waivers of $39,122) with respect to the Equity Income Fund; and (iii) the fiscal
years ended May 31, 1996 and 1995: $571,860 and $183,900 (after waivers of
$27,051) with respect to the Mid Cap Regional Fund.
Each Advisory Agreement provides that the advisers shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the advisers in the performance of
their duties or from reckless disregard by them of their duties and obligations
thereunder. In addition, the advisers have undertaken in the Advisory Agreements
to maintain their policy and practice of conducting their Trust Departments
independently of their Commercial Departments.
The Advisory Agreement relating to the Equity Fund was approved
by the shareholders of such Fund on September 26, 1990. The Advisory Agreements
relating to the Equity Income and Mid Cap Regional Funds were approved by their
sole shareholder prior to the Funds' commencement of investment operations.
Unless sooner terminated, the Advisory Agreements will continue in effect with
respect to a particular Fund until September 30, 1997 and from year to year
thereafter, subject to annual approval by the Trust's Board of Trustees, or by a
vote of a majority of the outstanding shares of such Fund (as defined in the
Funds' Prospectus) and a majority of the trustees who are not parties to the
Agreement or
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<PAGE> 83
interested persons (as defined in the 1940 Act) of any party by votes cast in
person at a meeting called for such purpose. The Advisory Agreements may be
terminated by the Trust or the advisers on 60 days written notice, and will
terminate immediately in the event of its assignment.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the advisers
will reimburse the Trust for any such excess with respect to the Funds to the
extent described in any written undertaking provided by the advisers to such
state. To the Trust's knowledge, as of the date of this Statement of Additional
Information, the most restrictive expense limitation applicable to the Trust
provides that annual expenses (as defined by statute) may not exceed 2.5% of the
first $30 million, 2% of the next $70 million and 1.5% of the remaining average
net assets of a particular Fund. Such amount, if any, will be estimated,
reconciled and paid on a monthly basis. The fees Banks may charge to Customers
for services provided in connection with their investments in the Trust are not
covered by the state securities expense limitations described above.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC for
(i) the fiscal years ended May 31, 1996, 1995 and 1994 : $148,244, $108,651 and
$96,563 respectively, for the Equity Fund; (ii) the fiscal years ended May 31,
1996 and 1995: $49,418 and $17,597 (after waivers of $5,100) with respect to the
Equity Income Fund; and (iii) the fiscal years ended May 31, 1996 and 1995:
$76,026 and $23,006 (after waivers of $5,121) with respect to the Mid Cap
Regional Fund.
DISTRIBUTION PLAN AND RELATED AGREEMENT
The Distributor acts as distributor of the Funds' shares pursuant
to its Distribution Agreement with the Trust as described in the Prospectus.
Shares are sold on a continuous basis.
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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 Trusts' Plan provides that each Fund will reimburse the
Distributor for distribution expenses in an amount not to exceed .10% of such
fund's average net assets. Distribution expenses payable by the Distributor
pursuant to the Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a fund's shares, and direct and
indirect costs and expenses of preparing, printing and distributing its
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prospectuses to other than current shareholders. In addition, the Plan provides
that the Trust will pay the Distributor an annual distribution fee of $250,000
payable monthly and accrued daily by all of the Trust's investment funds with
respect to which the Distributor is distributing shares. For the fiscal years
ended May 31, 1996 and 1995, the Trust paid the Distributor $106,059 and $67,272
with respect to the Equity Fund, $23,250 and $10,408 with respect to the Equity
Income Fund and $62,220 and $31,486 with respect to the Mid Cap Regional Fund.
Of the aggregate amount paid to the Distributor by the Trust with respect to the
Equity Fund approximately $2,064 and $959 was attributable to postage, $2,648
and $3,919 was attributable to communications with shareholders, $82,731 and
$51,233 was attributable to advertisement/promotions and $10,930 and $11,161 was
attributable to general compensation to the Distributor. Of the aggregate amount
paid to the Distributor by the Trust with respect to the Equity Income Fund
approximately $757 and $119 was attributable to postage, $1,130 and $4,192
was attributable to communications with shareholders, $38,365 and $4,256 was
attributable to advertisement/ promotions and $3,663 and $1,842 was
attributable to general compensation to the Distributor. Of the aggregate amount
paid to the Distributor by the Trust with respect to the Mid Cap Regional Fund
approximately $1,126 and $222 was attributable to postage, $1,458 and $7,132
was attributable to communications with shareholders, $50,190 and $22,263 was
attributable to advertisement/promotions and $5,700 and $1,869 was
attributable to general compensation to the Distributor.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with respect
to the Funds. Under its Custodian Services Agreement, National City Bank has
agreed to: (i) maintain a separate account or accounts in the name of each Fund;
(ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and
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make disbursements of money on behalf of each Fund; (iv) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities; (v) respond to correspondence by security brokers and others
relating to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Funds' operations. National City Bank is authorized to select one
or more banks or trust companies to serve as sub-custodian on behalf of the
Funds, provided that it shall remain responsible for the performance of all of
its duties under the Custodian Services Agreement and shall hold the Funds
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian. The Funds reimburse National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by each Fund in any year may not exceed $.225
for each $1,000 of average gross assets of such Fund.
First Data Investor Services Group, Inc. (formerly, The
Shareholder Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Services Plan with respect to Retail shares in each of the Funds. Pursuant to
the Services Plan, the Trust may enter into agreements with financial
institutions pertaining to the provision
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<PAGE> 87
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 Funds; (iv) providing
information periodically to customers showing their position in Retail shares;
(v) arranging for bank wires; (vi) responding to customer inquiries relating to
the services performed with respect to Retail shares beneficially owned by
customers; (vii) forwarding shareholder communications; and (viii) other similar
services requested by the Trust. Agreements between the Trust and financial
institutions will be terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
Pursuant to their Advisory Agreements with the Trust, National
City, National City Columbus and National City Kentucky are responsible for
making decisions with respect to and placing orders for all purchases and sales
of portfolio securities for the Funds. The advisers purchase portfolio
securities either directly from the issuer or from an underwriter or dealer
making a market in the securities involved. Purchases from an underwriter of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and purchases from dealers serving as market makers may include
the spread between the bid and asked price. Transactions on stock exchanges
involve the payment of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market, but the price includes an undisclosed commission or mark-up.
For the fiscal years ended May 31, 1996 and 1995, the Equity,
Equity Income and Mid Cap Regional Funds paid $265,644 and $80,991, $102,100 and
$68,108 and $356,904 and $217,900 in brokerage commissions, respectively.
While the advisers generally seek competitive spreads or
commissions, they may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission
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<PAGE> 88
available on the transaction. Allocation of transactions, including their
frequency, to various dealers is determined by the advisers in their best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the advisers may receive orders for transactions by a
Fund. Information so received is in addition to and not in lieu of services
required to be performed by the advisers and does not reduce the fees payable to
the advisers by the Fund. Such information may be useful to the advisers in
serving both the Trust and other clients, and, similarly, supplemental
information obtained by the placement of business of other clients may be useful
to the advisers in carrying out their obligations to the Trust.
Portfolio securities will not be purchased from or sold to the
Fund's advisers, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, a Fund will not give preference to its
advisers' correspondents with respect to such transactions, securities, savings
deposits, repurchase agreements and reverse repurchase agreements.
While serving as advisers to the Fund, National City, National
City Columbus and National City Kentucky have agreed to maintain their policy
and practice of conducting their Trust departments independently of their
Commercial Departments. In making investment recommendations for the Trust,
Trust Department personnel will not inquire or take into consideration whether
the issuer of securities proposed for purchase or sale for the Trust's account
are customers of the Commercial Department. In dealing with commercial
customers, the Commercial Department will not inquire or take into consideration
whether securities of those customers are held by the Trust.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the advisers. Such other Funds, investment companies and
accounts may also invest in the same securities as such Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund
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<PAGE> 89
and another investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the advisers believe to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by such Fund. To the extent permitted by law, the advisers may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in order to obtain best
execution.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust. The financial statements, as
of and for the period ended May 31, 1996, which are incorporated by reference in
this Statement of Additional Information, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report referred to elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
The Equity Income Fund's "yield" described in the Prospectus is
calculated by dividing each Fund's net investment income per share earned during
a 30-day period (or another period permitted by the rules of the SEC) by the net
asset value per share on the last day of the period and annualizing the result
on a semi-annual basis by adding one to the quotient, raising the sum to the
power of six, subtracting one from the result and then doubling the
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<PAGE> 90
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 (to the 6th power)
Yield = 2 [(----------------------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends.
d = maximum offering price per share on the last
day of the period.
The Equity Income Fund calculates interest earned on debt
obligations held in its fund by computing the yield to maturity of each
obligation held by it based on the market value of the obligation (including
actual accrued interest) at the close of business on the last business day of
each 30-day period, or, with respect to obligations purchased during the 30-day
period, the purchase price (plus actual accrued interest) and dividing the
result by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent 30-day period that the obligation
is in the Fund. The maturity of an obligation with a call provision is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date. With respect to debt obligations purchased by a Fund at
a discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
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<PAGE> 91
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" in
the Prospectus.
For the 30-day period ended May 31, 1996, the yields of the
Retail and Institutional shares of the Equity , Equity Income and Mid Cap
Regional Funds were 0.44% and 0.70%, 1.14% and 2.71% and 0.41% and 0.66%,
respectively.
Each Fund computes its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV (to the 1/nth power)
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
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<PAGE> 92
Each Fund computes its aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
T = (---) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total returns for the one year period ending
May 31, 1996 were 19.65% (after taking the sales load into account) and 24.34%
(without taking into account any sales load), for the Equity Fund's Retail
Shares and 24.61% for the Equity Fund's Institutional shares. The average annual
total returns since the Equity Fund's commencement of operations through May 31,
1996 were 11.22% (after taking into account the sales load) and 11.88% (without
taking into account any sales load), for its Retail shares and 12.11% for the
Institutional shares.
The average annual total returns for the one year period ended
May 31, 1996 were 14.88% (after taking the sales load into account) and 19.37%
(without taking into account any sales load), for the Equity Income Fund's
Retail shares and 19.72% for the Equity Income Fund's Institutional shares. The
average annual total returns since the Equity Income Fund's commencement of
operations through May 31, 1996 were 14.12% (after taking into account the sales
load) and 16.60% (without taking into account
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<PAGE> 93
any sales load), for its Retail shares and 17.09% for the Institutional shares.
The average annual total returns for the period ended May 31,
1996 were 17.68% (after taking the sales load into account) and 22.28% (without
taking into account any sales load), for the Mid Cap Regional Fund's Retail
shares and 22.64% for the Mid Cap Regional Fund's Institutional shares. The
average annual total returns since the Mid Cap Regional Fund's commencement of
operations through May 31, 1996 were 16.35% (after taking into account the sales
load) and 18.88% (without taking into account any sales load), for its Retail
shares and 20.19% for the Institutional shares.
The Funds may also from time to time include in Materials a total
return figure that is not calculated according to the formulas set forth above
in order to compare more accurately a Fund's performance with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of an index,
a Fund may calculate its aggregate total return for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. A Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. A Fund will, however, disclose the maximum sales charge and will also
disclose that the performance data do not reflect sales charges and that
inclusion of sale charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would
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<PAGE> 94
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Funds may also include in Materials discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of a Fund, high-quality investments (with respect to the Equity and
Equity Income Funds), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Materials may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the views
of the advisers as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Funds and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of a Fund and/or other mutual
funds. Materials may include a discussion of certain attributes or benefits to
be derived by an investment in a Fund and/or other mutual funds (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable investments), shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Materials may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
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<PAGE> 95
MISCELLANEOUS
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are being amortized on the straight-line method over a period of five
years from the date of commencement of operations.
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the liabilities in respect of that Fund.
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<PAGE> 96
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Equity Income Fund as of July 15,
1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Equity Income Fund Shares Shares
- ------------------- ------------- -------------
<S> <C> <C>
National City Non Contributing Pension Plan 2,138,941.45 35.41%
National City Corporation
Attn: Karl A. Johns
Secretary, Pension Committee
1900 E. Ninth Street
Cleveland, Ohio 44114
National City 348,447.30 5.77%
Savings and Investment Plan
National City Corporation
1900 East Ninth Street
Cleveland, Ohio 44114
</TABLE>
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<PAGE> 97
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Mid Cap Regional Fund as of July 15,
1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Mid Cap Regional Fund Shares Shares
- ---------------------- ------------- -------------
<S> <C> <C>
National City 2,144,732.86 25.42%
Non Contributory
Pension Plan
Attn: Karl A. Johns
1900 East Ninth Street
Cleveland, Ohio 44114
National City Savings & Investment Plan 617,715.46 7.32%
National City Corporation
1900 East Ninth Street
Cleveland, OH 44114
Dispatch Printing Company 518,032.92 6.14%
c/o National City Bank of Columbus
155 East Broad Street, Trust Division
Columbus, OH 43251
Cleveland Foundation 441,605.09 5.23%
c/o National City Bank, 8th Floor
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Equity Income Fund as of July 15, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Retail Outstanding
Equity Income Fund Shares Retail Shares
- ------------------- ---------------- -------------
<S> <C> <C>
Lawanah Harris 2,010.146 9.45%
244 Natale Drive
Cortland, OH 44410
Carroll C. Homans, TTEE 5,449.308 25.61%
Alan & Carroll C. Homans
Declaration of Trust, U/A 5/19/92
1190 Sugar Sand Blvd., #517
Riviera Beach, FL 33404
Melva D. Upshaw 1,548.741 7.28%
15100 Minerva Avenue
Dolton, IL 60419
John E. Hoeffel 1,168.196 5.49%
Carol L. Hoeffel
972 Glenwood
Napoleon, OH 43545
</TABLE>
The following shareholders beneficially owned 5% or more of the
Outstanding Retail Shares of the Mid Cap Regional Fund as of July 15, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Mid Cap Regional Fund Retail Shares Retail Shares
- --------------------- ------------- -------------
<S> <C> <C>
Susan G. Ledford 19,608.992 5.50%
1241 Carron Drive
Columbus, OH 43220
</TABLE>
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<PAGE> 98
To the Trust's knowledge, no shareholder beneficially owned 5% or
more of the outstanding Institutional and Retail Shares of the Equity Fund as
of July 15, 1996.
FINANCIAL STATEMENTS
The audited financial statements contained in the annual report for the fiscal
year ended May 31, 1996 are hereby incorporated herein by reference. Copies of
the annual report may be obtained by calling the Trust at 1-800-622-FUND or by
writing to the Trust at 4400 Computer Drive, Westborough, Massachusetts 01581.
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<PAGE> 99
APPENDIX A
DESCRIPTION OF RATINGS
Corporate Long-Term Debt
The following summarizes the four highest rating categories used
by Standard & Poor's Ratings Group ("S&P") for corporate debt:
"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 is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated
categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than in higher-rated categories.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "BBB" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the four highest rating categories used
by Moody's Investors Service, Inc. ("Moody's) for corporate debt:
A-1
<PAGE> 100
"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 present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations (i.e., they are
neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operation experience, (c) rentals which begin when facilities
are completed, or (d) payments to which some other limiting
A-2
<PAGE> 101
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 "Baa" 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 four highest rating categories used
by Duff & Phelps Credit Rating Co. ("Duff & Phelps") for corporate debt:
"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" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in
periods of economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during
economic cycles.
To provide more detailed indications of credit quality, the "AA,"
"A" and "BBB" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.
A-3
<PAGE> 102
The following summarizes the four highest rating categories used
by Fitch Investors Service, Inc. ("Fitch") for corporate 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 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.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
A-4
<PAGE> 103
The following summarizes the four 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" - 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.
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 highest rating category 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-5
<PAGE> 104
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the highest rating
category used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. 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.
The following summarizes the highest rating category 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.
The following summarizes the highest rating category used by
Fitch for short-term notes, municipal notes, variable rate demand instruments
and commercial paper:
A-6
<PAGE> 105
"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+."
IBCA uses the following highest rating category 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.
A-7
<PAGE> 106
APPENDIX B
As stated in the Prospectus, the Mid Cap Regional Fund (the
"Fund") may enter into certain futures transactions and options for hedging
purposes. Such transactions are described in this Appendix.
I. Index Futures Contracts
General. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's Ratings Group 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes or indexes based on an industry or market
segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by
the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
The Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Fund may do so either to hedge the value of its Fund
as a whole, or to protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold. Conversely, the Fund will
purchase index futures contracts in anticipation of purchases of securities. A
long futures position may be terminated without a corresponding purchase of
securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its Fund holdings. For example, in
the event that the Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. The
Fund may also sell futures contracts in connection with this strategy, in order
to protect against the possibility that the value of the
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<PAGE> 107
securities to be sold as part of the restructuring of the Fund will decline
prior to the time of sale.
II. Margin Payments
Unlike purchases or sales of portfolio securities, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, the
advisers may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
B-2
<PAGE> 108
III. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by
the Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, the Fund may buy or sell futures contracts in a greater
dollar amount than the dollar amount of instruments being hedged if the
volatility over a particular time period of the prices of such instruments has
been greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the advisers. Conversely, the Fund may buy
or sell fewer futures contracts if the volatility over a particular time period
of the prices of the instruments being hedged is less than the volatility over
such time period of the futures contract being used, or if otherwise deemed to
be appropriate by the advisers. It is also possible that, where the Fund has
sold futures to hedge its Fund against a decline in the market, the market may
advance and the value of instruments held in the Fund may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities.
When futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as
B-3
<PAGE> 109
to possible further market decline or for other reasons, the Fund will realize a
loss on the futures contract that is not offset by a reduction in the price of
the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund will continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or
B-4
<PAGE> 110
completely offset losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities will in fact correlate
with the price movements in the futures contract and thus provide an offset on a
futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Fund is also subject to the
advisers ability to predict correctly movements in the direction of the market.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
IV. Options on Futures Contracts
The Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between
B-5
<PAGE> 111
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. The Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received will
be included as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
V. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
B-6
<PAGE> 112
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 five investment
funds (the "Funds") of Armada Funds (the "Trust"), each having its own
investment objective and policies:
FIXED INCOME FUND'S investment objective is to provide as high a level
of current income as is consistent with prudent investment risk. The Fund
invests in high and medium grade bonds and other fixed income securities. Under
normal market conditions, the Fund maintains an average dollar-weighted
portfolio maturity of ten years or less.
ENHANCED INCOME FUND'S investment objective is to [seek a total rate
of return greater than that of the Merrill Lynch 1-3 year Treasury Index]. The
Fund [will normally] invest [at least 80% of the value of its total assets in
investment quality debt securities of all types. However, up to 20% of the value
of its total assets may be invested in preferred stocks and other
investments]. Under normal market conditions, the Fund [intends to] maintain an
average dollar-weighted portfolio maturity [for its debt securities] of [from
1-1/2 to 4 years].
TOTAL RETURN ADVANTAGE FUND'S investment objective is to provide a
total rate of return, income and price appreciation greater than that of popular
market indices with similar maturity and quality characteristics. Under normal
market conditions, the Fund maintains an average dollar-weighted portfolio
maturity of
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<PAGE> 113
two years above or below the average maturity of the Lehman Brothers
Government/Corporate Bond Index.
INTERMEDIATE GOVERNMENT FUND'S investment objective is to seek
preservation of capital and a high degree of liquidity while providing current
income. The Fund invests primarily in obligations issued or guaranteed as to
principal and interest by the U.S. Government and its agencies and
instrumentalities.
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 each Fund will fluctuate as the value
of its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City"), National City Bank, Columbus
("National City Columbus") and National City Bank, Kentucky ("National City
Kentucky") serve as investment advisers to the Fixed Income Fund; National Asset
Management Corporation ("NAM") serves as investment adviser to the Enhanced
Income Fund and Total Return Advantage Fund; and National City serves as
investment adviser to the GNMA Fund and Intermediate Government Fund. These
investment advisers are referred to herein individually as an "adviser" and
collectively as the "advisers ."
440 Financial Distributors, Inc., a wholly-owned subsidiary of
First Data Corp. (the "Distributor"), serves as the Trust's sponsor and
distributor. Each Fund pays a fee to the Distributor for distributing its
shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the
-3-
<PAGE> 114
Trust at its telephone number or address shown above. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL
CITY BANK, COLUMBUS, NATIONAL CITY BANK, KENTUCKY, NATIONAL ASSET MANAGEMENT
CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES, AND ARE NOT
FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE
TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 30, 1996
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<PAGE> 115
The classes which represent interests in the Funds are
described in this Prospectus. Class I, Class O , Class P, Class R and Class S
shares constitute the Institutional class of shares (herein referred to as the
"Institutional shares") of the Fixed Income Fund, Enhanced Income Fund, Total
Return Advantage Fund, Intermediate Government Fund and GNMA Fund, respectively.
Class I - Special Series 1, Class O - Special Series 1 , Class P -Special
Series 1, Class R - Special Series 1 and Class S -Special Series 1 shares
constitute the Retail class of shares (herein referred to as the "Retail
shares") of the Fixed Income, Enhanced Income , Total Return Advantage,
Intermediate Government and GNMA Funds, respectively.
Institutional shares are sold primarily to Banks and
customers of NAM. Retail shares are sold to the public primarily through
financial institutions such as banks, brokers and dealers.
<TABLE>
<CAPTION>
EXPENSE TABLES
FIXED FIXED ENHANCED ENHANCED TOTAL RETURN TOTAL RETURN
INCOME INCOME INCOME INCOME ADVANTAGE ADVANTAGE
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES SHARES(1) SHARES SHARES(1) SHARES
-------- ------------- -------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases............... 3.75% None 2.75% None 3.75% None
Sales Charge Imposed
on Reinvested Dividends............ None None None None None None
Deferred Sales Charge................ None None None None None None
Redemption Fee....................... None None None None None None
Exchange Fee......................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (after fee
waivers).......................... .55% .55% 0%(3) 0%(3) 0%(3) 0%(3)
12b-1 Fees (after fee
waivers)(2)........................ .05%(2) .05%(2) .01%(2) .01%(2) .01%(2) .01%(2)
Other Expenses........................ .47% .22% .34% .24% .42% .17%
----- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (after fee
waivers)(3)........................ 1.07% .82% .35%(3) .25%(3) .43%(3) .18%(3)
===== ==== ==== ==== ==== ====
</TABLE>
-4-
<PAGE> 116
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
GOVERNMENT GOVERNMENT GNMA GNMA
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES(1) SHARES(1) SHARES
-------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge
Imposed on Purchases 3.75% None 3.75% None
Sales Charge Imposed
on Reinvested Dividends None None None None
Deferred Sales Charge None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Annual Fund Operating Expenses
(as a percentage of average net
assets)
Management Fees .55% .55% .55% .55%
12b-1 Fees (after fee waivers)(2) .01%(2) .01%(2) .01%(2) .01%(2)
Other Expenses .50% .25% .53% .28%
-------- ------- ------- -------
Total Fund Operating
Expenses (after fee waivers)(3) 1.06%(3) .81%(3) 1.09%(3) .84%(3)
======= ======= ======= =======
<FN>
- ---------------------------
(1) The Trust has implemented a Shareholder Services Plan (the "Services Plan")
with respect to Retail shares in each of the Funds. Pursuant to the Services
Plan, the Trust enters into shareholder servicing agreements with certain
financial institutions under which they agree to provide shareholder
administrative services to their customers who beneficially own Retail
shares in consideration for the payment of up to .25% (on an annualized
basis) of the net asset value of Retail shares of the Fixed Income Fund,
Total Return Advantage Fund, Intermediate Government Fund and GNMA Fund
and/or up to .10% (on an annualized basis) of the net asset value of Retail
shares of the Enhanced Income Fund. For further information concerning the
Services Plan, see "Shareholder Services Plan."
(2) The Funds have in effect 12b-1 Plans pursuant to which each Fund may bear
fees in an amount of up to .10% of average daily net assets. As a result of
the payment of sales charges and 12b-1 and certain other related fees,
long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which
generally limit the aggregate sales charges and payments under the Trust's
Service and Distribution Plan ("Distribution Plan") and Services Plan to a
certain percentage of total new gross share sales, plus interest. The Trust
would stop accruing 12b-1 and related fees if, to the extent, and for as
long as, such limit would otherwise be exceeded.
(3) The expense information in the table relating to each Fund has been restated
to reflect current fees. NAM will waive its entire advisory fee of .45% and
.55% of the average daily net assets of the Enhanced Income and Total Return
Advantage Funds, respectively, through May 31, 1997. Without such fee
waivers, Total Fund Operating Expenses would be .70% and .80% for the
Institutional and Retail shares of the Enhanced Income Fund, respectively,
and .73% and .98% for the Institutional and Retail shares of the Total
Return Advantage Fund, respectively. Additionally, if the maximum
distribution fee permitted under the 12b-1 plan were imposed, Total Fund
Operating Expenses would be .87% and 1.12%, .79% and .89%, .82% and
1.07%, .90% and 1.15% and .93% and 1.18% for the Institutional and Retail
Shares of the Fixed Income Fund, Enhanced Income Fund, Total Return
Advantage Fund, Intermediate Government Fund and GNMA Fund, respectively.
</TABLE>
- ---------------------------
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<PAGE> 117
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Fixed Income Retail Shares............................ $48 $70 $94 $163
Fixed Income Institutional Shares..................... $ 8 $26 $46 $101
Enhanced Income Retail Shares......................... $31 $38 $47 $ 71
Enhanced Income Institutional Shares.................. $ 3 $ 8 $14 $ 32
Total Return Advantage Retail Shares.................. $42 $51 $61 $ 90
Total Return Advantage Institutional Shares........... $ 2 $ 6 $10 $ 23
Intermediate Government Fund
Retail Shares....................................... $48 $70 $94 $162
Intermediate Government Fund
Institutional Shares................................ $ 8 $26 $45 $100
GNMA Fund Retail Shares............................... $48 $71 $95 $165
GNMA Fund Institutional Shares........................ $ 9 $27 $47 $104
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF
RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Funds will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Financial Highlights," "Management of the Trust" and
"Distribution Agreement" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Funds. Any fees that are charged by affiliates of the
adviser or other institutions directly to their customer accounts for services
related to an investment in retail shares of any of the Funds are in addition to
and not reflected in the fees and expenses described above.
-6-
<PAGE> 118
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FIXED INCOME FUND
The following table has been audited by Ernst & Young LLP,
independent auditors, whose report is incorporated by reference in the Statement
of Additional Information. It should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Statement of Additional Information. Additional information about the
performance of the Fixed Income Fund is contained in the Trust's Annual Report
to Shareholders, which may be obtained without charge by contacting the Trust at
its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, May 31, May 31, May 31, May 31, May 31, May 31,
1996 1996 1995 1995 1994 1994 1993
Institutional Retail Institutional Retail Institutional Retail Institutional
------------- ---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $10.54 $10.60 $10.24 $10.30 $10.93 $10.98 $10.60
------ ------ ------ ------ ------ ------ ------
Income from Investment Operations
Net Investment Income..................... .61 .59 .63 .61 .61 .58 .70
Net Gains (Losses) on Securities
Realized and Unrealized.................. (.22) (.23) .30 .30 (.59) (.58) .46
----- ----- --- --- ----- ----- ----
Total from Investment Operations....... .39 .36 .93 .91 .02 .00 1.16
---- ---- --- --- ---- ---- ----
Less Distributions
Dividends from Net Investment Income...... (.61) (.59) (.63) (.61) (.61) (.58) (.70)
Dividends in Excess of Net Investment
Income.................................. (.00) (.00) (.00) (.00) (.05) (.05) (.02)
Dividends from Net Realized
Capital Gains........................... (.00) (.00) (.00) (.00) (.03) (.03) (.11)
Dividends in Excess of Net Realized
Capital Gains........................... (.02) (.02) (.00) (.00) (.02) (.02) (.00)
----- ----- ----- ----- ----- ----- -----
Total Distributions.................... (.63) (.61) (.63) (.61) (.71) (.68) (.83)
----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of Period............ $10.30 $10.35 $10.54 $10.60 $10.24 $10.30 $10.93
====== ====== ====== ====== ====== ====== ======
Total Return.............................. 3.79% 3.44%(3) 9.55% 9.26%(3) 0.00% (0.23%)(3) 11.32%
Ratios/Supplemental Data
Net Assets, End of Period (000s)..........$111,240 $6,216 $88,047 $5,527 $95,907 $5,480 $95,246
Ratio of Expenses to Average
Net Assets (after fee
waivers)............................ .80%(4) 1.04%(5) 0.85%(4) 1.09%(5) 0.83% 1.08% .32%(4)
Ratio of Net Investment
Income to Average Net
Assets (after fee waivers)......... 5.78%(4) 5.50%(5) 6.24%(4) 5.95%(5) 5.59% 5.34% 6.46%(4)
Portfolio Turnover Rate................... 45% 45% 42% 42% 34% 34% 33%
</TABLE>
<TABLE>
<CAPTION>
For the Period
Year Ended Year Ended Year Ended Year Ended Year Ended December 20, 1989
May 31, May 31, May 31, May 31, May 31, (commencement of
1993 1992 1992 1991 1991 operations) to
Retail Institutional Retail Institutional Retail(1) May 31, 1990
---------- ------------- ---------- ------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $10.63 $10.15 $10.15 $9.83 $10.11 $10.00
------ ------ ------ ----- ------- ------
Income from Investment Operations
Net Investment Income..................... .65 .81 .79 .76 .10 .33
Net Gains (Losses) on Securities
Realized and Unrealized.................. .48 .45 .45 .39 .01 (.24)
---- ---- ---- ---- ---- -----
Total from Investment Operations....... 1.13 1.26 1.24 1.15 .11 .09
---- ---- ---- ---- --- ---
Less Distributions
Dividends from Net Investment Income...... (.65) (.81) (.76) (.76) (.07) (.26)
Dividends in Excess of Net Investment
Income.................................. (.02) (.00) (.00) (.07) (.00) (.00)
Dividends from Net Realized
Capital Gains........................... (.11) (.00) (.00) (.00) (.00) (.00)
Dividends in Excess of Net Realized
Capital Gains........................... (.00) (.00) (.00) (.00) (.00) (.00)
----- ----- ----- ----- ----- -----
Total Distributions.................... (.78) (.81) (.76) (.83) (.07) (.26)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period............ $10.98 $10.60 $10.63 $10.15 $10.15 $9.83
====== ====== ====== ====== ====== =====
Total Return.............................. 11.03%(3) 12.96% 12.64%(3) 12.20% 8.45%(2),(3) 2.21%(2)
Ratios/Supplemental Data
Net Assets, End of Period (000s).......... $5,208 $40,414 $1,033 $34,664 $284 $30,699
Ratio of Expenses to Average
Net Assets (after fee
waivers)............................ .57%(5) .30%(4) .55%(5) .33%(4) .56%(2),(5) .37%(2)
Ratio of Net Investment
Income to Average Net
Assets (after fee waivers)......... 6.21%(5) 7.84%(4) 7.57%(5) 8.34(4) 7.89%(2),(5) 8.34%(2)
Portfolio Turnover Rate................... 33% 13% 13% 0% 0% 20%(2)
</TABLE>
- -------------------
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total return excludes sales load.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the Custodian for the Institutional class for the years ended
May 31, 1996 and 1995, would have been .82% and 5.76%, and .86% and 6.23%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the Investment Advisers for the Institutional class
for the years ended May 31, 1993, 1992 and 1991 would have been .80% and
5.98%, .85% and 7.29%, and .88% and 7.79%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the Retail class for the years ended May 31,
1996 and 1995 would have been 1.06% and 5.48%, and 1.10% and 5.94%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the Investment Advisers for the Retail class for the
years ended May 31, 1993 and 1992 and for the period ended May 31, 1991
would have been 1.05% and 5.73%, 1.10% and 7.02%, and 1.11% and 7.34%,
respectively.
-7-
<PAGE> 119
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
ENHANCED INCOME FUND
The following table has been audited by Ernst & Young LLP,
independent auditors, whose report is incorporated by reference in the Statement
of Additional Information. It should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Statement of Additional Information. Additional information about the
performance of the Enhanced Income Fund is contained in the Trust's Annual
Report to Shareholders, which may be obtained without charge by contacting the
Trust at its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
May 31, 1996 May 31, 1996 May 31, 1995 May 31, 1995
Institutional Retail Institutional(1) Retail(1)
------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........... $10.16 $10.18 $10.00 $10.10
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ .58 .56 .51(2) .43(2)
Net gains on securities (realized
and unrealized)............................ (.05) (.05) .06 .06
----- ----- ----- -----
Total from investment
operations............................. .53 .51 .57 .49
---- ---- --- ---
LESS DISTRIBUTIONS
Dividends from net investment income......... (.58) (.56) (.41) (.41)
----- ----- ----- -----
Dividends in excess of net
investment income.......................... (.10) (.11) (.00) (.00)
----- ----- ----- -----
Total distributions...................... (.68) (.67) (.41) (.41)
----- ----- ----- -----
Net asset value, end of period................. $10.01 $10.02 $10.16 $10.18
===== ===== ===== =====
TOTAL RETURN................................... 5.36% 5.13%(3) 6.54%(3)(5) 6.84%(3)(4)(5)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)......... $66,918 $1,718 $60,467 $2,547
Ratio of expenses to average net
assets (after fee waivers)................ .23%(6) .33%(7) .21%(3)(6) .32%(3)(7)
Ratio of net investment income to
average net assets (after fee
waivers)................................... 5.72%(6) 5.55%(7) 5.70%(3)(6) 5.89%(3)(7)
Portfolio Turnover Rate...................... 98% 98% 36% 36%
</TABLE>
(1) Institutional and Retail classes commenced operations on July 7, 1994 and
September 9, 1994, respectively.
(2) Calculated based upon average shares outstanding.
(3) Annualized.
(4) Total Return excludes sales load.
(5) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the
Institutional and Retail classes for the period were 5.87% and 4.92%,
respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Institutional class
for the year ended May 31, 1996 would have been .70% and 5.25%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Adviser, Administrator and
Custodian for the Institutional class for the period ended May 31, 19985
would have been .71% and 5.20%, respectively.
(7) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Retail class for the
year ended May 31, 1996 would have been .80% and 5.08%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser, Administrator and Custodian for the
Retail class for the period ended May 31, 1995 would have been .79% and
5.42%, respectively.
-8-
<PAGE> 120
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
TOTAL RETURN ADVANTAGE FUND
The following table has been audited by Ernst & Young LLP, independent
auditors, whose report is incorporated by reference in the Statement of
Additional Information. It should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Statement of Additional Information. Additional information about the
performance of the Total Return Advantage Fund is contained in the Trust's
Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone numbers or address provided on page 1.
<TABLE>
<CAPTION>
For the Period For the Period
Year Ended Year Ended Ended Ended
May 31, 1996 May 31, 1996 May 31, 1995 May 31, 1995
Institutional Retail Institutional(1) Retail(1)
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........... $10.55 $10.54 $10.00 $10.16
----- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ .70 .62 .65(2) .49(2)
Net gains on securities (realized
and unrealized)............................ (.24)(2) (.22)(2) .43 .40
----- ----- --- ---
Total from investment operations............... .46 .40 1.08 .89
--- --- ---- ---
LESS DISTRIBUTIONS
Dividends from net investment income......... (.70) (.62) (.53) (.49)
Dividends in excess of net
investment income.......................... (.12) (.14) (.00) (.02)
-----
Dividends from net realized
capital gains.............................. ( .31) (.31) (.00) (.00)
------ ----- ----- -----
Total distributions...................... (1.13) (1.07) (.53) (.51)
------ ------ ----- -----
Net asset value, end of period................. $9.88 $9.87 $10.55 $10.54
==== ==== ===== =====
TOTAL RETURN................................... 4.22% 3.74%(4) 12.52%(3)(5) 12.65%(3)(4)(5)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)......... $280,401 $2,040 $261,403 $106
Ratio of expenses to average net
assets (after fee waivers)................ .13%(6) .36%(7) .18%(3)(6) .31%(3)(7)
Ratio of net investment income to
average net assets (after fee
waivers)................................... 6.67%(6) 6.12%(7) 7.23%(3)(6) 6.92%(3)(7)
Portfolio Turnover Rate...................... 268% 268% 166% 166%
</TABLE>
(1) Institutional and Retail classes commenced operations on July 7, 1994 and
September 6, 1994, respectively.
(2) Calculated based upon average shares outstanding.
(3) Annualized.
(4) Total Return excludes sales load.
(5) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the
Institutional and Retail classes for the period were 11.22% and 9.14%,
respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Institutional
class for the year ended May 31, 1996 would have been .69% and 6.11%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Adviser, Administrator and
Custodian for the Institutional class for the period ended May 31, 1995
would have been .77% and 6.64%, respectively.
(7) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Custodian for the Retail class for
the year ended May 31, 1996 would have been .89% and 5.59%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Adviser, Administrator and
Custodian for the Retail class for the period ended May 31, 1995 would
have been .87% and 6.36%, respectively.
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<PAGE> 121
The Intermediate Government Fund and GNMA Fund commenced operations on
August 10, 1994 as separate investment portfolios (the "Predecessor Intermediate
Government Fund" and the "Predecessor GNMA Fund," respectively, and
collectively, the "Predecessor Funds") of Inventor Funds, Inc., which was
organized as a Maryland corporation. On _________________, 1996, the Funds were
reorganized as new portfolios of the Trust. Prior to the reorganization, the
Predecessor Funds offered and sold Retail Shares that were similar to the Funds'
Retail Shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Funds' Retail Shares (the
series that is similar to the Retail Shares of the Intermediate Government and
GNMA Funds) for the fiscal year ended April 30, 1996 and the fiscal period ended
April 30, 1995. The information was audited by Coopers & Lybrand L.L.P.,
independent accountants for the Predecessor Funds, 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 and GNMA
Funds. Additional information about the performance of the Predecessor Funds 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.
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<PAGE> 122
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, April 30,
1996 1995(1)
---------- ------------
<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....................................... 7.09% 4.75%(2)
Ratio/Supplemental Data
Net Assets End of Period (000)..................... $ 89,901 $ 53,316
Ratio of Expenses to Average Net Assets
(after fee waivers)................................ 0.85% 0.85%(3),(4)
Ratio of Net Investment Income to Average
Net Assets (after fee waivers)..................... 6.20% 6.17%(3),(4)
Portfolio Turnover Rate............................ 94% 172%
</TABLE>
- ---------------------------------------
(1) Commenced operations on August 10, 1984. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
(2) Total Return does not reflect sales charge. Not annualized.
(3) Annualized.
(4) 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.
-11-
<PAGE> 123
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PREDECESSOR GNMA FUND
<TABLE>
<CAPTION>
Year Ended Period Ended
April 30, April 30,
1996 1995(1)
---------- ------------
<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 0.14 0.16
Securities.....................................
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....................................... 7.97% 6.61%(2)
RATIO/SUPPLEMENTAL DATA
Net Assets End of Period (000)................... $ 62,161 $ 42,212
Ratio of Expenses to Average Net Assets
(after fee waivers)............................. 0.85% 0.85%(3),(4)
Ratio of Net Investment Income to Average 6.30% 6.68%(3),(4)
Net Assets (after fee waivers)..................
Portfolio Turnover Rate.......................... 149% 226%
</TABLE>
(1) Commenced operations on August 10, 1994. The Fund did not offer
Institutional shares during the period covered by the Financial
Highlights.
(2) Total Return does not reflect the sales charge. Not annualized.
(3) Annualized.
(4) 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.
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<PAGE> 124
INTRODUCTION
The Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund
consists of a separate pool of assets with separate investment objectives and
policies as described below under "Risk Factors, Investment Objectives and
Policies." Each Fund is classified as a diversified investment fund under the
1940 Act.
Shares of each Fund have been classified into two separate classes --
Retail shares and Institutional shares. Retail shares and Institutional shares
represent equal pro rata interests in a Fund except that, as described more
fully below under "Shareholder Services Plan," the Trust has implemented the
Services Plan with respect to Retail shares in the Funds. Under the Services
Plan, only the beneficial owners of Retail shares bear the expenses of
shareholder administrative services which are provided by financial institutions
for their benefit (not to exceed .25% annually with respect to the Fixed Income,
Total Return Advantage, Intermediate Government and GNMA Funds, and .10%
annually with respect to the Enhanced Income Fund). See "Shareholder Services
Plan," "Dividends and Distributions" and "Description of the Trust and Its
Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
The Trust uses a range of different investments and investment
techniques in seeking to achieve a Fund's investment objective. The investments
and investment techniques utilized by the Funds are described below. Prior to
making an investment decision, an investor should consider which Fund or Funds
best meet an investor's investment objectives and review carefully the risks
involved in Fund investments described below.
The investment objective of a Fund may not be changed without the vote
of the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Except as noted below under "Investment Limitations," a Fund's
investment policies, however, may be changed without a vote of shareholders. In
-13-
<PAGE> 125
addition, each Fund may sell portfolio securities shortly after they are
purchased, which may result in higher transaction costs and taxable gains for
the Fund. There can be no assurance that a Fund will achieve its objective.
FIXED INCOME FUND
The investment objective of the Fixed Income Fund is to provide as high
a level of current income as is consistent with prudent investment risk. The
Fund seeks to achieve its objective by investing substantially all of its assets
in a fund of high and medium grade bonds and other fixed income securities. The
Fund normally invests at least 80% of the value of its total assets in debt
securities of all types, although up to 20% of the value of its total assets may
be invested in preferred stocks and other investments. In making investment
decisions, the Fund's advisers will consider such factors as current yield,
preservation of capital, maturity, yield to maturity, and the potential for
realizing capital appreciation. Under normal market conditions, the Fund
maintains an average dollar-weighted portfolio maturity of ten years or less.
ENHANCED INCOME FUND
The investment objective of the Enhanced Income Fund is to [seek a
total rate of return greater than that of the Merrill Lynch 1-3 year Treasury
Index]. The Fund [will normally] invest [at least 80% of the value of its total
assets in investment quality debt securities of all types. However, up to 20%
of the value of its total assets may be invested in preferred stocks and other
investments]. In making investment decisions, the Fund's adviser will focus on a
number of factors, including yield to maturity, maturity, quality and the
outlook for specific issuers and market sectors. Under normal market conditions,
the Fund [intends to] maintain an average dollar-weighted portfolio maturity
for [its debt securities] of [from 1-1/2 to 4 years]. [The Merrill Lynch 1-3
Year Treasury Index is composed of Treasury Securities that mature in one to
three years. The average dollar-weighted maturity of the Index is generally from
2-1/2 to 3 years. The Index is unmanaged, and its yield does not reflect the
expenses that a mutual fund normally incurs. The Fund's objective refers to a
return after deduction of Fund expenses.]
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<PAGE> 126
TOTAL RETURN ADVANTAGE FUND
The investment objective of the Total Return Advantage Fund is to
provide a total rate of return, income and price appreciation greater than that
of popular market indices with similar maturity and quality characteristics. One
such index is the Lehman Brothers Government/Corporate Bond Index which is
composed of government securities and investment grade corporate securities with
an average maturity of approximately ten years and an average rating in the
highest rating category assigned by Moody's, S&P, Fitch, Duff or IBCA (defined
below under "Ratings Criteria"). The Fund will normally invest at least 80% of
the value of its total assets in debt securities of all types, although up to
20% of the value of its total assets may be invested in preferred stocks and
other investments. Under normal market conditions, the Fund maintains an average
dollar-weighted portfolio maturity of two years above or below the average
maturity of the Lehman Brothers Government/Corporate Bond Index.
Although the Total Return Advantage Fund normally invests substantially
all of its assets in investment grade debt securities, it may invest up to 15%
of its net assets in non-rated securities and securities rated below investment
grade (commonly referred to as "junk bonds"). For a discussion of risk factors
relating to such securities, see "Risks Related to Lower Rated Securities"
below.
INTERMEDIATE GOVERNMENT FUND
The investment objective of the Intermediate Government Fund is to
preserve capital and maintain a high degree of liquidity while providing current
income. The Fund seeks to achieve this objective by investing primarily (at
least 65% of the Fund's assets) in obligations issued or guaranteed as to
principal and interest by the U.S. Government and its agencies and
instrumentalities ("U.S. Governments"). The Fund also invests in U.S. Treasury
obligations and futures on U.S. Treasury obligations. The Fund's dollar-weighted
average maturity ordinarily will be approximately five years; however, the
adviser may vary this average maturity substantially in anticipation of a change
in the interest rate environment. Nevertheless, under normal circumstances, the
Fund will maintain a dollar-weighted average maturity of between three and ten
years.
-15-
<PAGE> 127
In order to meet liquidity needs, the Intermediate Government Fund may
hold cash reserves, and may, for temporary defensive purposes, invest up to 100%
of its assets in Short Term obligations (as described below).
The Fund may also purchase securities on a when-issued basis.
The Fund reserves the right to engage in securities lending, although
it does not presently have the intent of doing so. The Fund may also borrow
money in amounts up to 33-1/3% of its net assets.
GNMA FUND
The investment objective of the GNMA Fund is to provide the highest
level of current income consistent with preservation of capital and a high
degree of liquidity.
The Fund invests primarily (at least 65% of its total assets under
normal conditions) in mortgage pass-through securities guaranteed by the
Government National Mortgage Association ("GNMA"). Any remaining assets may
consist of: (i) obligations of the U.S. Treasury; (ii) obligations issued or
guaranteed as to principal and interest by agencies and instrumentalities of the
U.S. Government; (iii) mortgage-backed securities issued by other government
agencies and privately issued mortgage-backed securities rated at least A by a
Nationally Recognized Security Rating Organization ("Rating Agency"); (iv)
repurchase agreements involving any of such obligations; (v) shares of money
market investment companies investing exclusively in such obligations; and (vi)
futures on U.S. Treasury obligations. The Fund may also engage in dollar rolls,
short sales against the box and interest rate swaps.
Under normal market conditions, the estimated average life of the
Fund's holdings of mortgage pass-through and mortgage-backed securities will
range between 4 and 10 years.
In order to meet liquidity needs, the GNMA Fund may hold cash reserves,
and may, for temporary defensive purposes, invest up to 100% of its assets in
Money Market Instruments (as defined below).
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<PAGE> 128
The Fund may purchase securities on a when-issued basis.
The Fund reserves the right to engage in securities lending, although
it does not have the present intent of doing so during the current fiscal year.
The Fund may also borrow money in amounts up to 33-1/3% of its net assets.
COMMON INVESTMENT POLICIES OF THE FUNDS
Debt Securities
The Fixed Income, Enhanced Income and Total Return Advantage Funds
may invest in debt securities which may include: equipment lease and trust
certificates; corporate issues; collateralized mortgage obligations; state,
municipal and private activity bonds; obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; securities of supranational
organizations such as the World Bank; participation certificates in pools of
mortgages, including mortgages issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; asset-backed securities such as mortgage backed
securities, Certificates of Automobile Receivables ("CARS") and Certificates of
Amortizing Revolving Debts ("CARDS"); private placements; and income
participation loans. Each Fund normally limits investments in asset-backed
securities to under 50% of its net assets. The Fixed Income Fund, Enhanced
Income Fund and Total Return Advantage Fund normally limit investments in income
participation loans to under 5%, 20% and 10% of their respective net assets.
Some of the securities in which the Funds invest may have warrants or options
attached. Recognizing the increasing globalization of the securities markets,
each Fund may also invest in foreign securities, currencies, securities of
domestic issuers denominated in foreign currencies and related investments
described below.
The Intermediate Government Fund may invest in debt securities which
may include obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Certain federal agencies such as GNMA have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. Issues of these agencies, while not
direct obligations of the United States
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<PAGE> 129
Government, are either backed by the full faith and credit of the United States
(e.g. GNMA) or supported by the issuing agencies' right to borrow from the
Treasury. The issues of other agencies are supported by the credit of the
instrumentality, e.g., Federal National Mortgage Association ("FNMA").
Fund appreciation may result from an improvement in the credit standing
of an issuer whose securities are held or a general decline in the level of
interest rates or a combination of both. An increase in the level of interest
rates generally reduces the value of the fixed rate debt instruments held by
a Fund; conversely, a decline in the level of interest rates generally
increases the value of such investments. An increase in the level of interest
rates may temporarily reduce the value of the floating rate debt instruments
held by a Fund; conversely, a decline in the level of interest rates may
temporarily increase the value of those investments.
Ratings Criteria
The Fixed Income Fund invests only in debt securities which are rated
at the time of purchase within the three highest rating groups assigned by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa and A), Standard & Poor's
Ratings Group ("S&P") (AAA, AA and A), Fitch Investors Service, Inc. ("Fitch")
(AAA, AA and A), Duff & Phelps Credit Rating Co. ("Duff") (AAA, AA and A) or
IBCA, Inc. ("IBCA") (AAA, AA and A), or, if unrated, which are determined by the
Fund's adviser or advisers to be of comparable quality pursuant to guidelines
approved by the Trust's Board of Trustees.
The Enhanced Income Fund invests only in, and the Total Return
Advantage Fund invests substantially all of its assets in investment grade debt
securities which are rated at the time of purchase within the four highest
rating groups assigned by Moody's (Aaa, Aa, A and Baa), S&P (AAA, AA, A and
BBB), Fitch (AAA, AA, A and BBB), Duff (AAA, AA, A and BBB), or IBCA (AAA, AA, A
and BBB), or, if unrated, which are determined by the Funds' adviser to be of
comparable quality pursuant to guidelines approved by the Trust's Board of
Trustees. Each of the Enhanced Income Fund and Total Return Advantage Fund
normally maintains a minimum, dollar-weighted average quality rating for its
portfolio of securities within the two highest rating categories assigned
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<PAGE> 130
by one or more rating agencies. Debt securities rated in the lowest investment
grade debt category (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) may have
speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. In the
event that subsequent to its purchase by a Fund, a rated security ceases to be
rated or its rating is reduced below investment grade, its adviser will consider
whether the Fund should continue to hold the security. The adviser expects,
however, to sell promptly any securities that are non-investment grade as a
result of such events that exceed 5% of a Fund's net assets where the adviser
has determined that such sale is in the best interest of the Fund.
Rating symbols are more fully described in Appendix A of the Statement
of Additional Information.
Risks Related to Lower Rated Securities Which May be Purchased by the
Total Return Advantage Fund
While any investment carries some risk, certain risks associated with
lower rated securities (commonly referred to as "junk bonds") are different than
those for investment grade securities. The risk of loss through default is
greater because lower rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations in the Total Return Advantage
Fund's net asset value per share.
In addition, an economic downturn or increase in interest rates could
have a negative impact on both the markets for lower rated securities (resulting
in a greater number of bond defaults) and the value of lower rated securities
held by the Total Return Advantage Fund. Current laws, such as those requiring
federally insured savings and loan associations to remove investments in lower
rated securities from their funds, as well as other pending proposals, may also
have a material adverse effect on the market for lower rated securities.
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The economy and interest rates may affect lower rated securities
differently than other securities. For example, the prices of lower rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security held by the Total Return Advantage Fund
defaults, the Fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty would likely result in increased volatility for
the market prices of lower rated securities as well as the Fund's net asset
value. In general, both the prices and yields of lower rated securities will
fluctuate.
In certain circumstances it may be difficult to determine a security's
fair value due to a lack of reliable objective information. Such instances occur
where there is no established secondary market for the security or the security
is lightly traded. As a result, the Total Return Advantage Fund's valuation of a
security and the price it is actually able to obtain when it sells the security
could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower rated
securities held by the Total Return Advantage Fund, especially in a thinly
traded market. Illiquid or restricted securities held by the Fund may involve
special registration responsibilities, liabilities and costs, and could involve
other liquidity and valuation difficulties.
The ratings of Moody's, S&P, Fitch, Duff and IBCA evaluate the safety
of a lower rated security's principal and interest payments, but do not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, the Fund's adviser performs its own analysis of the
issuers of lower rated securities purchased by
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the Fund. Because of this, the Fund's performance may depend more on its own
credit analysis than is the case for mutual funds investing in higher rated
securities.
The Total Return Advantage Fund's adviser continuously monitors the
issuers of lower rated securities held by the Fund for their ability to make
required principal and interest payments, as well as in an effort to control the
liquidity of the Fund so that it can meet redemption requests.
Asset-Backed Securities
The Fixed Income, Enhanced Income and Total Return Advantage Funds
may purchase securities that are secured or backed by mortgages or other assets
(i.e., automobile loans and credit card receivables) and are issued by entities
such as GNMA, FNMA, Federal Home Loan Mortgage Corporation ("FHLMC"),
commercial banks, financial companies, finance subsidiaries of industrial
companies, savings and loan associations, mortgage banks and investment banks.
Mortgage-Backed Securities. Asset-Backed Securities acquired by the
Fixed Income, Enhanced Income and Total Return Advantage Funds consist of both
mortgage and non-mortgage-backed securities. Mortgage-backed securities
represent an ownership interest in a pool of mortgages, the interest on which is
in most cases issued and guaranteed by an agency or instrumentality of the U.S.
Government, although not necessarily by the U.S. Government itself.
Mortgage-backed securities include collateralized mortgage obligations and
mortgage pass-through certificates. The Intermediate Government and GNMA Funds
may purchase securities that are secured or backed by mortgages and are issued
by entities such as GNMA, FNMA and FHLMC, and the GNMA Fund may also purchase
securities issued by commercial banks, savings and loan associations, mortgage
banks and investment banks.
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Mortgage pass-through certificates, which represent interests in pools
of mortgage loans, provide the holder with a pro rata interest in the underlying
mortgages. One type of such certificate in which the Funds may invest is a GNMA
Certificate which is backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. Government. Another type is a FNMA
Certificate, the principal and interest of which are guaranteed only by FNMA
itself, not by the full faith and credit of the U.S. Government. Another type is
a FHLMC Participation Certificate which is guaranteed by FHLMC as to timely
payment of principal and interest. However, like a FNMA security it is not
guaranteed by the full faith and credit of the U.S. Government. Privately issued
mortgage backed securities will carry a rating at the time of purchase of at
least A by S&P or by Moody's or, if unrated, will be in the adviser's opinion
equivalent in credit quality to such rating. Mortgage-backed securities issued
by private issuers, whether or not such obligations are subject to guarantees by
the private issuer, may entail greater risk than obligations directly or
indirectly guaranteed by the U.S. Government.
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The yield characteristics of asset-backed and mortgage-backed
securities differ from traditional debt securities. A major difference is that
the principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, if an asset-backed or mortgage-backed security is purchased at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if an asset-backed
or mortgage-backed security is purchased at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will decrease,
yield to maturity. In calculating the average weighted maturity of the Funds,
the maturity of asset-backed and
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mortgage-backed securities will be based on estimates of average life.
Prepayments on asset-backed and mortgage-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and social
factors. In general, the collateral supporting non-mortgage, asset-backed
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments. Like other fixed income securities, when
interest rates rise, the value of an asset-backed or mortgage-backed security
generally will decline; however, when interest rates decline, the value of an
assetbacked or mortgage-backed security with prepayment features may not
increase as much as that of other fixed income securities, and, as noted above,
changes in market rates of interest may accelerate or retard prepayments and
thus affect maturities. For further information, see "Risk Factors, Investment
Objectives and Policies" in the Statement of Additional Information.
These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the trading
market for short-term mortgages and Asset-Backed and Mortgage-Backed Securities
is ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Non-Mortgage-Backed Securities. The Funds may also invest in
non-mortgage-backed securities including interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage backed securities are not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
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Non-mortgage-backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws. Most issuers
of motor vehicle receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
motor vehicle receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
REITs
The GNMA Fund may also invest in real estate investment trusts
("REITs") which are trusts that invest primarily in commercial real estate or
real estate-related loans. The value of interests in REITs may be affected by
the value of the property owned or the quality of the mortgages held by the
trust.
Foreign Securities, American Depository Receipts ("ADRs") and Foreign
Currencies
The Fixed Income, Enhanced Income and Total Return Advantage Funds
may invest in foreign securities including ADRs, securities of domestic issuers
denominated in foreign currencies, securities of foreign issuers denominated in
foreign currencies, securities of foreign issuers denominated in U.S. dollars,
and foreign currencies. ADRs are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by foreign issuers.
ADRs may be listed on a national securities exchange or may be traded in the
over-the-counter market. ADR prices are denominated in U.S. dollars; the
underlying security may be denominated in a foreign currency.
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Investments in foreign securities involve certain inherent risks, such
as political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns, changes in exchange rates
of foreign currencies and the possibility of adverse changes in investment or
exchange control regulations. There may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets, or
diplomatic developments that could affect investment within those countries.
Because of these and other factors, securities of foreign companies acquired by
the Funds may be subject to greater fluctuation in price than securities of
domestic companies. For further information, see "Risk Factors, Investment
Objectives and Policies" in the Statement of Additional Information.
Exchange Rate-Related Securities
The Enhanced Income and Total Return Advantage Funds may each
invest in securities for which the principal repayment at maturity, while paid
in U.S. dollars, is determined by reference to the exchange rate between the
U.S. dollar and the currency of one or more foreign countries ("Exchange
Rate-Related Securities"). The interest payable on these securities is
denominated in U.S. dollars and is not subject to foreign currency risk and, in
most cases, is paid at rates higher than most other similarly rated securities
in recognition of the foreign currency risk component of Exchange Rate-Related
Securities.
Investments in Exchange Rate-Related Securities entail certain risks.
There is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related Security
is linked. In addition, there is no assurance that sufficient trading interest
to create a liquid secondary market will exist for a particular Exchange
Rate-Related Security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the
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foreign exchange market may, from time to time, combine to
make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
Forward Currency Exchange Contracts
The Enhanced Income and Total Return Advantage Funds may enter into
forward currency exchange contracts in an effort to reduce the level of
volatility caused by changes in foreign currency exchange rates or where such
transactions are economically appropriate for the reduction of risks inherent in
the ongoing management of the Funds. The Funds may not enter into such contracts
for speculative purposes. A forward currency exchange contract is an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of contract. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time, they tend to limit any potential gain that might be realized should the
value of such currency increase. Consequently, a Fund may choose to refrain from
entering into such contracts. In connection with forward currency exchange
contracts, the Funds will create a segregated account of liquid assets, such as
cash, U.S. Government securities or other liquid high grade debt obligations, or
will otherwise cover their position in accordance with applicable requirements
of the SEC.
Interest Rate Swaps
In order to protect its value from interest rate fluctuations, each of
the Enhanced Income, Total Return Advantage and GNMA Funds may enter into
interest rate swaps. The Funds expect to enter into these hedging transactions
primarily to preserve a return or spread of a particular investment or portion
of their holdings and to protect against an increase in the price of securities
the Funds anticipate purchasing at a later date. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest (i.e., an exchange of floating rate payments for fixed rate
payments). The net amount of the excess, if any, of a Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount
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of liquid assets, such as cash, U.S. Government securities or other liquid high
grade debt securities, having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Fund's
custodian. A Fund will not enter into any interest rate swap unless the
unsecured commercial paper, senior debt, or claims paying ability of the other
party is rated, with respect to the Enhanced Income and Total Return Advantage
Funds, either "A" or "A-1" or better by S&P, Duff or Fitch, or "A" or "P-1" or
better by Moody's or, with respect to the GNMA Fund, the claims paying ability
of the other party is deemed creditworthy and any such obligation the GNMA Fund
may have under such an arrangement will be covered by setting aside liquid high
grade securities in a segregated account. For further information, see "Risk
Factors, Investment Objectives and Policies" in the Statement of Additional
Information.
Futures Contracts and Related Options
The Enhanced Income, Total Return Advantage and Intermediate Government
Funds may invest in interest rate and bond index futures contracts and options
on futures contracts and the Intermediate Government and GNMA Funds may invest
in futures contracts on U.S. Treasury Obligations in order to offset an expected
decrease in the value of its fund that might otherwise result from a market
decline. The Funds may do so either to hedge the value of its portfolio
securities as a whole, or to protect against declines occurring prior to sales
of securities in the value of the securities to be sold. In addition, the Funds
may utilize futures contracts in anticipation of changes in the composition of
its holdings for hedging purposes or to maintain liquidity.
Futures contracts obligate a Fund, at maturity, to take or make
delivery of certain securities or the cash value of a contract or securities
index. When interest rates are rising, futures contracts can offset a decline in
value of the securities held by a Fund. When rates are falling or prices of
securities are rising, these contracts can secure higher yields for securities a
Fund intends to purchase. In addition, a Fund may utilize futures contracts in
anticipation of changes in the composition of its fund holdings.
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The Enhanced Income and Total Return Advantage Funds may purchase and
sell call and put options on futures contracts traded on an exchange or board of
trade. When a Fund purchases an option on a futures contract, it has the right
to assume a position as a purchaser or seller of a futures contract at a
specified exercise price at any time during the option period. When a Fund sells
an option on a futures contract, it becomes obligated to purchase or sell a
futures contract if the option is exercised. In anticipation of a market
advance, a Fund may purchase call options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund intends to purchase. Similarly, if the
value of a Fund's securities is expected to decline, the Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
The Enhanced Income, Total Return Advantage, Intermediate Government
and GNMA Funds intend to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC") exempting the Funds from registration as a
"commodity pool operator." A Fund's commodities transactions must constitute
bona fide hedging or other permissible transactions pursuant to such
regulations. In addition, a Fund may not engage in such transactions if the sum
of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5% of the liquidation value of its assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into. In
connection with a Fund's position in a futures contract or option thereon, the
Fund will create a segregated account of liquid assets, such as cash, U.S.
Government securities or other liquid high grade debt obligations, or will
otherwise cover its position in accordance with applicable requirements of the
SEC.
Risk Factors Associated with Futures and Related Options
To the extent the Enhanced Income, Total Return Advantage,
Intermediate Government and GNMA Funds are engaging in a futures transaction as
a hedging device, due to the risk of an imperfect correlation between securities
in their funds that are the subject of a hedging transaction and the futures
contract
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used as a hedging device, it is possible that the hedge will not be fully
effective in that, for example, losses on the portfolio securities may be in
excess of gains on the futures contract or losses on the futures contract may be
in excess of gains on the portfolio securities that were the subject of the
hedge. In futures contracts based on indices, the risk of imperfect correlation
increases as the composition of the Funds varies from the composition of the
index. In an effort to compensate for the imperfect correlation of movements in
the price of the securities being hedged and movements in the price of futures
contracts, the Funds may buy or sell futures contracts in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than that
of the securities. Such "over hedging" or "under hedging" may adversely affect a
Fund's net investment results if market movements are not as anticipated when
the hedge is established.
Successful use of futures by the Funds also are subject to the
advisers' ability to predict correctly movements in the direction of securities
prices, interest rates and other economic factors. For example, if the Funds
have hedged against the possibility of a decline in the market adversely
affecting the value of securities held in their funds and prices increase
instead, the Funds will lose part or all of the benefit of the increased value
of securities which they have hedged because they will have offsetting losses in
their futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market. The Funds may have to sell
securities at a time when it may be disadvantageous to do so.
Although the Enhanced Income, Total Return Advantage and Intermediate
Government Funds intend to enter into futures contracts and the Enhanced Income
and Total Return Advantage Funds into options transactions only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. See "Illiquid
Securities" 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
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daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contracts prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Funds to substantial losses. If it is not possible, or a Fund
determines not, to close a futures position in anticipation of adverse price
movements, it will be required to make daily cash payments of variation margin.
In such circumstances, an increase in the value of the portion of the Fund
being hedged, if any, may offset partially or completely losses on the futures
contract.
The primary risks associated with the use of futures contracts and
options are: (i) the imperfect correlation between the change in market value of
the securities held by a Fund and the price of the futures contract or option;
(ii) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (iii) losses due
to unanticipated market movements which are potentially unlimited; and (iv) the
adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. For a further discussion see "Risk
Factors, Investment Objectives and Policies -- Futures Contracts and Options"
and Appendix B in the Statement of Additional Information.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or delayed
delivery basis. These transactions are arrangements in which a Fund purchases
securities with payment and delivery scheduled for a future time. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when delivery takes place. The
Funds do not intend to purchase when-issued securities for speculative purposes
but only for the purpose of acquiring portfolio securities. In when-issued and
delayed delivery transactions, a Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be attractive. One form of when-issued or delayed delivery
security that the Intermediate Government and GNMA Funds
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may purchase is a "to be announced" ("TBA") mortgage-backed security. A TBA
transaction arises when a mortgage-backed security, such as a GNMA pass-through
security, is purchased or sold with the specific pools that will constitute that
GNMA pass-through security to be announced on a future settlement date. The
Fixed Income, Enhanced Income, Total Return Advantage and GNMA Funds expect that
commitments to purchase when-issued securities will not exceed 25% of the value
of their respective total assets under normal market conditions. For further
information, see "Risk Factors, Investment Objectives and Policies" in the
Statement of Additional Information.
Variable and Floating Rate Obligations
The Funds may purchase rated and unrated variable and floating rate
instruments. These instruments may include variable amount master demand notes
and adjustable rate mortgages that permit the indebtedness thereunder to vary in
addition to providing for periodic adjustments in the interest rate. The absence
of an active secondary market with respect to particular variable and floating
rate instruments could, however, make it difficult for the Funds to dispose of
instruments if the issuer defaulted on its payment obligation or during periods
that the Funds are not entitled to exercise their demand rights, and the Funds
could, for these or other reasons, suffer a loss with respect to such
instruments. For a further description, see "Risk Factors, Objectives and
Policies" in the Statement of Additional Information.
Short Term Obligations
The Fixed Income, Enhanced Income and Total Return Advantage Funds
will ordinarily hold some short term obligations (with maturities of 18 months
or less) such as domestic and foreign commercial paper, bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, reverse repurchase agreements, U.S.
Treasury bills, money market funds, and guaranteed investment contracts
("GICs"). Reverse repurchase agreements involve the risk that the market value
of the securities held by a Fund may decline below the price of the securities
it is obligated to repurchase.
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All Funds may acquire repurchase agreements, which carry the risk that
default or bankruptcy of the seller may expose a Fund to possible loss because
of adverse market action or delays connected with the disposition of the
underlying obligations. Further, it is uncertain whether the Fund would be
entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities.
The GNMA Fund may invest in reverse repurchase agreements in the form
of Dollar Rolls. Dollar Rolls are transactions in which securities are sold by
the Fund for delivery in the current month and the Fund simultaneously contracts
to repurchase substantially similar securities on a specified future date. Any
difference between the sale price and the purchase price is netted against the
interest income foregone on the securities sold to arrive at an implied
borrowing rate. Alternatively, the sale and purchase transactions can be
executed at the same price, with the Fund being paid a fee as consideration for
entering into the commitment to purchase. Dollar Rolls may be renewed prior to
cash settlement and initially may involve only a firm commitment agreement by
the Fund to buy a security. If the broker-dealer to whom the Fund sells the
security becomes insolvent, the Fund's right to repurchase the security may be
restricted. Other risks involved in entering into Dollar Rolls include the risk
that the value of the security may change adversely over the term of the Dollar
Roll and that the security the Fund is required to repurchase may be worth less
than the security that the Fund originally held.
To avoid any leveraging concerns, the GNMA Fund will place U.S.
Government or other liquid, high grade debt securities in a segregated account
in an amount sufficient to cover its repurchase obligations.
For further information, see "Risk Factors, Investment Objectives and
Policies" in the Statement of Additional Information.
Receipts
The Intermediate Government Fund may invest in separately traded
interest and principal component parts of the U.S. Treasury obligations that are
issued by banks or brokerage
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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.
U.S. Treasury Obligations
The GNMA Fund may invest in U.S. Treasury obligations consisting of
bills, notes and bonds issued by the U.S. Treasury, and separately traded
interest and principal component parts of such obligations that are transferable
through the Federal book entry system known as STRIPS (Separately Traded
Registered Interest and Principal Securities).
U.S. Government Obligations
The GNMA Fund may purchase obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some of these obligations are
supported by the full faith and credit of the U.S. Treasury, such as obligations
issued by the GNMA. Others, such as those of the Export-Import Bank of the
United States, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the FNMA, are supported by the discretionary
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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 GNMA Fund may engage in short sales of its securities. Selling
securities short involves selling securities the seller does not own (but has
borrowed) in anticipation of a decline in the market price of such securities.
To deliver the securities to the buyer, the seller must arrange through a broker
to borrow the securities and, in so doing, the seller becomes obligated to
replace the securities borrowed at their market price at the time of
replacement. In a short sale, the proceeds the seller receives from the sale are
retained by a broker until the seller replaces the borrowed securities. The
seller may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The GNMA Fund may only sell securities short "against the box." A short
sale is "against the box" if, at all times during which the short position is
open, the Fund owns at least an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issuer as the securities that are sold short.
Lending Portfolio Securities
In order to generate additional income, each Fund may, from time to
time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. A Fund must receive 100% collateral in the form of cash
or U.S. Government securities. This collateral must be valued daily by the
Fund's adviser or advisers, and the borrower will be required to provide
additional collateral should the market value of the loaned
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securities increase. During the time portfolio securities are on loan, the
borrower pays the Fund involved any dividends or interest paid on such
securities. Loans are subject to termination by the Funds or the borrower at any
time. While a Fund does not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if this is considered
important with respect to the investment. A Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which its adviser
or advisers have determined are creditworthy under guidelines established by the
Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations, each Fund may invest in securities
issued by other investment companies (including other investment companies
advised by the advisers) which invest in high quality, short-term debt
securities and which determine their net asset value per share based on the
amortized cost or penny-rounding method. As a shareholder of another investment
company, a Fund would bear, along with other shareholders, its pro rata portion
of that company's expenses, including advisory fees. These expenses would be in
addition to the advisory and other expenses that a Fund bears directly in
connection with its own operations. Investment companies in which a Fund may
invest may also impose a sales or distribution charge in connection with the
purchase or redemption of their shares and other types of commissions or
charges. Such charges will be payable by the Fund and, therefore, will be borne
indirectly by its shareholders. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
Illiquid Securities
The Fixed Income Fund will not knowingly invest more than 10% of its
net assets, and the other Funds will not knowingly invest more than 15% of
their respective net assets, in securities that are illiquid. Illiquid
securities would generally include repurchase agreements, interest rate swaps
and GICs with notice/termination dates in excess of seven days and certain
securities which are subject to trading restrictions because they are not
registered under the Securities Act of 1933, as amended (the "1933 Act").
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Each Fund may purchase securities which are not registered under the
1933 Act but which can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the 1933 Act. Any such security will not be considered
illiquid so long as it is determined by the Board of Trustees or the Fund's
adviser or advisers, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in a Fund
during any period that qualified institutional buyers become uninterested in
purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop. The Board will carefully
monitor any investment by a Fund in these securities.
Risk Factors Associated with Derivative Instruments
The Funds may purchase certain "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of
different securities, interest or currency exchange rates, or indices. The
types of derivative instruments that the Funds may purchase include (but are not
limited to) futures contracts, options, forward currency contracts and
structured debt obligations (including collateralized mortgage obligations,
various floating rate instruments and other types of securities).
Like all investments, derivative instruments involve several basic
types of risks which must be managed in order to meet investment objectives. The
specific risks presented by derivatives include, to varying degrees, market risk
in the form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
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is based; liquidity risk that a Fund will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying securities, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The advisers have determined that the risk features that most
distinguish derivatives from other investment instruments (and which heavily
influence the market, volatility and leveraging, liquidity, and pricing risks
referred to above) can be described generally as "structural risk." Structural
risk refers to the contractual features of an investment that can cause its
total return to vary with changes in interest rates or other variables.
Structural risk is not unique to derivatives, but because derivatives often are
created through the intricate division of the cash flows of the underlying
security, they can (but do not necessarily) present a high degree of structural
risk. Structural risk can arise from variations in coupon levels, principal,
and/or average life.
The advisers have adopted the following internal policies concerning
management of the structural risk inherent in derivative instruments on behalf
of the Funds. The advisers will evaluate the risks presented by the derivative
instruments purchased by the Funds, and will determine, in connection with their
day-to-day management of the Funds, how they will be used in furtherance of the
Funds' investment objectives.
Fixed Income Fund. The Fund may invest in moderate structural risk
derivatives containing features which can modestly or moderately alter the
timing and/or amount of principal return and/or amount of income return. This
would include, for example, investments that are subject to normal prepayment
variances experienced in mortgage pass-through securities. Periodic occurrence
of this degree of structural risk would not be expected to materially impact
overall Fund returns relative to its investment objective.
The Fund will not invest in high structural risk derivatives whose
duration (and hence return) can vary widely depending on moves in interest rates
or other contractual variables. Generally, these are instruments which are
deemed to have a high
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sensitivity to changes in interest rates, which could materially alter the
effective duration or coupon and return of the instruments.
The Fund may invest in mortgage-backed derivative securities, including
collateralized mortgage obligations ("CMOs"), provided that they are not
identified by the advisers as "high risk securities" by certain quantitative
tests that are generally accepted standards in the investment industry.
Other derivative instruments that are suitable for investment include:
asset-backed securities such as those backed by automobile loans or credit card
receivables. All such securities, however, must conform to the structural risk
standards stated above (i.e. not present high structural risk).
The advisers do not presently intend to invest in the following types
of derivatives on behalf of the Fund:
- exchange rate-related securities;
- forward currency exchange contracts;
- interest rate swaps;
- futures contracts and related options; 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.
Enhanced Income Fund and Total Return Advantage Fund. These Funds may
invest in derivative instruments having either moderate structural risk or high
structural risk characteristics (as described above in the section pertaining to
the Fixed Income Fund). There are no policy restrictions on specific types of
derivative instruments in which the Funds are permitted to invest. However,
structural risk is controlled by adherence to specific overall Fund parameters.
The Funds are managed in accordance with a policy goal that constrains the
potential variability of overall Fund duration and total return in relation to
specified investment performance benchmarks. Fund exposure to derivative
instruments having high structural risk characteristics is targeted at a maximum
of 5.0% of each Fund's net assets with no individual position greater than 1.0%
of each Fund. Variability in total Fund duration caused by these
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securities is targeted not to exceed 0.1 years in any one calendar year.
Intermediate Government Fund. The adviser does not presently intend to
invest in the following types of derivatives which are structured instruments,
such as range notes, dual index notes, leveraged or deleveraged bonds, inverse
floaters, index amortizing notes and other structured instruments having similar
cash flow characteristics.
GNMA Fund. The adviser has adopted the following internal policy
concerning management of the structural risk inherent in derivative instruments
on behalf of the GNMA Fund:
The adviser does not presently intend to invest in the following types
of derivatives on behalf of the GNMA Fund:
- 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
Each Fund may engage in short term trading and may sell securities
which have been held for periods ranging from several months to less than a day.
The object of such short-term trading is to increase the potential for capital
appreciation and/or income by making fund changes in anticipation of expected
movements in interest rates or fixed income security prices or in order to take
advantage of what the Fund's adviser or advisers believe is a temporary
disparity in the normal yield relationship between two securities. Any such
trading would increase a Fund's turnover rate and its transaction costs. Higher
portfolio turnover may result in increased taxable gains to shareholders (see
"Taxes" below) and increased expenses paid by the Fund due to transaction costs.
Portfolio turnover will tend to rise during periods of economic
turbulence and decline during periods of stable growth. Each Fund's annual
portfolio turnover is not expected to exceed
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100% under normal market conditions. For further information, see "Risk Factors,
Investment Objectives and Policies" in the Statement of Additional Information.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Fund without the affirmative vote of the
Fund's outstanding shares (as defined under "Miscellaneous"). (Other investment
limitations that also cannot be changed without a vote of shareholders are
contained in the Statement of Additional Information under "Risk Factors,
Investment Objectives and Policies.")
No Fund may:
1. Make loans, except that each Fund may purchase or hold debt
instruments, lend portfolio securities and enter into repurchase agreements in
accordance with its investment objective and policies.
2. (a) This paragraph (a) applies to the Fixed Income, Enhanced
Income and Total Return Advantage Funds. Borrow money or issue senior
securities, except that each Fund may borrow from banks and enter into reverse
repurchase agreements for temporary purposes in amounts not in excess of 10% of
the value of its total assets at the time of such borrowing; or mortgage,
pledge, or hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of the value of the Fund's total assets at the time of such borrowing. A Fund
will not purchase securities while borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding.
(b) This paragraph (b) applies to the Intermediate
Government and GNMA Funds. Neither Fund may borrow money or issue senior
securities, except that each Fund may borrow from anyone for temporary purposes
in amounts not in excess of 5% of the value of its total assets at the time of
such
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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. "Asset
coverage" means that the Fund would be required to set aside assets valued in an
amount that is at least 300% of the amount borrowed.
3. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured by such obligations, (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents, (c) utilities will be classified according to
their services, for example, gas, gas transmission, electric and gas, electric,
and telephone will each be considered a separate industry, and (d) with respect
to the GNMA Fund, there is no limit with respect to securities issued by state
and local governments.
4. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer [or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of the outstanding voting securities of the issuer], except that up to 25%
of the value of the Fund's total assets may be invested without regard to such
limitations. With respect to the Intermediate Government and GNMA Funds, this
investment limitation No. 4 does not apply to repurchase agreements involving
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Additional investment limitations which are matters of fundamental
policy are as follows:
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5. The Fixed Income Fund may invest no more than 10% of the value
of its net assets in illiquid securities, including repurchase agreements with
remaining maturities in excess of seven days, non-negotiable time deposits,
certificates of participation without corresponding remarketing agreements, and
other securities which are not readily marketable.
6. Neither the Enhanced Income Fund nor the Total Return
Advantage Fund may invest more than 15% of the value of its net assets in
illiquid securities. See "Illiquid Securities" under "Risk Factors, Investment
Objectives and Policies - Common Investment Policies of the Funds."
For purposes of investment limitations No. 3 (with respect to the
Intermediate Government and GNMA Funds) and 4 (with respect to all Funds), a
security is considered to be issued by the government entity (or entities) whose
assets and revenues back the security.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation for
purposes of the 1940 Act. If the Funds exceed their limitations on the holding
of illiquid securities, they will sell illiquid securities as necessary to
maintain the required liquidity when the adviser believes that it is in the best
interests of the Funds to do so.
In order to permit the sale of the Funds' shares in certain states, the
Trust may make commitments more restrictive than the investment policies and
limitations described above. Should the Trust determine that any such commitment
is no longer in a Fund's best interests, it will revoke the commitment by
terminating sales of the Fund's shares to investors residing in the state
involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports
to shareholders each Fund's yield and total return data for its Institutional
shares and Retail shares. The "yield" quoted in advertisements refers to the
income generated by an investment in a class of shares of a Fund over a 30-day
period identified in the advertisement. This
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income is then "annualized." The amount of income so generated by the investment
during the 30-day period is assumed to be earned and reinvested at a constant
rate and compounded semi-annually; the annualized income is then shown as a
percentage of the investment.
The Funds calculate their total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by a Fund with
respect to a class during the period are reinvested in shares of that class.
When considering average total return figures for periods longer than one year,
it is important to note that the annual total return of a class for any one year
in the period might have been greater or less than the average for the entire
period. The Funds may also advertise, from time to time, the total returns of
one or more classes of shares on a year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
Shareholders should note that the yield and total return of Retail
shares will be reduced by the amount of shareholder servicing fees that are
payable under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares of a Fund
to the performance of other mutual funds with comparable investment objectives,
to various mutual fund or market indices, respectively, and to data or rankings
prepared by independent services such as Lipper Analytical Services, Inc. or
other financial or industry publications that monitor the performance of mutual
funds. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar,
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Incorporated and other publications of a local, regional or financial industry
nature.
The performance of each class of shares of the Funds is based on
historical earnings and will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value of a class
should be considered in ascertaining the total return to shareholders for a
given period. Yield and total return data should also be considered in light of
the risks associated with a Fund's portfolio composition, quality, maturity,
operating expenses and market conditions. Any fees charged by financial
institutions (as described in "How to Purchase and Redeem Shares") are not
included in the computation of performance data but will reduce a shareholder's
net return on an investment in a Fund.
Further information about the performance of the Funds is available in
the annual and semi-annual reports to shareholders. Shareholders may obtain
these materials from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For purposes of pricing purchases and redemption orders, the net asset
value per share of each Fund is calculated as of the close of trading on the New
York Stock Exchange (the "Exchange") (generally, 4:00 p.m. Eastern Time). Net
asset value per share is determined on each business day, except those holidays
which the Exchange, or banks and trust companies which are affiliated with
National City Corporation (the "Banks"), observe (currently New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day) ("Business Day"). Net asset value per share of a particular class
in a Fund is calculated by dividing the value of all securities and other assets
belonging to the Fund allocable
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to such class, less the liabilities charged to that class, by the number of the
outstanding shares of that class.
With respect to each Fund, investments in securities for which market
quotations are readily available are valued at their market values determined on
the basis of the mean between their current available bid and asked prices in
the principal market (closing sales prices if the principal market is an
exchange) in which such securities are normally traded. Securities and other
assets for which quotations are not readily available are valued at their fair
value under procedures approved by the Board of Trustees. Absent unusual
circumstances, short-term investments having maturities of 60 days or less are
valued on the basis of amortized cost unless the Trust's Board of Trustees
determines that this does not represent fair value. The net asset value per
share of each class of shares of each Fund will fluctuate as the value of its
investment fund changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's
sponsor and distributor. The Distributor is a registered broker/dealer with
principal offices located at 4400 Computer Drive, Westborough, Massachusetts
01581.
From time to time, the Distributor, at its expense, may offer
promotional incentives to dealers. As of the date of this Prospectus, the
Distributor intends to offer certain promotional incentives, including trips and
monetary awards to 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.
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Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. (For
information on such fees, the Investor should review his agreement with the
institution or contact it directly.) In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby a
financial institution would perform various administrative support services for
its customers who are the beneficial owners of Retail shares and would receive
fees from the Funds for such services of up to .10% (on an annualized basis)
with respect to the Enhanced Income Fund and .25% (on an annualized basis) with
respect to the Fixed Income Fund and Total Return Advantage Fund of the average
daily net asset value of such shares. See "Shareholder Services Plan." To
purchase shares, Investors should call 1-800-622-FUND(3863) or visit their local
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.
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Under a monthly savings program, Investors may add to their investment
in the Retail shares of a Fund, in a consistent manner each month, with a
minimum amount of $50. Monies may be automatically withdrawn from a
shareholder's checking or savings account available through an investor's
financial institution and invested in additional Retail shares at the Public
Offering Price next determined after an order is received by the Trust. An
Investor may apply for participation in a monthly program 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 Fixed Income Fund,
Total Return Advantage Fund, Intermediate Government Fund and GNMA Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, per Fund, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C> <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
</TABLE>
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<TABLE>
<S> <C> <C> <C>
than $1,000,000................... 1.25 1.27 1.25
$1,000,000 or more.................. 0.00 0.00 0.00
</TABLE>
The Public Offering Price for Retail shares of the Enhanced Income Fund
is the sum of the net asset value of the shares being purchased plus any
applicable sales charge per account, per Fund, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000.................. 2.75 2.83 2.75
$100,000 but less
than $250,000..................... 1.75 1.78 1.75
$250,000 but less
than $500,000...................... 1.00 1.01 1.00
$500,000 but less
than $1,000,000................... 0.50 0.50 0.50
$1,000,000 or more.................. 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons who offer or sell
for an issuer in connection with the distribution of a security or have a direct
or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of Retail shares made by:
(a) trustees and officers of the Trust; (b) directors, employees and
participants in employee benefit/retirement plans (annuitants) of National City
Corporation or any of its affiliates; (c) the spouses, children, grandchildren,
and parents of individuals referred to in clauses (a) and (b) above; (d)
qualified retirement plans purchasing shares through National City Investments
Corporation or NatCity
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Investments, Inc.; (e) individuals investing in a Fund by way of a direct
transfer or a rollover from a qualified plan distribution and subsequent
transactions into the same account where affiliates of National City Corporation
are serving as a trustee or agent; (f) investors purchasing Fund shares through
a payroll deduction plan; and (g) individuals investing in the Intermediate
Government and GNMA Funds by way of an asset allocation program sponsored by
financial institutions, although certain account level fees may apply.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail
shares of each Fund made under the Right of Accumulation or Letter of Intent, as
described below. To qualify for a reduced sales charge, Investors must so notify
their financial institutions at the time of purchase. Reduced sales charges may
be modified or terminated at any time and are subject to confirmation of an
Investor's holdings.
Right of Accumulation. Investors may use their aggregate investments in
Retail shares in determining the applicable sales charge. An Investor's
aggregate investment in Retail shares is the total value (based on the higher of
current net asset value or any Public Offering Price originally paid) of: (a)
current purchases; (b) Retail shares that are already beneficially owned by the
Investor for which a sales charge has been paid; (c) Retail shares that are
already beneficially owned by the Investor which were purchased prior to July
22, 1990; and (d) Retail shares purchased by dividends or capital gains that are
reinvested. If, for example, an Investor beneficially owns Retail shares of the
Fixed Income Fund with an aggregate current value of $90,000 and subsequently
purchases Retail shares of that Fund having a current value of $10,000, the
sales charge applicable to the subsequent purchase would be reduced to 2.75% of
the Public Offering Price.
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.
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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 a Fund. There is no minimum
investment.
Customers may purchase Institutional shares through procedures
established by the Banks in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Bank and the
Customer in additional Institutional shares of a Fund. Customers should obtain
information relating to the requirements of such accounts from their Banks.
If participating in an Asset Diversification Account, Customers may
purchase Institutional shares under a monthly savings program. Customers may add
to their investment in the Institutional shares of a Fund, in a consistent
manner each
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month, with a minimum amount of $50. Monies may be automatically withdrawn from
a shareholder's checking or savings account available through a Customer's
financial institution and invested in additional shares at the net asset value
per share next determined after an order is received by the Trust. A Customer
may apply for participation in a monthly program through the Customer's Bank by
completing an application. The program may be modified or terminated by an
Investor on 30 days written notice or by the Trust at any time.
It is the responsibility of the Banks to transmit their Customers'
purchase orders to the Transfer Agent and to deliver required funds on a timely
basis, in accordance with the procedures stated above. Institutional shares will
normally be held of record by the Banks. Confirmations of share purchases and
redemptions will be sent to the Banks. Beneficial ownership of Institutional
shares will be recorded by the Banks and reflected in the account statements
provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Funds which are received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) on any Business Day are priced
according to the net asset value per share determined on that day plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third Business Day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the same
financial institution that placed the
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original purchase order. It is the responsibility of the financial institutions
to transmit redemption orders to the Transfer Agent. Investors who purchased
shares directly from the Trust may redeem shares in any amount by calling
1-800-628-0523. Redemption proceeds are paid by check or credited to the
Investor's account with his financial institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks. It is the responsibility of the Banks to transmit redemption orders to
the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a minimum
balance in his account at the Bank and the balance in such account falls below
that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder of record may redeem shares in any amount by sending a
written request to Armada Funds, P.O. Box 5109, Westborough, Massachusetts
01581-5109. Redemption requests must be signed by each shareholder, including
each joint owner on redemption requests for joint accounts, in the exact manner
as the Fund account is registered, and must state the number of shares or the
amount to be redeemed and identify the shareholder account number and tax
identification number. For a redemption amount of $5,000 or more, each signature
on the written request must be guaranteed by a commercial bank or trust company
which is a member of the Federal Reserve System or FDIC, a member firm of
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a national securities exchange or a savings and loan association. A signature
guaranteed by a savings bank or notarized by a notary public is not acceptable.
For a redemption amount less than $5,000, no signature guarantee is needed. The
Trust may require additional supporting documents for redemptions made by
corporations, fiduciaries, executors, administrators, trustees, guardians and
institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder of record also may redeem shares in any amount by calling
1-800-628-0523 (provided he has made the appropriate election in his account
application).
During periods of unusual economic or market changes, telephone
redemptions may be difficult to implement. In such event, shareholders should
mail their redemption requests to their financial institutions or Armada Funds
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming Retail Shares by telephone may be modified or terminated at any time
by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Fund transfer agent's
system. The Plan allows the shareholder to have a fixed minimum sum of $250
distributed at
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regular intervals. The shareholder's account must have a minimum value of $5,000
to be eligible for the Plan. Additional information regarding this service may
be obtained from an investor's financial institution or the Transfer Agent at
1-800- 622-FUND(3863).
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts, the
Trust reserves the right to redeem, at net asset value, any account maintained
by a shareholder that has a value of less than $1,000 due to redemptions where
the shareholder does not increase the amount in the account to at least $1,000
upon 60 days' notice.
If any portion of the shares to be redeemed represents an investment
made by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to 10 days from the date of
purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
federal funds.
Payment to shareholders for shares redeemed will be made within seven
days after receipt of the request for redemption or such shorter time period as
may be required by the Securities Exchange Act of 1934.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (each a "no load Fund") at the net asset value per share on the
date of exchange, provided that such other Retail shares may be legally sold in
the state of the shareholder's residence. As a result, no additional sales
charge will be
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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 1-800-628-0523.
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.
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DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act, each investment fund of the
Trust reimburses the Distributor monthly for the direct and indirect expenses
incurred by the Distributor in providing such fund advertising, marketing,
prospectus printing and other distribution services up to a maximum of .10% per
annum of the average net assets of the fund, inclusive of an annual distribution
fee of $250,000 payable monthly and accrued daily among the investment funds
with respect to which the Distributor is distributing shares.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to Retail
shares in each of the Funds. Pursuant to the Services Plan, the Trust enters
into shareholder servicing agreements with certain financial institutions
pursuant to which the institutions render shareholder administrative services to
their customers who are the beneficial owners of Retail shares in consideration
for the payment of up to .10% (on an annualized basis) with respect to the
Enhanced Income Fund and up to .25% (on an annualized basis) with respect to the
Fixed Income Fund, Total Return Advantage Fund, Intermediate Government Fund
and GNMA Fund of the average daily net asset value of such shares. Persons
entitled to receive compensation for servicing Retail shares may receive
different compensation with respect to those shares than with respect to
Institutional shares in the same Fund. Shareholder administrative services may
include aggregating and processing purchase and redemption orders, processing
dividend payments from the Trust on behalf of customers, providing information
periodically to customers showing their position in Retail shares, and providing
sub- transfer agent services or the information necessary for subaccounting,
with respect to Retail shares beneficially owned by customers. Since financial
institutions may charge their customers fees depending on the type of customer
account the Investor has established, beneficial owners of Retail shares should
read this Prospectus in light of the terms and fees governing their accounts
with financial institutions.
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DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared
daily and paid monthly. Any net realized capital gains will be distributed at
least annually. Dividends and distributions will reduce the Funds' net asset
value per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class or series at the net asset
value of such shares on the payment date. Shareholders must make such election,
or any revocation thereof, in writing to his Bank or financial institution. The
election will become effective with respect to dividends and distributions paid
after its receipt.
Under the Services Plan, the amount of each Fund's net investment
income available for distribution to the holders of Retail shares is reduced by
the amount of shareholder servicing fees payable to financial institutions under
the Services Plan.
TAXES
Each of the Funds intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification relieves a Fund of liability for federal income
taxes to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income (if any) net of
certain deductions for such year. In general, a 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. Each Fund intends to distribute
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substantially all of its investment company taxable income and net tax-exempt
income each taxable year. Such distributions by a Fund will be taxable as
ordinary income to its shareholders who are not currently exempt from federal
income taxes, whether such income is received in cash or reinvested in
additional shares. (Federal income taxes for distributions to an IRA or to a
qualified retirement plan are deferred under the Code.) Since all of each Fund's
net investment income is expected to be derived from earned interest, it is
anticipated that no part of any distribution will be eligible for the dividends
received deduction for corporations.
Substantially all of each Fund's net realized long-term capital gains,
if any, will be distributed at least annually to Fund shareholders. A Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in 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.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after a purchase of shares prior to the record date will have the effect
of reducing the per share net asset value by the per share amount of the
dividend or distribution. All or a portion of such dividend or distribution,
although in effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then
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any loss the shareholder might realize on the sale of those shares will be
treated as a long-term loss to the extent of the earlier capital gain
distribution. Generally, a shareholder may include sales charges incurred upon
the purchase of Fund shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Fund within 90 days of the purchase and is able to reduce the sales
charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included (subject to this
limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which
were in effect as of the date of this Prospectus; such laws and regulations may
be changed by legislative or administrative actions. The foregoing summarizes
some of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction
of the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
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<TABLE>
<CAPTION>
Principle 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
Age 82 information processing
equipment), since October
1985; Director, NACCO
Materials Handling Group,
Inc. (manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex, Inc.
(manufacturer of
household appliances),
since 1990; Director,
Waste-Quip, Inc. (waste
handling equipment),
since 1989.
Thomas R. Benua, Jr. Trustee Chairman, EBCO
564 Hackberry Drive Manufacturing Company and
Westerville, OH 43081 subsidiaries
Age 51 (manufacture, sale and
financing of water coolers
and dehumidifiers), since
January 1996 and President,
January 1987 to January 1996;
Vice President and Executive
Committee Member of Ebtech Corp.
(market and sell bottled and point-
of-use water coolers), since March
1991.
</TABLE>
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<TABLE>
<CAPTION>
Principle Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
Leigh Carter* Trustee, President Retired President and Chief Operating
13901 Shaker Blvd., #6B and Treasurer Officer, BFGoodrich Company, August 1986 to
Cleveland, OH 44120 September 1990; Director, Adams Express
Age 70 Company (closed-end investment company),
since April 1982; Director, Lamson &
Sessions Co. (producer of electrical
supplies for construction, consumer power
and communications industry), since April
1991; Director, Petroleum & Resources Corp.,
since April 1987; Director, Morrison
Products (manufacturer of blower fans and
air moving equipment), since April 1983.
John F. Durkott Trustee President and Chief Operating Officer,
8600 Allisonville Road Kittle's Home Furnishings Center, Inc.,
Indianapolis, IN 46250 since January 1982; partner, Kittles
Age 51 Bloomington Property Company, since January
1981; partner, KK&D (Affiliated Real Estate
Companies of Kittle's Home Furnishings
Center), since January 1989.
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol Martin
Carol Martin Gatton Gatton, College of Business and Economics,
College of Business and University of Kentucky, since 1981;
Economics Director, Studio Plus Hotels, Inc., since
University of Kentucky 1994.
Lexington, KY 40506-0034
Age 57
</TABLE>
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<TABLE>
<CAPTION>
Principle Occupation
Position with During Past 5 Years
NAME AND ADDRESS the Trust and Other Affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
Robert D. Neary Trustee Retired; Co-Chairman of Ernst & Young, April
2000 National City Center 1984 - September 1993; Director, Cold Metal
1900 E. 9th Street Products, Inc., since March 1994; Director,
Cleveland, OH 44114 Zurn Industries, Inc., (environmental
Age 62 systems and engineering and construction
services) since June 1995.
J. William Pullen Trustee President and Chief Executive Officer,
Whayne Supply Company Whayne Supply Co. (engine and heavy
1400 Cecil Avenue equipment distribution), since 1986;
P.O. Box 35900 President and Chief Executive Officer,
Louisville, KY 40232-5900 American Contractors Rentals & Sales (rental
Age 57 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 ADVISERS
National City, National City Columbus and National City Kentucky
("National City Banks") serve as investment advisers to the Fixed Income Fund
and serves as the investment adviser to the Enhanced Income and Total Return
Advantage Funds. The National City Banks are wholly owned subsidiaries of
National City
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Corporation. They provide trust and banking services to individuals,
corporations, and institutions, both nationally and internationally, including
investment management, estate and trust administration, financial planning,
corporate trust and agency, and personal and corporate banking. The National
City Banks are member banks of the Federal Reserve System and the Federal
Deposit Insurance Corporation. NAM is a registered investment adviser providing
investment advisory and related services.
On June 30, 1996, the Trust Departments of National City, National
City Columbus and National City Kentucky had approximately $___ billion,
$___ billion and $___ billion, respectively, in assets under management, and
National City, National City Columbus and National City Kentucky had
approximately $____ billion, $____ billion and $___ billion, respectively,
in total assets. NAM had approximately $___ billion in assets under
management. National City has its principal offices at 1900 East Ninth Street,
Cleveland, Ohio 44114; National City Columbus has its principal offices at 155
East Broad Street, Columbus, Ohio 43251; National City Kentucky has its
principal offices at National City Tower, 101 South Fifth Street, Louisville,
Kentucky 40202; and NAM has its principal offices at 101 South Fifth Street,
Louisville, Kentucky 40202.
The National City Banks manage the Fixed Income Fund, makes decisions
with respect to and places orders for all purchases and sales of such Fund's
securities, and maintains the Fund's records relating to such purchases and
sales. Larry Kekst is the person primarily responsible for the day to day
management of the Fixed Income Fund. Mr. Kekst, a Vice President at National
City since 1988, has been the Asset Manager of the Fixed Income Fund since its
inception on December 20, 1989.
NAM manages the Enhanced Income and Total Return Advantage Funds, makes
decisions with respect to and places orders for all purchases and sales of the
Funds' securities and maintains the Funds' records relating to such purchases
and sales. The Fixed Management Group of NAM makes the investment decisions for
these Funds. No person is primarily responsible for making recommendations to
the Fixed Management Group.
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National City manages the Intermediate Government and GNMA Funds, makes
decisions with respect to and places orders for all purchases and sales of the
Funds' securities, and maintains the Funds' records relating to such purchases
and sales. The Fixed Income Team of National City's Asset Management Group
assumed responsibility for the day-to-day management of the Fund as of May 2,
1996, when the shareholders of the Predecessor Funds approved the adviser.
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
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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.
The investment advisers are entitled to receive advisory fees,
computed daily and payable monthly, at the annual rate of .55% of the average
daily net assets of each of the Fixed Income, Total Return Advantage,
Intermediate Government, and GNMA Funds, and at the annual rate of .45% of the
average daily net assets of the Enhanced Income Fund. The advisers may from time
to time waive all or a portion of their advisory fees to increase the net income
of the Funds available for distribution as dividends.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass- Steagall Act as
presently interpreted by the Board of Governors of the Federal Reserve System,
(a) prohibit a bank holding company registered under the Federal Bank Holding
Company Act of 1956 or any affiliate thereof from sponsoring, organizing, or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, but (b) do not prohibit such a bank holding company
or affiliate from acting as investment adviser, transfer agent, or custodian to
such an investment company. The advisers believe that they may perform the
services for the Funds contemplated by their Advisory Agreements with the Trust
as described in such agreements and this Prospectus without violation of
applicable banking laws or regulations. However, there are no controlling
judicial precedents and future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well
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as future interpretations of present requirements, could prevent the advisers
from continuing to perform services for the Trust. If the advisers were
prohibited from providing services to the Funds, the Board of Trustees would
consider selecting another qualified firm. Any new investment advisory agreement
would be subject to shareholder approval.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of the advisers, or their affiliated and
correspondent banks in connection with shareholder purchases of Fund shares, the
advisers and their affiliated and correspondent banks might be required to alter
materially or discontinue the services offered by them to shareholders. It is
not anticipated, however, that any resulting change in the Trust's method of
operations would affect its net asset value per share or result in financial
losses to any shareholder.
If current restrictions preventing a bank or its affiliates from
legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington,
Delaware 19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the
Trust, PFPC has agreed to provide the following services with respect to the
Funds: statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the
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required fidelity bond coverage; calculate each Fund's net asset value per
share, net income, and realized capital gains (losses); and generally assist the
Funds with respect to all aspects of their administration and operation. PFPC is
entitled to receive with respect to each Fund an administrative fee, computed
daily and paid monthly, at the annual rate of .10% of the first $200,000,000 of
its net assets, .075% of the next $200,000,000 of its net assets, .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 each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January
28, 1986. The Trust is a series fund authorized to issue 36 separate classes
or series of shares of beneficial interest ("shares"). Eight of these classes
or series, which represent interests in the Fixed Income Fund (Class I and Class
I - Special Series 1), Enhanced Income Fund (Class O, Class O Special Series
1), Total Return Advantage Fund (Class P and Class P - Special Series 1),
Intermediate Government Fund (Class R and Class R - Special Series 1) and GNMA
Fund (Class S and Class S - Special Series 1) are described in this Prospectus.
Class I, Class O, Class P, Class R and Class S shares constitute the
Institutional class or series of shares; and Class I -Special Series 1, Class O
- - Special Series 1, Class P - Special Series 1, Class R - Special Series 1 and
Class S Special Series 1 shares constitute the Retail class or series of shares.
The other Funds of the Trust are: Money Market Fund (Class A and Class A -
Special Series 1), Government Fund (Class B and Class B - Special Series 1),
Treasury Fund (Class C and Class C - Special Series 1), Tax Exempt Fund (Class D
and Class D - Special Series 1), Equity Fund (Class H and Class H - Special
Series 1), Ohio Tax Exempt Fund (Class K and Class K - Special Series 1),
National Tax Exempt Fund (Class L and Class L Special Series 1), Equity Income
Fund (Class M and Class M Special Series 1), Mid Cap Regional Fund (Class N
and Class N Special Series 1), Pennsylvania Tax Exempt Fund (Class Q and Class Q
- -Special Series 1) and Pennsylvania Municipal Fund (Class T and Class T -
Special Series 1). Each share has no par value, represents an equal
proportionate interest in the investment fund
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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
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written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of _________, 1996, National City, National City Columbus and
National City Kentucky held beneficially or of record approximately _____%,
_____% and _____%, respectively, of the outstanding Institutional shares of the
Fixed Income Fund; National City and National City Kentucky held beneficially or
of record approximately ____% and _____%, respectively, of the outstanding
Institutional shares of the Enhanced Income Fund; and National City, National
City Columbus and National City Kentucky held beneficially or of record
approximately _____%, ____% and _____%, respectively, of the outstanding
Institutional shares of the Total Return Advantage Fund.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets.
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corp., serves as the Trust's transfer and dividend disbursing agent.
Communications to the Transfer Agent should be directed to P. O. Box 5109,
Westborough, Massachusetts 01581-5109. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's advisers bear all expenses in
connection with the performance of their services. Each Fund of the Trust bears
its own expenses incurred in its operations including: taxes; interest; fees
(including fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian
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and Transfer Agent; certain insurance premiums; outside auditing and legal
expenses; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
in connection with the purchase of its portfolio securities. Under the Services
Plan, the Retail shares in the Funds also bear the expense of shareholder
servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both
the custodian and an investment adviser, a procedure has been established
requiring three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
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ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
ARMADA FUNDS
National City Bank, Columbus
155 East Broad Street PROSPECTUS
Columbus, Ohio 43251
September 30, 1996
National City Bank, Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
National Asset Management Fixed Income Fund
Corporation Enhanced Income Fund
101 South Fifth Street Total Return Advantage Fund
Louisville, Kentucky 40202 Intermediate Government Fund
GNMA Fund
TABLE OF CONTENTS
PAGE
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EXPENSE TABLES..................................................... 3
FINANCIAL HIGHLIGHTS............................................... 5
INTRODUCTION....................................................... 12
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES................... 12
INVESTMENT LIMITATIONS............................................. 35
YIELD AND PERFORMANCE INFORMATION.................................. 37
PRICING OF SHARES.................................................. 39
HOW TO PURCHASE AND REDEEM SHARES.................................. 39
DISTRIBUTION AGREEMENT............................................. 48
SHAREHOLDER SERVICES PLAN.......................................... 48
DIVIDENDS AND DISTRIBUTIONS........................................ 49
TAXES .......................................................... 49
MANAGEMENT OF THE TRUST............................................ 51
DESCRIPTION OF THE TRUST AND ITS SHARES............................ 57
CUSTODIAN AND TRANSFER AGENT....................................... 59
EXPENSES .......................................................... 59
MISCELLANEOUS...................................................... 60
- --------------------------------------------------------------------------------
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK;
NATIONAL CITY BANK, COLUMBUS; NATIONAL CITY BANK, KENTUCKY; NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR
ANY BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED
BY THE U.S. GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. National City Bank and
certain of its affiliates 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
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<PAGE> 184
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1996
FIXED INCOME FUND
ENHANCED INCOME FUND
TOTAL RETURN ADVANTAGE FUND
INTERMEDIATE GOVERNMENT FUND
GNMA FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Funds of Armada Funds
(the "Trust"),
<PAGE> 186
dated September 30, 1996 (the "Prospectus"). A copy of the Prospectus may be
obtained by calling or writing the Trust at 1- 800-622-FUND, Drive, Westborough,
Massachusetts 01581.
<PAGE> 187
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
STATEMENT OF ADDITIONAL INFORMATION....................................................................
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES.......................................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.........................................................
DESCRIPTION OF SHARES..................................................................................
ADDITIONAL INFORMATION CONCERNING TAXES................................................................
TRUSTEES AND OFFICERS..................................................................................
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS...........................................................
SHAREHOLDER SERVICES PLAN..............................................................................
PORTFOLIO TRANSACTIONS.................................................................................
AUDITORS...............................................................................................
COUNSEL................................................................................................
YIELD AND PERFORMANCE INFORMATION......................................................................
MISCELLANEOUS..........................................................................................
FINANCIAL STATEMENTS...................................................................................
APPENDIX A.............................................................................................
APPENDIX B.............................................................................................
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction
with the Prospectus of Armada Funds (the "Trust") that describes the Fixed
Income, Enhanced Income and Total Return Advantage, Intermediate Government and
GNMA Funds. The information contained in this Statement of Additional
Information expands upon matters discussed in the Prospectus. No investment in
shares of a Fund should be made without first reading the Prospectus.
The Intermediate Government Fund and GNMA Fund commenced operations on
August 10, 1994 as separate investment portfolios (the "Predecessor Intermediate
Government Fund" and the "Predecessor GNMA Fund", collectively the "Predecessor
Funds") of Inventor Funds, Inc. which was organized as a Maryland corporation.
On ___________, 1996, the Predecessor Funds were reorganized as new portfolios
of Armada. Prior to the reorganizatio, the Predecessor Funds offered and sold
shares of stock that were similar to Armada's Retail shares of beneficial
interest.
RISK FACTORS, INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the advisers' investment management strategies,
techniques, policies and related matters may be included from time to time in
advertisements, sales literature, communications to shareholders and other
materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is Appendix A
which contains descriptions of the rating symbols used by S&P, Fitch, Duff, IBCA
and Moody's for securities which may be held by the Funds.
ASSET-BACKED SECURITIES
Each Fund may purchase asset-backed securities, which are securities
backed by mortgages, installment contracts, credit card receivables or other
assets. Asset-backed securities represent interests in "pools" of assets in
which payments of both interest and principal on the securities are made
monthly, thus in effect "passing through" monthly payments made by the
individual borrowers
<PAGE> 189
on the assets that underlie the securities, net of any fees paid to the issuer
or guarantor of the securities. The average life of asset-backed securities
varies with the maturities of the underlying instruments, and the average life
of a mortgage-backed instrument, in particular, is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely. Asset-backed securities acquired by a Fund
may include collateralized mortgage obligations ("CMOS") issued by private
companies.
Each Fund may invest in securities the timely payment of principal and
interest on which are guaranteed by the Government National Mortgage Association
("GNMA") a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. The market value and interest yield of these
instruments can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages. These securities represent ownership in a
pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to predict
accurately the average maturity of a particular GNMA pool. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. The scheduled monthly
interest and principal payments relating to mortgages in the pool are "passed
through" to investors. In addition, there may be unscheduled principal payments
representing prepayments on the underlying mortgages. Although GNMA certificates
may offer yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a GNMA certificate originally purchased at a premium to decline in price to its
par value, which may result in a loss.
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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 by FNMA.
Mortgage-related securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain
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<PAGE> 191
amounts owed on the credit cards, thereby reducing the balance due. Most issuers
of automobile receivables permit the services to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments resulting
from a decline or appreciation in the value of a particular foreign currency
against the U.S. dollar or another foreign currency or for other reasons, the
Enhanced Income and Total Return Advantage Funds are authorized to enter into
forward currency exchange contracts. These contracts involve an obligation to
purchase or sell a specified currency at a future date at a price set at the
time of the contract. Forward currency contracts do not eliminate fluctuations
in the values of fund securities but rather allow a Fund to establish a rate of
exchange for a future point in time.
When entering into a contract for the purchase or sale of a security,
these Funds may enter into a forward foreign currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When the Enhanced Income and Total Return Advantage Funds' adviser
anticipates that a particular foreign currency may decline substantially
relative to the U.S. dollar or other leading currencies, in order to reduce
risk, a Fund may enter into a forward contract to sell, for a fixed amount, the
amount of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency. Similarly, when
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<PAGE> 192
the obligations held by a Fund create a short position in a foreign currency,
the Fund may enter into a forward contract to buy, for a fixed amount, an amount
of foreign currency approximating the short position. With respect to any
forward foreign currency contract, it will not generally be possible to match
precisely the amount covered by that contract and the value of the securities
involved due to the changes in the values of such securities resulting from
market movements between the date the forward contract is entered into and the
date it matures. In addition, while forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such currency. A Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A separate account consisting of liquid assets, such as cash, U.S.
Government securities or other liquid high grade debt obligations equal to the
amount of the Enhanced Income and Total Return Advantage Funds' assets that
could be required to consummate forward contracts will be established with the
Funds' Custodian except to the extent the contracts are otherwise "covered." For
the purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Funds. A forward contract to sell a foreign
currency is "covered" if a Fund owns the currency (or securities denominated in
the currency) underlying the contract, or holds a forward contract (or call
option) permitting the Fund to buy the same currency at a price no higher than
the Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if a Fund holds a forward contract (or call option)
permitting the Fund to sell the same currency at a price as high as or higher
than the Fund's price to buy the currency.
INTEREST RATE SWAPS
The Enhanced Income , Total Return Advantage and GNMA Funds may enter
into interest rate swaps for hedging purposes and not for speculation. These
Funds will typically use interest rate swaps to preserve a return on a
particular investment or portion of
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its Fund or to shorten the effective duration of their Fund investments.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments.
The Enhanced Income , Total Return Advantage and GNMA Funds will only
enter into interest rate swaps on a net basis, (i.e., the two payment streams
are netted out, with a Fund receiving or paying, as the case may be, only the
net amount of the two payments). Inasmuch as these transactions are entered into
for good faith hedging purposes, the Funds and their adviser believe that such
obligations do not constitute senior securities as defined in the 1940 Act and,
accordingly, will not treat them as being subject to the Funds' borrowing
restrictions. The net amount of the excess, if any, of the Funds' obligations
over their entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of liquid assets, such as cash, U.S. Government
securities or other liquid high grade debt securities, having an aggregate net
asset value at least equal to such accrued excess will be maintained in a
segregated account by the Funds' custodian.
If there is a default by the other party to an interest rate swap
transaction, the Fund involved will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with markets
for other similar instruments which are traded in the Interbank market.
FUTURES CONTRACTS AND RELATED OPTIONS
The Enhanced Income and Total Return Advantage Funds may purchase and
sell futures contracts and may purchase and sell call and put options on futures
contracts. The GNMA and Intermediate Government Funds may purchase and sell
futures contracts only on U.S. Treasury obligations. For a detailed description
of futures contracts and related options, see Appendix B to this Statement of
Additional Information.
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<PAGE> 194
INCOME PARTICIPATION LOANS
The Fixed Income, Enhanced Income and Total Return Advantage Funds may
make or acquire participations in privately negotiated loans to borrowers.
Frequently, such loans have variable interest rates and may be backed by a bank
letter of credit; in other cases they may be unsecured. Such transactions may
provide an opportunity to achieve higher yields than those that may be available
from other securities offered and sold to the general public.
Privately arranged loans, however, will generally not be rated by a
credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made by
a Fund may have a demand provision permitting the Fund to require repayment
within seven days. Participations in such loans, however, may not have such a
demand provision and may not be otherwise marketable. Recovery of an investment
in any such loan that is illiquid and payable on demand will depend on the
ability of the borrower to meet an obligation for full repayment of principal
and payment of accrued interest within the demand period, normally seven days or
less (unless the Fund determines that a particular loan issue, unlike most such
loans, has a readily available market). As it deems appropriate, the Board of
Trustees of the Trust will establish procedures to monitor the credit standing
of each such borrower, including its ability to honor contractual payment
obligations.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield). When a
Fund agrees to purchase when-issued securities, the custodian sets aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment,
marked to market daily. It is likely that a Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash.
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<PAGE> 195
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its fund might be affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between a Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, a Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
Government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the advisers. In the event an issuer
of a variable or floating rate obligation defaulted on its payment obligation, a
Fund might be unable to dispose of the instrument because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
SHORT TERM OBLIGATIONS
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The Fixed Income, Enhanced Income and Total Return Advantage Funds may
invest in various short term obligations including those described below.
Investments include commercial paper and other short term promissory
notes issued by corporations (including variable and floating rate instruments).
In addition, The Fixed Income, Enhanced Income and Total Return Funds may invest
in Canadian Commercial Paper ("CCP"), which is commercial paper issued by a
Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer. Each such Fund may also acquire zero coupon obligations, which have
greater price volatility than coupon obligations and which will not result in
the payment of interest until maturity.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable demand and time deposits issued for a definite
period of time and earning a specified return by a U.S. bank which is a member
of the Federal Reserve System. Bank obligations also include U.S. dollar
denominated bankers' acceptances, certificates of deposit and time deposits
issued by foreign branches of U.S. banks or foreign banks. Investment in bank
obligations is limited to the obligations of financial institutions having more
than $1 billion in total assets at the time of purchase. The Fixed Income,
Enhanced Income and Total Return Advantage Funds may also make interest bearing
savings deposits in commercial and savings banks not in excess of 5% of its
total assets. Investment in non-negotiable time deposits is limited to no more
than 5% of each such Fund's total assets at the time of purchase.
The Fixed Income, Enhanced Income and Total Return Advantage Funds may
also make limited investments in a Guaranteed Investment Contract ("GIC") issued
by U.S. insurance companies. When investing in GICs, a Fund makes cash
contributions to a deposit fund or an insurance company's general account. The
insurance company then credits to that Fund monthly a guaranteed minimum
interest which is based on an index. The insurance company may assess periodic
charges against a GIC for expense and service costs allocable to it, and the
charges will be deducted from the value of the deposit fund. A Fund will
purchase a GIC only when its advisers have determined, under guidelines
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established by the Board of Trustees, that the GIC presents minimal credit risks
to the Fund and is of comparable quality to instruments that are rated high
quality by one or more rating agencies.
REPURCHASE AGREEMENTS
Securities held by the Funds may be subject to repurchase agreements.
Under the terms of a repurchase agreement, a Fund purchases securities from
financial institutions such as banks and broker-dealers which the Fund's
advisers deem creditworthy under guidelines approved by the Board of Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price generally equals the price paid
by the Fund plus interest negotiated on the basis of current short term rates,
which may be more or less than the rate on the underlying fund securities. The
seller under a repurchase agreement will be required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying fund
securities were less than the repurchase price under the agreement, or to the
extent that the disposition of such securities by the Fund were delayed pending
court action. Although there is no controlling legal precedent confirming that a
Fund would be entitled, as against a claim by such seller or its receiver or
trustee in bankruptcy, to retain the underlying securities, the Board of
Trustees of the Trust believes that, under the regular procedures normally in
effect for custody of a Trust's securities subject to repurchase agreements and
under Federal laws, a court of competent jurisdiction would rule in favor of the
Trust if presented with the question. Securities subject to repurchase
agreements will be held by the Trust's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
The Fixed Income, Enhanced Income and Total Return Advantage Funds may
borrow funds for temporary purposes by entering into reverse repurchase
agreements in accordance with
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their respective investment restrictions. Pursuant to such agreements, the Fund
would sell Fund securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. These Funds intend to enter into reverse repurchase agreements only to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account assets such as U.S. Government
securities or other liquid, high grade debt securities consistent with the
Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest), and will subsequently monitor the account to
ensure that such equivalent value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Fund may
decline below the price at which it is obligated to repurchase the securities.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS
The Fixed Income, Enhanced Income, Total Return Advantage and
Intermediate Government Funds may purchase obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Some of these
obligations are supported by the full faith and credit of the U.S. Treasury,
such as obligations issued by the Government National Mortgage Association.
Others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the U.S. Treasury; others,
such as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Funds will invest
in the obligations of such agencies or instrumentalities only when the advisers
believe that the credit risk with respect thereto is minimal.
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SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund currently intends to limit its investments in securities
issued by other investment companies so that, as determined immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
LENDING OF PORTFOLIO SECURITIES
The Intermediate Government Fund may lend securities pursuant to
agreements requiring that the loans be continuously secured by cash, securities
of the U.S. government or its agencies, or any combination of cash and such
securities, as collateral equal to 100% of the market value at all times of the
securities lent. Such loans will not be made if, as a result, the aggregate
amount of all outstanding securities loans for the Fund exceed one-third of the
value of its total assets taken at fair market value. The Fund will continue to
receive interest on the securities lent while simultaneously earning interest on
the investment of the cash collateral in U.S. government securities. However,
the Fund will normally pay lending fees to such broker-dealers and related
expenses from the interest earned on invested collateral. There may be risks of
delay in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. However, loans are made only to borrowers deemed by
the adviser to be of good standing and when, in the judgment of the adviser, the
consideration which can be earned currently from such securities loans justifies
the attendant risk. Any loan may be terminated by either party upon reasonable
notice to the other party.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the
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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 Funds are subject to the following investment limitations which may be
changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of securities,
or maintain a short position, except that (i) each Fund may purchase and sell
futures contracts and options on futures contracts in accordance with its
investment objective; and (ii) the GNMA Fund may obtain short term credits as
necessary for the clearance of securities transactions and make short sales
"against the box" as described in the Prospectus.
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of certain portfolio securities acquired within the limitation
on purchases of restricted securities.
3. Purchase or sell real estate, or, in the case of the GNMA and
Intermediate Government Funds, real estate limited partnerships, except that the
Fixed Income, Enhanced Income and Total Return Advantage Funds may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
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4. Purchase or sell commodities or commodity contracts or invest
in oil, gas, or other mineral exploration or development programs, except that a
Fund may: (a) to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs; and (b) purchase and sell futures
contracts and options on futures contracts in accordance with its investment
objective. In addition, the Fixed Income, Enhanced Income and Total Return
Advantage Funds may enter into forward currency contracts and other financial
instruments in accordance with its investment objective and policies.
5. Invest in any issuer for the purpose of exercising control or
management.
6. Purchase or retain securities of any issuer if the officers or
trustees of the Trust or the officers or directors of its investment advisers
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.
7. Pledge, mortgage or hypothecate assets, except to secure
borrowings permitted by the Fund's investment limitations in aggregate amounts
not to exceed 33 1/3% of the Fund's total assets taken at current value at the
time of the incurrence of such loan.
8. Acquire more than 10% of the voting securities of any one
issuer, provided that this limitation shall apply only as to 75% of the Fund's
net assets.
9. Purchase securities of other investment companies, except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
10. Issue senior securities (as defined in the Investment Company
Act of 1940), except in connection with permitted borrowings as described above
or as permitted by rule, regulation or order of the Securities and Exchange
Commission.
In addition, the Fixed Income, GNMA and Intermediate Government Funds
may not write or purchase put options, call options, straddles, spreads, or any
combination thereof, except that the Funds may purchase and sell futures
contracts and
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options on futures contracts in accordance with their investment objectives.
The Enhanced Income Fund and Total Return Advantage Fund may not write
puts, calls or combinations thereof, except for transactions in: options on
securities, financial instruments, currencies and indices of securities; futures
contracts; options on futures contracts; forward currency contracts; interest
rate swaps; and similar instruments.
The GNMA and Intermediate Government Funds may not invest in illiquid
securities in an amount exceeding, in the aggregate, 15% of their respective net
assets.
The GNMA and Intermediate Government Funds may not purchase securities
of any company which has (with predecessors) a record of less than three years
continuing operations, if, as a result, more than 5% of the total assets of each
such Fund (taken at current value) would be invested in such securities.
The foregoing percentages will apply at the time of purchase of a
security. If a Fund exceeds its limitation on the holding of illiquid
securities, it will sell illiquid securities as necessary to maintain the
required liquidity when the adviser believes it is in the best interests of the
Fund to do so.
* * * * *
In addition, so long as a Fund is offering and selling its shares in
the state of Texas the Fund may not (i) invest more than 5.0% of its net assets
in warrants (including within that amount, but not to exceed 2.0%, may be
warrants that are not listed on the New York or American Stock Exchange; (ii)
invest in oil, gas, or other mineral leases; and (iii) invest in real estate
limited partnership interests.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Fund are sold on a continuous basis by 440 Financial
Distributors, Inc. (the "Distributor"), which has agreed to use appropriate
efforts to solicit all purchase orders. The issuance of shares is recorded on
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the books of the Trust. To change the commercial bank or account designated to
receive redemption proceeds, a written request must be sent to an investor's
financial institution at its principal office. Such requests must be signed by
each shareholder, with each signature guaranteed by a U.S. commercial bank or
trust company or by a member firm of a national securities exchange. Guarantees
must be signed by an authorized signatory and "Signature Guaranteed" must appear
with the signature. An investor's financial institution may request further
documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the date of
payment for more than seven days for shares during any period when (a) trading
on the Exchange is restricted by applicable rules and regulations of the SEC;
(b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended May 31, 1996, sales loads paid by
shareholders of the Fixed Income, Enhanced Income and Total Return Advantage
Funds totalled $4,002, $6,935 and $1,240, respectively.
For the fiscal year ended April 30, 1996, sales loads paid by
shareholders of the Predecessor GNMA and Intermediate Government Funds totalled
$1,391.24 and $8,175.50, respectively.
Automatic investment programs such as the monthly savings program
("Program") described in the Prospectus offered by the Funds permit an investor
to use "dollar cost averaging" in making investments. Under this Program, an
agreed upon fixed dollar amount is invested in Fund shares at predetermined
intervals. This may help investors to reduce their average cost per share
because the Program results in more shares being purchased during periods of
lower share prices and fewer shares during periods of higher share prices. In
order to be effective, dollar cost averaging should usually be followed on a
sustained, consistent basis.
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<PAGE> 204
Investors should be aware, however, that dollar cost averaging results in
purchases of shares regardless of their price on the day of investment or market
trends and does not ensure a profit, protect against losses in a declining
market, or prevent a loss if an investor ultimately redeems his shares at a
price which is lower than their purchase price. An investor may want to consider
his financial ability to continue purchases through periods of low price levels.
From time to time, in advertisements, sales literature, communications to
shareholders and other materials ("Materials"), the Trust may illustrate the
effects of dollar cost averaging through use of or comparison to an index such
as the S&P 500 Index or Lehman Intermediate Government Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
Illustrations of the computation of the offering price per Retail share
of the Fixed Income, Enhanced Income and Total Return Advantage Funds, based on
the value of the Funds' net assets and number of outstanding shares on May 31,
1996 are as follows:
TABLE
FIXED INCOME FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares....................................... $6,216,191
Outstanding Retail Shares......................................... 600,711
Net Asset Value Per Share
$6,216,191 / 600,771)............................................. $ 10.35
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share)........................................ 0.40
Offering to Public................................................ $ 10.75
</TABLE>
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ENHANCED INCOME FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares....................................... $1,717,679
Outstanding Retail Shares......................................... 171,392
Net Asset Value Per Share
($1,717,619 / 171,392)............................................ $ 10.02
Sales Charge, 2.75% of
offering price (2.80% of
net asset value per share)........................................ 0.28
Offering to Public................................................ $ 10.30
</TABLE>
TOTAL RETURN ADVANTAGE FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares....................................... $2,040,140
Outstanding Retail Shares......................................... 206,613
Net Asset Value Per Share
($2,040,140 / 206,613)............................................ $ 9.87
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share)........................................ 0.38
Offering to Public................................................ $ 10.25
</TABLE>
Illustrations of the computation of the offering price per Retail share of the
Fund, based on the value of the Predecessor GNMA and
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Intermediate Government Funds' net assets and number of outstanding shares on
April 30, 1996 are as follows:
INTERMEDIATE GOVERNMENT
FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares $ 89,901,309
Outstanding Retail Shares 8,952,005
Net Asset Value Per Share
($89,901,309 / 8,952,005) $ 10.04
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) $ 0.42
Offering to Public $ 10.46
</TABLE>
GNMA FUND
<TABLE>
<S> <C>
Net Assets of Retail Shares $ 62,160,843
Outstanding Retail Shares 6,142,810
Net Asset Value Per Share
($62,160,843 / 6,142,810) $ 10.12
Sales Charge, 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.
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By use of the exchange privilege, the Investor authorizes the Trust's
Transfer Agent or his financial institution to act on telephonic or written
instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's Declaration of
Trust authorizes the Board of Trustees to issue an unlimited number of shares of
beneficial interest and to classify or reclassify any unissued shares of the
Trust into one or more additional classes or series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption. Pursuant to such
authority, the Board of Trustees has authorized the issuance of 36 classes or
series of shares. Ten of these classes or series, which represent interests in
the Fixed Income Fund (Class I and Class I - Special Series 1), Enhanced Income
Fund (Class O and Class O - Special Series 1), Total Return Advantage Fund
(Class P and Class P - Special Series 1), GNMA Fund (Class S and Class S -
Special Series 1) and Intermediate Government Fund (Class R and Class R -
Special Series 1) are described in this Statement of Additional Information and
the related Prospectus.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectus, the Trust's shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of the Trust or
an individual Fund, shareholders of a Fund are entitled to receive the assets
available for distribution belonging to the particular Fund, and a proportionate
distribution, based upon the relative asset values of the respective Funds, of
any general assets of the Trust not belonging to any particular Fund which are
available for distribution.
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Rule 18f-2 under the 1940 Act provides that any matter required by the
1940 Act, applicable state law, or otherwise, to be submitted to the holders of
the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each investment fund affected
by such matter. Rule 18f-2 further provides that an investment fund is affected
by a matter unless the interests of each fund in the matter are substantially
identical or the matter does not affect any interest of the fund. Under the
Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment fund only if approved by a majority of the outstanding shares of such
fund. However, the Rule also provides that the ratification of the appointment
of independent public accountants, the approval of principal underwriting
contracts, and the election of trustees may be effectively acted upon by
shareholders of the Trust voting together in the aggregate without regard to a
particular fund. In addition, shareholders of each class in a particular
investment fund have equal voting rights except that only Retail shares of an
investment fund will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing fees that are allocable
to such shares.
Although the following types of transactions are normally subject to
shareholder approval, the Board of Trustees may, under certain limited
circumstances, (a) sell and convey the assets of an investment fund to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such fund involved to be redeemed at a price which is equal to their
net asset value and which may be paid in cash or by distribution of the
securities or other consideration received from the sale and conveyance; (b)
sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund
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to be redeemed at their net asset value or converted into shares of another
class of the Trust shares at net asset value. In the event that shares are
redeemed in cash at their net asset value, a shareholder may receive in payment
for such shares an amount that is more or less than his original investment due
to changes in the market prices of the fund's securities. The exercise of such
authority by the Board of Trustees will be subject to the provisions of the 1940
Act, and the Board of Trustees will not take any action described in this
paragraph unless the proposed action has been disclosed in writing to the fund's
shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
Each Fund of the Trust will be treated as a separate corporate entity
under the Code and intends to qualify as a regulated investment company. In
order to qualify for tax treatment as a regulated investment company under the
Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or
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trust is treated as derived with respect to the Fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the Fund in the same manner as by the partnership or trust. Some of
the investments that the Funds may make (such as equipment lease and trust
certificates) may not be securities or may not produce qualifying income.
Therefore, it may be necessary for the advisers to restrict the investments of
the Funds to ensure that nonqualifying income does not exceed 10% of its total
gross income for a taxable year.
Another requirement for qualification as a regulated investment company
under the Code is that less than 30% of a Fund's gross income for a taxable year
must be derived from gains realized on the sale or other disposition of the
following investments held for less than three months: (1) stock and securities
(as defined in Section 2(a)(36) of the 1940 Act); (2) options, futures and
forward contracts other than those on foreign currencies; and (3) foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are not directly related to a Fund's principal business of investing in
stock and securities (and options and futures with respect to stocks and
securities). Interest (including original issue discount and, with respect to
taxable debt securities, accrued market discount) received by a Fund upon
maturity or disposition of a security held for less than three months will not
be treated as gross income derived from the sale or other disposition of such
security within the meaning of this requirement. However, any other income which
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
Some investments held by a Fund may be subject to special rules which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar
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financial instrument. The disposition of a currency other than the U.S. dollar
by a U.S. taxpayer is also treated as a transaction subject to the special
currency rules. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss.
Gain or loss attributable to the foreign currency component of transactions
engaged in by a Fund which are not subject to the special currency rules (such
as foreign equity investments other than certain preferred stocks) will be
treated as capital gain or loss and will not be segregated from the gain or loss
on the underlying transaction.
The Trust will designate any distribution of long-term capital gains of
a Fund as a capital gain dividend in a written notice mailed to shareholders
within 60 days after the close of the Trust's taxable year. Shareholders should
note that, upon the sale or exchange of such Funds' shares, if the shareholder
has not held such shares for at least six months, any loss on the sale or
exchange of those shares will be treated as long-term capital loss to the extent
of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
If for any taxable year a Fund does not qualify for federal tax
treatment as a regulated investment company, all of such Fund's taxable income
will be subject to federal income tax at regular corporate rates without any
deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits, and would be eligible for
the dividends received deduction for corporations.
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Each Fund may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, or who are subject to withholding by the Internal
Revenue Service for failure to properly include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients".
TRUSTEES AND OFFICERS
The 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:
<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>
</TABLE>
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<PAGE> 213
<TABLE>
<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 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
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that all persons having any claim against the trustees or the Trust shall look
solely to the trust property for payment. With the exceptions stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expense, reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved or
with which he may be threatened by reason of his being or having been a trustee,
and that the trustees, have the power, but not the duty, to indemnify officers
and employees of the Trust unless any such person would not be entitled to
indemnification had he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AGREEMENT
As described in the Prospectus, National City, National City Columbus
and National City Kentucky serve as investment advisers to the Fixed Income
Fund; and National Asset Management Corporation ("NAM") serves as investment
adviser to the Enhanced Income and Total Return Advantage Funds. National City
alone serves as investment adviser to the GNMA and Intermediate Government
Funds. Prior to September 26, 1990, only National City and National City
Columbus served as advisers to the Fixed Income Fund. The advisers are
affiliates of National City Corporation, a bank holding company with $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.
Pursuant to the Advisory Agreement, the Trust incurred advisory fees in
the following amounts for (i) the fiscal years ended May 31, 1996, 1995 and
1994: $588,875, $481,437 (after waivers of $12,158) and $601,710 (after waivers
of $322,518) , respectively, for the Fixed Income Fund; (ii) the fiscal years
ended May 31, 1996 and 1995: $0 (after waivers of
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$298,505) and $0 (after waivers of $256,026) with respect to the Enhanced Income
Fund; and (iii) the fiscal years ended May 31, 1996 and 1995: $0 (after waivers
of $1,545,558) and $0 (after waivers of $1,176,389) with respect to the Total
Return Advantage Fund.
For the fiscal years ended April 30, 1996 and 1995, Integra Trust
Company ("Integra"), the investment adviser to the Predecessor Intermediate
Government and GNMA Funds, earned advisory fees of (i) $385,463 and $132,372;
and (ii) $602, 602 and $178,282, respectively. Integra waived advisory fees
during the same period in the amounts of (i) $107,340 and $72,352; and (ii)
$130,371 and $76,919, respectively.
Each Advisory Agreement provides that the advisers shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the advisers in the performance of
their duties or from reckless disregard by them of their duties and obligations
thereunder. In addition, the advisers have undertaken in their Advisory
Agreements to maintain their policy and practice of conducting their Trust
Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Fixed Income Fund was approved
by the shareholders of the Fund on September 26, 1990.
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The Advisory Agreement with respect to the Enhanced Income and Total Return
Advantage Funds was approved by their sole shareholder prior to the Funds'
commencement of investment operations. The Advisory Agreement with respect to
the GNMA and Intermediate Government Funds was approved by their respective sole
shareholders prior to their commencement of operations. Unless sooner
terminated, each Advisory Agreement will continue in effect with respect to each
Fund to which it relates until September 30, 1997 and from year to year
thereafter, subject to annual approval by the Trust's Board of Trustees, or by a
vote of a majority of the outstanding shares of such Fund (as defined in the
Fund's Prospectus) and a majority of the trustees who are not parties to the
Agreement or interested persons (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. Each Advisory
Agreement may be terminated by the Trust or the advisers on 60 days written
notice, and will terminate immediately in the event of its assignment.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Fund's
advisers will reimburse the Trust for any such excess with respect to the Fund
to the extent described in any written undertaking provided by the advisers to
such state. To the Trust's knowledge, as of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Trust provides that annual expenses (as defined by statute) may not exceed
2.5% of the first $30 million, 2% of the next $70 million and 1.5% of the
remaining average net assets of a particular Fund. Such amount, if any, will be
estimated, reconciled and paid on a monthly basis. The fees banks and NAM may
charge to Customers for services provided in connection with their investments
in the Trust are not covered by the state securities expense limitations
described above.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
PFPC serves as the administrator and accounting agent to the Trust. The
services provided as administrator and accounting agent and current fees are
described in the Prospectus. Pursuant to the Administration and Accounting
Services Agreement, the Trust incurred the following fees to PFPC for (i) the
fiscal years ended May 31, 1996, 1995 and 1994: $107,068, $89,856 and $109,402,
respectively
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for the Fixed Income Fund; (ii) the fiscal years ended May 31, 1996 and 1995:
$866,336 and $37,396 (after waivers of $14,882) with respect to the Enhanced
Income Fund; and (iii) the fiscal years ended May 31, 1996 and 1995: $260,951
and $150,557 (after waivers of $55,353) with respect to the Total Return
Advantage Fund.
For the 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 GNMA and Intermediate Government Funds and
earned the following fees: (i) $99,119 and $52,643; and (ii) $154,955 and
$65,623) respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENT
The Distributor acts as distributor of the Funds' shares pursuant to
its Distribution Agreement with the Trust as described in the Prospectus. Shares
are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a
Distribution Plan (the "Plan") which permits the Trust to bear certain expenses
in connection with the distribution of its shares. As required by Rule 12b-1,
the Trust's 12b-1 Plan and related distribution agreement have been approved,
and are subject to annual approval by, a majority of the Trust's Board of
Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement relating to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan 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.
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Any change in the Plan that would materially increase the distribution
expenses of a Fund requires approval by its shareholders, but otherwise, the
Plan may be amended by the trustees, including a majority of the disinterested
trustees who do not have any direct or indirect financial interest in the Plan
or related agreement. The Plan and related agreement may be terminated as to a
particular Fund by a vote of the Trust's disinterested trustees or by vote of
the shareholders of the Fund, on not more than 60 days written notice. The
selection and nomination of disinterested trustees has been committed to the
discretion of such disinterested trustees as required by the Rule.
The Trust's Plan provides that each fund will reimburse the Distributor
for distribution expenses in an amount not to exceed .10% of such fund's average
net assets. Distribution expenses payable by the Distributor pursuant to the
Plan include direct and indirect costs and expenses incurred in connection with
advertising and marketing a fund's shares, and direct and indirect costs and
expenses of preparing, printing and distributing its prospectuses to other than
current shareholders. In addition, the Plan provides that the Trust will pay the
Distributor an annual distribution fee of $250,000 payable monthly and accrued
daily by all of the Trust's investment funds with respect to which the
Distributor is distributing shares. For the fiscal years ended May 31, 1996 and
1995, the Trust paid the Distributor a total of $69,261 and $51,163 with respect
to the Fixed Income Fund, $4,453 and $8,805 with respect to the Enhanced Income
Fund and $18,798 and $27,748 with respect to the Total Return Advantage Fund. Of
the aggregate amount paid to the Distributor by the Trust with respect to the
Fixed Income Fund, approximately $1,517 and $988 was attributable to postage,
$2,140 and $3,867 was attributable to communications with shareholders,
$57,740 and $36,019 was attributable to advertisement/promotions and $7,864 and
$10,289 was attributable to general compensation to the Distributor. Of the
aggregate amount paid to the Distributor by the Trust with respect to the
Enhanced Income Fund, approximately $0 and $102 was attributable to postage,
$0 and $2,364 was attributable to communications with shareholders,
$0 and $1,088 was attributable to advertisement/promotions and $4,453 and
$5,251 was attributable to general compensation to the Distributor. Of the
aggregate amount paid to the Distributor by the Trust with respect to the Total
Return Advantage Fund, approximately $0 and $340 was attributable to
postage,
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$0 and $3,319 was attributable to communications with shareholders,
$0 and $3,801 was attributable to advertisement/ promotions and $18,798 and
$20,289 was attributable to general compensation to the Distributor.
The Plan has been approved, and will continue in effect for successive
one year periods provided that such continuance is specifically approved by (1)
the vote of a majority of the trustees who are not parties to the Plan or
interested persons of any such party and who have no direct or indirect
financial interest in the Plan and (2) the vote of a majority of the entire
Board of Trustees.
Class A Shares of the Predecessor Intermediate Government and GNMA
Funds were subject to a plan adopted pursuant to Rule 12b- 1 under the 1940 Act
(the "Plan"). The Plan provided for reimbursement to the Predecessor Fund's
distributor of the Fund's distribution expenses, including (1) the cost of
prospectuses, reports to shareholders, sales literature and other materials for
potential investors; (2) advertising; (3) expenses incurred in connection with
the promotion and sale of Inventor's shares excluding the distributor's expenses
for travel, communication, compensation and benefits for sales personnel; and
(4) any other expenses reasonably incurred in connection with the distribution
and marketing of Class A shares subject to approval by a majority of
disinterested directors of Integra. For the fiscal years ended April 30, 1996
and for the period from August 10, 1994 (commencement of operations) through
April 30, 1995), the Predecessor Intermediate Government Fund and the
Predecessor GNMA Fund paid $0 and $0, respectively, in 12b-1 fees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with respect to the
Funds. Under its Custodian Services Agreement, National City Bank has agreed to:
(i) maintain a separate account or accounts in the name of each Fund; (ii) hold
and disburse fund securities on account of each Fund; (iii) collect and make
disbursements of money on behalf of each Fund; (iv) collect and receive all
income and other payments and distributions on account of each Fund's fund
securities; (v) respond to correspondence by security brokers and others
relating to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Funds'
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operations. National City Bank is authorized to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Funds, provided that
it shall remain responsible for the performance of all of its duties under the
Custodian Services Agreement and shall hold the Funds harmless from the acts and
omissions of any bank or trust company serving as sub-custodian. The Funds
reimburse National City Bank for its direct and indirect costs and expenses
incurred in rendering custodial services, except that the costs and expenses
borne by each Fund in any year may not exceed $.225 for each $1,000 of average
gross assets of such Fund.
First Data Investor Services Group, Inc. (formerly, The Shareholder
Services Group, Inc., d/b/a 440 Financial) (the "Transfer Agent") serves as the
Trust's transfer agent and dividend disbursing agent with respect to the Funds.
Under its Transfer Agency Agreement, it has agreed to: (i) issue and redeem
shares of each Fund; (ii) transmit all communications by each Fund to its
shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the Shareholder
Services Plan (the "Services Plan" with respect to Retail shares in each of the
Funds. Pursuant to the Services Plan, the Trust may enter into agreements with
financial institutions pertaining to the provision of administrative services to
their customers who are the beneficial owners of Retail shares in consideration
for the payment of up to .25% (on an annualized basis) in the case of the Fixed
Income Fund , Total Return Advantage , GNMA and Intermediate Funds, and .10% (on
an annualized basis) in the case of the Enhanced Income Fund of the
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net asset value of such shares. Such services may include: (i) aggregating and
processing purchase and redemption requests from customers; (ii) providing
customers with a service that invests the assets of their accounts in Retail
shares; (iii) processing dividend payments from the Funds; (iv) providing
information periodically to customers showing their position in Retail shares;
(v) arranging for bank wires; (vi) responding to customer inquiries relating to
the services performed with respect to Retail shares beneficially owned by
customers; (vii) forwarding shareholder communications; and (viii) other similar
services requested by the Trust. Agreements between the Trust and financial
institutions will be terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
Pursuant to their Advisory Agreement with the Trust, National City,
National City Columbus and National City Kentucky are responsible for making
decisions with respect to and placing orders for all purchases and sales of Fund
securities for the Fixed Income Fund. Pursuant to its Advisory Agreement with
the Trust, NAM is responsible for making decisions with respect to and placing
orders for all purchases and sales of fund securities for the Enhanced Income
and Total Return Advantage Funds. Pursuant to its Advisory Agreement with the
Trust, National City alone is responsible for making decisions with respect to
and placing orders for all purchases and sales of fund securities for the GNMA
and Intermediate Government Funds. The advisers purchase Fund securities either
directly from the issuer or from an underwriter or dealer making a market in the
securities involved. Purchases from an underwriter of Fund securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers may include the spread between the bid and
asked price. Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up.
For the fiscal years ended May 31, 1996 and 1995, the Fixed Income and
Enhanced Income Funds did not pay any brokerage commissions. For the fiscal
year ended May 31, 1996 the Total Return Advantage Fund did not pay any
brokerage commission and for the fiscal year ended May 31, 1995, the Fund paid
$14,093 in brokerage commissions.
For the fiscal year ended April 30, 1996, the Predecessor GNMA and
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Intermediate Government Funds did not pay any brokerage commissions.
While the advisers generally seek competitive spreads or commissions,
they may not necessarily allocate each transaction to the underwriter or dealer
charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the advisers in their best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to the
advisers may receive orders for transactions by a Fund. Information so received
is in addition to and not in lieu of services required to be performed by the
advisers and does not reduce the fees payable to them by the Funds. Such
information may be useful to the advisers in serving both the Trust and other
clients, and, similarly, supplemental information obtained by the placement of
business of other clients may be useful to the advisers in carrying out their
obligations to the Trust.
Fund securities will not be purchased from or sold to the Funds'
advisers, the Distributor, or any "affiliated person" (as such term is defined
under the 1940 Act) of any of them acting as principal, except to the extent
permitted by the SEC. In addition, a Fund will not give preference to its
advisers' correspondents with respect to such transactions, securities, savings
deposits, repurchase agreements and reverse repurchase agreements.
While serving as advisers to the Trust, National City, National City
Columbus and National City Kentucky have agreed to maintain their policy and
practice of conducting their Trust departments independently of their Commercial
Departments. As adviser to the Enhanced Income and Total Return Advantage Funds,
NAM has similarly agreed to maintain its policies and the practices of
conducting its investment management activities independently of the Commercial
Departments of all banking affiliates. In making investment recommendations for
the Trust, personnel will not inquire or take into consideration whether the
issuer of securities proposed for purchase or sale for the Trust's account are
customers of the Commercial Department. In dealing with commercial
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customers, the Commercial Department will not inquire or take into consideration
whether securities of those customers are held by the Trust.
Investment decisions for each Fund are made independently from those
for the other Funds and for other investment companies and accounts advised or
managed by the advisers. Such other Funds, investment companies and accounts may
also invest in the same securities as such Fund. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
another investment company or account, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
advisers believe to be equitable to the Fund and such other investment company
or account. In some instances, this investment procedure may adversely affect
the price paid or received by a Fund or the size of the position obtained or
sold by such Fund. To the extent permitted by law, the advisers may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in order to obtain best
execution.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two Commerce
Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, serve
as independent auditors of the Trust. The financial statements, as of and for
the period ended May 31, 1996 for the Fixed Income, Enhanced Income and Total
Return Advantage Funds, which are incorporated by reference in this Statement of
Additional Information, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report referred to elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the Trust,
is a partner), with offices at 1345 Chestnut Street, Philadelphia, Pennsylvania
19107, are counsel to the Trust and will pass upon the legality of the shares
offered hereby.
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YIELD AND PERFORMANCE INFORMATION
Each Fund's "yield" described in the Prospectus is calculated by
dividing each Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. Each
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b (to the 6th power)
Yield = 2 [(----------------------) - 1]
cd + 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
Each Fund calculates interest earned on debt obligations held in its
fund by computing the yield to maturity of each obligation held by it based on
the market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each 30-day period, or, with
respect to obligations purchased during the 30-day period, the purchase price
(plus actual accrued interest) and dividing the result by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest) in order to determine the
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interest income on the obligation for each day of the subsequent 30-day period
that the obligation is in the Fund. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased by a Fund at a discount or premium, the formula generally
calls for amortization of the discount or premium. The amortization schedule
will be adjusted monthly to reflect changes in the market values of such debt
obligations.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by a Fund to all shareholder accounts in proportion
to the length of the base period and the Fund's mean (or median) account size.
Undeclared earned income will be subtracted from the net asset value per share
(variable "d" in the formula). Undeclared earned income is the net investment
income which, at the end of the 30-day base period, has not been declared as a
dividend, but is reasonably expected to be and is declared as a dividend shortly
thereafter. For applicable sales charges, see "How to Purchase and Redeem Shares
- -- Sales Charges Applicable to Purchases of Retail Shares" in the Prospectus.
For the 30-day period ended May 31, 1996, the yields of the Retail and
Institutional shares of the Fixed Income Fund, Enhanced Income Fund and Total
Return Advantage Fund were 5.40% and 5.86%, 5.45% and 5.64%, and 6.43% and
6.93%, respectively.
For the 30-day period ended April 30, 1996, the yields of the
Predecessor GNMA and Intermediate Government Funds were 6.21% and 5.55%,
respectively.
Each Fund computes its average annual total return by determining the
average annual compounded rate of return during specified periods that would
equate the initial amount invested to the ending redeemable value of such
investment by dividing the ending redeemable value of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
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ERV (to the 1/nth power)
T = [(------------------------) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed in terms of
years
Each Fund computes its aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period and include all recurring fees
charged to all shareholder accounts, assuming an account size equal to such
Funds' mean (or median) account size for any fees that vary with the size of the
account. The maximum sales load and other charges deducted from payments are
deducted from the initial $1,000 payment (variable "P" in the formula). The
ending redeemable value (variable "ERV" in the formula) is determined by
assuming complete redemption of the hypothetical investment and the deduction of
all nonrecurring charges at the end of the measuring period covered by the
computation.
The average annual total returns for the Fixed Income Fund's one year
period ending May 31, 1996 were (0.41)%
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(after taking the sales load into account) and 3.44% (without taking into
account any sales load), for its Retail shares and 3.79% for its Institutional
shares. The average annual total returns since the Fixed Income Fund's
commencement of operations through May 31, 1996 were 6.90% (after taking into
account the sales load) and 7.53% (without taking into account any sales load),
for its Retail shares and 7.77% for its Institutional shares. The Fixed Income
Fund commenced operations on December 20, 1989.
The average annual total returns for the Enhanced Income Fund's one
year period ending May 31, 1996 were 2.22% (after taking the sales load into
account) and 5.13% (without taking into account any sales load), for its Retail
shares and 5.36% for its Institutional shares. The average annual total returns
since the Enhanced Income Fund's commencement of operations through May 31,
1996 were 4.12% (after taking into account the sales load) and 5.84% (without
taking into account any sales load), for its Retail shares and 5.91% for its
Institutional shares. The Retail share class of the Enhanced Income Fund
commenced operations on September 9, 1994 and the Institutional share class of
the Enhanced Income Fund commenced operations on July 7, 1994.
The average annual total returns for the Total Return Advantage Fund's
period ending May 31, 1996 were (0.15)% (after taking the sales load into
account) and 3.74% (without taking into account any sales load), for its Retail
shares and 4.22% for its Institutional shares. The average annual total returns
since the Total Return Advantage Fund's commencement of operations through May
31, 1996 were 5.05% (after taking into account the sales load) and 7.41%
(without taking into account any sales load), for its Retail shares and 8.07%
for its Institutional shares. The Retail share class of the Total Return
Advantage Fund commenced operations on September 6, 1994 and the Institutional
share class of the Total Return Advantage Fund commenced operations on July 7,
1994.
The average annual total return for the Predecessor Intermediate
Government Fund's one 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
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total return since the Predecessor Intermediate Government 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
Predecessor Intermediate Government Fund commenced operations on August 10,
1994.
The average annual total returns for the Predecessor GNMA 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 GNMA 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 Predecessor
GNMA Fund commenced operations on August 10, 1994.
The Funds may also from time to time include in Materials a total
return figure that is not calculated according to the formulas set forth above
in order to compare more accurately a Fund's performance with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of an index,
a Fund may calculate its aggregate total return for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. A Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. A Fund will, however, disclose the maximum sales charge and will also
disclose that the performance data do not reflect sales charges and that
inclusion of sale charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would
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increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Funds may also include in Materials, discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of a Fund, high-quality investments, economic conditions, the
relationship between sectors of the economy and the economy as a whole, various
securities markets, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the advisers as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to a Fund. The Funds may also include in Materials charts, graphs
or drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Funds and/or other mutual funds, or
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury securities and
shares of a Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund
and/or other mutual funds (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternatives to certificates of deposit and other financial
instruments. Such Materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
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
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securities regulations. All organizational expenses are amortized on the
straight-line method over a period of five years from the date of commencement
of operations.
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the liabilities in respect of that Fund.
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The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Enhanced Income Fund as of July 15,
1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Enhanced Income Fund Shares Shares
- -------------------- ------------- -------------
<S> <C> <C>
Whayne Supply Co. 829,893.21 12.87%
P.O. Box 35900
Louisville, KY 40232
Kitchen Kompact, Inc. 727,473.30 11.28%
P.O. Box 868
Jeffersonville, IN 47131
Baptist Hospital 459,487.358 7.12%
Hayes Utley & Associates
Insurance Agency
6100 Dutchmans Lane
Louisville, KY 40205
</TABLE>
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<PAGE> 232
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Total Return Advantage Fund as of
July 15, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Total Return Institutional Institutional
Advantage Fund Shares Shares
- -------------- ------------ -------------
<S> <C> <C>
Ferro Corporation 1,999,764.81 6.96%
1000 Lakeside Avenue
Cleveland, OH 44114
Appalachian Regional Healthcare 1,496,234.83 5.21%
Attn: Paula Eden
P.O. Box 8086
Lexington, KY 40533
University of Louisville 1,803,287.66 6.28%
Belknap Campus Service
Complex
Louisville, KY 40292
</TABLE>
<TABLE>
<CAPTION>
Shares Shares
------------ ------
<S> <C> <C>
The Community 1,798,352.93 6.26%
Foundation of Louisville
c/o National City Bank of Kentucky
101 South Fifth Street, Trust Division
Louisville, KY 40202
</TABLE>
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<PAGE> 233
<TABLE>
<S> <C> <C>
Appalachian Regional 2,012,785.12 7.01%
Healthcare
1220 Harrodsburg
Lexington, KY 40533
</TABLE>
No institutional shares of the Predecessor GNMA and Intermediate Government
Funds had been issued as of July 15, 1996.
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Fixed Income Fund as of July 15, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Fixed Income Fund Retail Shares Retail Shares
- ----------------- ------------- -------------
<S> <C> <C>
The Somerset Group Inc. 145,952.280 24.59%
Joseph M. Richter
135 N. Pennsylvania Street
Suite 2800
Indianapolis, IN 46204
Intrac 95,804.092 16.14%
Gary Ream
8440 Woodfield Crossing Blvd., South
Indianapolis, IN 46240
Lawrence I. Cross 53,661.373 9.04%
c/o Financial Architects
Attn: L. Botzman
207 East Mount Vernon
Somerset, KY 42501
B-F Beverage Company, Inc. 48,383.240 8.15%
3150 Shelby Street
Indianapolis, IN 46227
</TABLE>
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<PAGE> 234
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Enhanced Income Fund as of July 15, 1996:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Enhanced Income Fund Retail Shares Retail Shares
- -------------------- ------------- -------------
<S> <C> <C>
Intrac 129,240.741 66.29%
Gary Ream
8440 Woodfield Crossing
Blvd., South
Indianapolis, IN 46240
B-F Beverage Company, Inc. 31,066.891 15.93%
3150 Shelby Street
Indianapolis, IN 46227
Harvey M. Brunner, Jr. 11,739.079 6.02%
700 Brick Mill Run #106
Westlake, OH 44145
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Total Return Advantage Fund as of July 15,
1996:
<TABLE>
<CAPTION>
Percentage of
Total Return Number of Retail Outstanding
Advantage Fund Shares Retail Shares
- -------------- ---------------- -------------
<S> <C> <C>
Intrac 198,348.367 95.49%
Gary Ream
8440 Woodfield Crossing Blvd., South
Indianapolis, IN 46240
</TABLE>
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<PAGE> 235
To the Trust's knowledge, no shareholder beneficially owned 5% or more
of the outstanding Retail shares of the Predecessor Intermediate Government and
GNMA Funds as of July 15, 1996.
FINANCIAL STATEMENTS
The audited financial statements contained in the annual report for the
Fixed Income, Enhanced Income and Total Return Advantage Funds for the fiscal
year ended May 31, 1996 are hereby incorporated herein by reference. Copies of
the annual report may be obtained by calling the Trust at 1-800-622-FUND or by
writing to the Trust at 4400 Computer Drive, Westborough, Massachusetts 01581.
The financial statements for the Predecessor GNMA and Intermediate
Government Funds for the fiscal year ended April 30, 1996 and the periods prior
thereto are contained in those Funds' Annual Reports to Shareholders (the
"Financial Statements") which have been filed with the Securities and Exchange
Commission and are incorporated into this Statement of Additional Information by
reference. The financial Statements and the information included in the
Financial Highlights tables for the same periods which appear in the Funds'
prospectuses have been audited by Coopers & Lybrand L.L.P., independent
accountants for the Predecessor GNMA and Intermediate Government Funds, whose
reports thereon appear in
-48-
<PAGE> 236
such Annual Reports. The Financial Statements in such Annual Reports have been
incorporated by reference herein and in the Funds' Prospectuses in reliance upon
the reports of said firm of independent accountants given upon their authority
as experts in accounting and auditing.
-49-
<PAGE> 237
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.
A-1
<PAGE> 238
"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.
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
A-2
<PAGE> 239
for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor
standing; "Ca" represents obligations which are speculative in a high
degree; and "C" represents the lowest rated class of bonds). "Caa,"
"Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
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.
A-3
<PAGE> 240
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during economic
cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations
when due. Debt rated "B" possesses the risk that obligations will not
be met when due. Debt rated "CCC" is well below investment grade and
has considerable uncertainty as to timely payment of principal,
interest or preferred dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the 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
A-4
<PAGE> 241
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.
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
A-5
<PAGE> 242
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-6
<PAGE> 243
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
A-7
<PAGE> 244
charges and high internal cash generation; and well established access
to a range of financial markets and assured sources of alternate
liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and the
requirement for relatively high financial leverage. Adequate alternate
liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The 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.
A-8
<PAGE> 245
"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 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
A-9
<PAGE> 246
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:
"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.
A-10
<PAGE> 247
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-11
<PAGE> 248
APPENDIX B
As stated in their Prospectuses, the Enhanced Income, Total Return
Advantage, GNMA and Intermediate Government Funds may enter into certain futures
transactions and options for hedging purposes. Such transactions are described
in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by
B-1
<PAGE> 249
a Fund, as purchaser, to take delivery of the specific type of financial
instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by a Fund's entering
into a futures contract purchase for the same aggregate amount of the specific
type of financial instrument and the same delivery date. If the price of the
sale exceeds the price of the offsetting purchase, the Fund is immediately paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by a Fund
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Funds would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Funds may trade in any interest rate futures
contracts for which there exists a public market, including, without limitation,
the foregoing instruments.
B-2
<PAGE> 250
EXAMPLE OF FUTURES CONTRACT SALE. The Funds may engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by a particular
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The advisers wish to fix the current
market value of this fund security until some point in the future. Assume the
fund security has a market value of 100, and the advisers believe that because
of an anticipated rise in interest rates, the value will decline to 95. The Fund
might enter into futures contract sales of Treasury bonds for a equivalent of
98. If the market value of the fund security does indeed decline from 100 to 95,
the equivalent futures market price for the Treasury bonds might also decline
from 98 to 93.
In that case, the five point loss in the market value of the fund
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The advisers could be wrong in their forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the fund securities, including the fund security being protected, would
increase. The benefit of this increase would be reduced by the loss realized on
closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss (which might be reduced by a offsetting transaction prior to
the settlement date). In each transaction, transaction expenses would also be
incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Funds may engage in a
interest rate futures contract purchase when they are not fully invested in
long-term bonds but wish to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds.
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<PAGE> 251
A Fund's basic motivation would be to maintain for a time the income advantage
from investing in the short-term securities; the Fund would be endeavoring at
the same time to eliminate the effect of all or part of a expected increase in
market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The advisers wish to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the advisers believe that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the 5
point increase in the price that the Fund pays for the long-term bond would be
offset by the 5 point gain realized by closing out the futures contract
purchase.
The advisers could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Fund would continue with its purchase
program for long-term bonds. The market price of available long-term bonds would
have decreased. The benefit of this price decrease, and thus yield increase,
will be reduced by the loss realized on closing out the futures contract
purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the fund, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than
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<PAGE> 252
yields on long-term bonds. The benefit of this continued incremental income will
be reduced by the loss realized on closing out the futures contract purchase. In
each transaction, expenses would also be incurred.
II. INDEX FUTURES CONTRACTS
GENERAL. A bond index assigns relative values to the bonds included in
the index which fluctuates with changes in the market values of the bonds
included.
A Fund may sell index futures contracts in order to offset a decrease
in market value of its fund securities that might otherwise result from a market
decline. A Fund may do so either to hedge the value of its fund as a whole, or
to protect against declines, occurring prior to sales of securities, in the
value of the securities to be sold. Conversely, a Fund may purchase index
futures contracts in anticipation of purchases of securities. A long futures
position may be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize index futures contracts in anticipation
of changes in the composition of its fund holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. A Fund may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the fund will decline prior to the time of sale.
III. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian or a subcustodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
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initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, the
advisers may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
Funds as hedging devices. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may move
more than or less than the price of the instruments being hedged. If the price
of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the instruments being
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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 involved will experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the instruments which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of instruments being
hedged and movements in the price of futures contracts, the Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
instruments being hedged if the volatility over a particular time period of the
prices of such instruments has been greater than the volatility over such time
period of the futures, or if otherwise deemed to be appropriate by the advisers.
Conversely, the Funds may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the instruments being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by the advisers.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in
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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 Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. However, in the event futures contracts have been used to
hedge fund securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
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Successful use of futures by the Funds is also subject to the advisers'
ability to predict correctly movements in the direction of the market. For
example, if a particular Fund has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. The Funds may have to
sell securities at a time when it may be disadvantageous to do so.
V. OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared
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to either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). The writing
of an option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
VI. OTHER MATTERS
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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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 Fixed Income Fund
for the Period from December 20, 1989 (commencement of
operations) to May 31, 1990, and the Years Ended May 31, 1991,
1992, 1993, 1994, 1995 and
1996;
(b) Financial Highlights for the Total Return
Advantage Fund for the Period July 7, 1994 (commencement of
operations) to November 30, 1994, and the Years Ended May 31,
1995 and 1996;
(c) Financial Highlights for the Enhanced Income Fund
for the Period July 7, 1994 (commencement of operations) to
November 30, 1994, and the Years Ended May 31, 1995 and 1996;
(d) 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;
(e) 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;
(f) Financial Highlights for the Equity Fund for the
Period from December 20, 1989 (commencement of operations) to
May 31, 1990, and the Years Ended May 31, 1991, 1992, 1993,
1994, 1995 and 1996;
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(g) Financial Highlights for the Equity Income Fund
for the Period from July 1, 1994 (commencement of operations)
to November 30, 1994, and the Years Ended May 31, 1995 and
1996;
(h) Financial Highlights for the Mid Cap Regional
Fund for the period from July 26, 1994 (commencement of
operations) to November 30, 1994, and the Years Ended May 31,
1995 and 1996.
(2) Incorporated by reference in Parts B of the
Registration Statement are the following audited financial
statements contained in the Annual Reports of Registrant for
the fiscal year ended May 31, 1996:
(a) For the Equity, Equity Income and Mid Cap
Regional Funds:
Portfolio of Investments - May 31, 1996. Statement of
Assets and Liabilities - May 31, 1996.
Statement of Operations - for the year ended May 31,
1996.
Statements of Changes in Net Assets - for the year
ended May 31, 1996.
Notes to Financial Statements.
(b) For the Fixed Income, Enhanced Income and Total
Return Advantage Funds:
Portfolio of Investments - May 31, 1996. Statement of
Assets and Liabilities - May 31, 1996. Statement of
Operations - for the year ended May 31, 1996.
Statements of Changes in Net Assets - for the year
ended May 31, 1996. Notes to Financial Statements.
(c) Incorporated by reference in Parts B of the
Registration Statement are the following audited
financial statements contained in the Annual Report
of the Predecessor Intermediate Government
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and GNMA Funds for the fiscal year ended April 30,
1996:
For the 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.
(B) Exhibits
(1) Declaration of Trust dated January 28, 1986 is incorporated
herein by reference to Exhibit 1 to Post-Effective Amendment No.
1 to Registrant's Registration Statement filed on December 16,
1986.
(a) Amendment No. 1 to Declaration of Trust is incorporated
herein by reference to Exhibit 1(a) to Post-Effective Amendment
No. 6 to Registrant's Registration Statement filed on August 1,
1989.
(b) Amendment No. 2 to Declaration of Trust is incorporated
herein by reference to Exhibit 1(b) to Post-Effective Amendment
No. 23 to Registrant's Registration Statement filed on May 11,
1995.
(c) Certificate of Classification of Shares reflecting the
creation of the Tax Exempt Portfolio (Trust) as filed with the
Office of Secretary of State of Massachusetts on October 16, 1989
is incorporated herein by reference to Exhibit 1(c) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
(d) Certificate of Classification of Shares reflecting the
creation of Special Series 1 in the
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Money Market, Government, Treasury, Tax Exempt, Equity, Bond and
Ohio Tax Exempt Portfolios as filed with the Office of Secretary
of State of Massachusetts on December 11, 1989 is incorporated
herein by reference to Exhibit 1(d) to Post-Effective Amendment
No. 26 to Registrant's Registration Statement filed on May 15,
1996.
(e) Certificate of Classification of Shares reflecting
the creation of Special Series 1 in the Money Market, Government,
Treasury, Tax Exempt, Equity, Bond and Ohio Tax Exempt Portfolios
as filed with the Office of the Secretary of State of
Massachusetts on September 12, 1990 is incorporated herein by
reference to Exhibit 1(e) to Post-Effective Amendment No. 26
to Registrant's Registration Statement filed on May 15, 1996.
(f) Certificate of Classification of Shares reflecting
the creation of Class L and Class L-Special Series 1 shares,
Class M and Class M-Special Series 1, Class N and Class N-Special
Series 1, Class O and Class O-Special Series 1, and Class P and
Class P-Special Series 1 representing interests in the National
Tax Exempt Portfolio, Equity Income Portfolio, Mid Cap Regional
Equity Portfolio, Enhanced Income Fund and Total Return Advantage
Fund, respectively, as filed with the Office of Secretary of
State of Massachusetts on June 30, 1994 is incorporated herein by
reference to Exhibit 1(e) to Post-Effective Amendment No. 26 to
Registrant's Registration Statement filed on May 15, 1996.
(g) Form of Certificate of Classification of Shares
reflecting the creation of Class Q and Class Q- Special Series 1
shares, Class R and Class R-Special Series 1, Class S and Class
S-Special Series 1, and Class T and Class T-Special Series 1
representing interests in the Pennsylvania Tax Exempt,
Intermediate Government, GNMA and Pennsylvania Municipal Funds is
incorporated herein by reference to Exhibit 1(e) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
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(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 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.
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(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.
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(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.
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(b) Investment Advisory Agreement for the Money Market
Portfolio (Trust), Government Portfolio (Trust) and Treasury
Portfolio (Trust) among Registrant and National City Bank and
BancOhio National Bank, dated June 17, 1986 is incorporated
herein by reference to Exhibit 5(b) to Post-Effective Amendment
No. 1 to Registrant's Registration Statement filed on December
16, 1986.
(c) Investment Advisory Agreement for the Tax Exempt
Portfolio between Registrant and National City 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),
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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.
(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
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to Exhibit 5(l) to Post-Effective Amendment No. 26 to
Registrant's Registration Statement filed on May 15, 1996.
(m) Form of Sub-Advisory Agreement for the Pennsylvania Tax
Exempt and Pennsylvania Municipal Funds between National City Bank and Weiss,
Peck & Greer L.L.C. is incorporated herein by reference to Exhibit 5(m) to
Post-Effective Amendment No. 26 to Registrant's Registration Statement filed on
May 15, 1996.
(6) (a) Distribution Agreement for the Money Market Portfolio
(Trust), Government Portfolio (Trust), Treasury Portfolio
(Trust), Money Market Portfolio, Government Portfolio and
Treasury Portfolio between Registrant and McDonald & Company
Securities, Inc., dated June 17, 1986 is incorporated herein
by reference to Exhibit 6(a) to Post-Effective Amendment No. 1
to Registrant's Registration Statement filed on December 16,
1986.
(b) Distribution Agreement for the Tax Exempt Portfolio
between Registrant and McDonald & Company Securities, Inc. is
incorporated herein by reference to Exhibit 6(b) to
Post-Effective Amendment No. 1 to Registrant's Registration
Statement filed on December 16, 1986.
(c) Distribution Agreement for the Tax Exempt Portfolio
(Trust) between Registrant and McDonald & Company Securities,
Inc., dated October 17, 1989 is incorporated herein by reference
to Exhibit 6(c) to Post-Effective Amendment No. 12 to
Registrant's Registration Statement filed on June 25, 1990.
(d) Distribution Agreement for the Bond Portfolio, Equity
Portfolio and Ohio Tax Exempt Portfolio between Registrant and
McDonald & Company Securities, Inc., dated December 22, 1989 is
incorporated herein by reference to Exhibit 6(d) to
Post-Effective Amendment No. 12 to Registrant's Registration
Statement filed on June 25, 1990.
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(e) Distribution Agreement for the Money Market,
Government, Treasury, Tax Exempt, Money Market (Trust),
Government (Trust), Treasury (Trust), Tax Exempt (Trust), Equity,
Fixed Income and Ohio Tax Exempt Portfolios of the Registrant
among Registrant, Allmerica Investments, Inc. and State Mutual
Life Assurance Company of America, dated March 1, 1993, is
incorporated herein by reference to Exhibit 6(e) to
Post-Effective Amendment No. 16 to Registrant's Registration
Statement filed on March 1, 1993.
(f) Distribution Agreement among Registrant, Allmerica
Investments, Inc. and State Mutual Life Assurance Company of
America, dated April 11, 1994, is incorporated herein by
reference to Exhibit 6(f) to Post-Effective Amendment No. 21 to
Registrant's Registration Statement filed on August 31, 1994.
(g) Distribution Agreement among Registrant, The
Shareholder Services Group, Inc. d/b/a/ 440 Financial and 440
Financial Distributors, Inc., dated March 31, 1995, is
incorporated herein by reference to Exhibit 6(g) to
Post-Effective Amendment No. 23 to Registrant's Registration
Statement filed on May 11, 1995.
(7) None.
(8) (a) Custodian Services Agreement between Registrant and
National City Bank, dated November 7, 1994, is incorporated
herein by reference to Exhibit 8(a) to Post-Effective
Amendment No. 22 to Registrant's Registration Statement filed
on December 30, 1994.
(b) Sub-Custodian Agreement between National City Bank and
The Bank of California, National Association, dated November 7,
1994, is incorporated herein by reference to Exhibit 8(a) to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement filed on December 30, 1994.
(c) Form of Exhibit A to the Custodian Services Agreement
between Registrant and National City Bank with respect to the
Pennsylvania Tax Exempt,
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Intermediate Government, GNMA and Pennsylvania Municipal Funds is
incorporated herein by reference to Exhibit 8(c) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
(9) (a) Administration and Accounting Services Agreement for
the Money Market Portfolio, Government Portfolio and Treasury
Portfolio between Registrant and Provident Financial Processing
Corporation, dated September 11, 1987 is incorporated herein by
reference to Exhibit 9(a) to Post-Effective Amendment No. 13 to
Registrant's Registration Statement filed on July 27, 1990.
(b) Administration and Accounting Services Agreement for
the Money Market Portfolio (Trust), Government Portfolio (Trust)
and Treasury Portfolio (Trust) between Registrant and Provident
Financial Processing Corporation, dated September 11, 1987 is
incorporated herein by reference to Exhibit 9(b) to
Post-Effective Amendment No. 13 to Registrant's Registration
Statement filed on July 27, 1990.
(c) Administration and Accounting Services Agreement for
Money Market Portfolio, Government Portfolio, Treasury Portfolio,
Tax Exempt Portfolio, Money Market Portfolio (Trust), Government
Portfolio (Trust), Treasury Portfolio (Trust) and Tax Exempt
Portfolio (Trust) between Registrant and Provident Financial
Processing Corporation, dated October 17, 1989 is incorporated
herein by reference to Exhibit 9(c) to Post-Effective Amendment
No. 12 to Registrant's Registration Statement filed on June 25,
1990.
(d) Administration and Accounting Services Agreement
for Equity Portfolio, Bond Portfolio and Ohio Tax Exempt
Portfolio between Registrant and Provident Financial
Processing Corporation, dated December 22, 1989 is
incorporated herein by reference to Exhibit 9(d) to
Post-Effective Amendment No. 12 to Registrant's Registration
Statement filed on June 25, 1990.
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(e) Administration and Accounting Services Agreement
between Registrant and PFPC Inc., dated March 1, 1993 is
incorporated by reference to Exhibit 9(l) to Post-Effective
Amendment No. 16 to Registrant's Registration Statement filed on
March 1, 1993.
(f) Exhibit A dated to Administration and Accounting
Services Agreement dated March 1, 1993 between Registrant and
PFPC Inc., dated June 1, 1994, is incorporated herein by
reference to Exhibit 9(f) to Post-Effective Amendment No. 21 to
Registrant's Registration Statement filed on August 31, 1994.
(g) Form of Exhibit A to the Administration and Accounting
Services Agreement dated March 1, 1993 between Registrant and
PFPC Inc., dated , 1996 with respect to the Pennsylvania Tax
Exempt, Intermediate Government, GNMA and Pennsylvania Municipal
Funds is incorporated herein by reference to Exhibit 9(g) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1996.
(h) Transfer Agency Agreement between Registrant, 440
Financial Group of Worcester, Inc. and State Mutual Life
Assurance Company of America, dated March 1, 1993 is incorporated
by reference to Exhibit 9(m) to Post- Effective Amendment No. 16
to Registrant's Registration Statement filed on March 1, 1993.
(i) Transfer Agency Agreement between Registrant and The
Shareholder Services Group, Inc. d/b/a 440 Financial, dated April
1, 1995, is incorporated herein by reference to Exhibit 9(h) to
Post-Effective Amendment No. 23 to Registrant's Registration
Statement filed on May 11, 1995.
(j) Shareholder Services Plan and Form of Servicing
Agreement is incorporated herein by reference to Exhibit 9(g) to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement filed on September 28, 1989.
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(k) Shareholder Services Plan and Form of Servicing
Agreement adopted by the Board of Trustees on January 9, 1990 is
incorporated herein by reference to Exhibit 9(h) to
Post-Effective Amendment No. 10 to Registrant's Registration
Statement filed April 17, 1990.
(l) Shareholder Services Plan and Form of Servicing
Agreement adopted by the Board of Trustees on February 14, 1991
is incorporated herein by reference to Exhibit 9(k) to
Post-Effective Amendment No. 14 to Registrant's Registration
Statement filed September 5, 1991.
(m) Shareholder Services Plan and Form of Servicing
Agreement adopted by the Board of Trustees on November 4, 1993 is
incorporated herein by reference to Exhibit 9(o) to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement filed February 8, 1994.
(n) Shareholder Services Plan and Servicing Agreement
adopted by the Board of Trustees on April 1, 1995, is
incorporated herein by reference to Exhibit 9(m) to
Post-Effective Amendment No. 23 to Registrant's Registration
Statement filed on May 11, 1995.
(o) Shareholder Services Plan and Servicing Agreement
adopted by the Board of Trustees on February 15, 1996 is
incorporated herein by reference to Exhibit 13(o) to Registrant's
Registration Statement on Form N- 14 filed on May 13, 1996.
(1)(10) Opinion and consent of counsel.
(11) (a) Consent of Drinker Biddle & Reath.
(b) Consent of Ernst & Young LLP.
- --------
(1) To be filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice.
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<PAGE> 272
(c) Consent of Coopers & Lybrand L.L.P.
(12) (a) Armada Funds Annual Reports to Shareholders with
respect to the Total Return Advantage, Fixed Income and Enhanced
Income Funds and the Mid Cap Regional, Equity and Equity Income
Funds (File No. 811-4416) for the fiscal year ended May 31, 1996
as filed with the Commission on July 30, 1996 are incorporated
by reference.
(b) Inventor Funds, Inc. Annual Report to Shareholders
(File No. 811-08486) for the 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.
(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
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<PAGE> 273
Post-Effective Amendment No. 21 to Registrant's Registration
Statement filed on August 31, 1994.
(f) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the Equity Income Portfolio
dated June 30, 1994, is incorporated herein by reference to
Exhibit 13(g) to Post-Effective Amendment No. 21 to Registrant's
Registration Statement filed on August 31, 1994.
(g) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the Mid Cap Regional Equity
Portfolio dated July 25, 1994, is incorporated herein by
reference to Exhibit 13(h) to Post-Effective Amendment No. 21 to
Registrant's Registration Statement filed on August 31, 1994.
(h) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the Total Return Advantage Fund
dated July 5, 1994 is incorporated herein by reference to Exhibit
13(f) to Post Effective Amendment No. 21 to Registrant's
Registration Statement filed on August 31, 1994.
(i) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the National Tax Exempt
Portfolio is incorporated herein by reference to Exhibit 13(e) to
Post Effective Amendment No. 20 to Registrant's Registration
Statement filed on February 8, 1994.
(j) Form of Purchase Agreement between Registrant and
440 Financial Distributors, Inc. with respect to the Pennsylvania
Tax Exempt Fund is incorporated herein by reference to Exhibit
13(j) to Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996.
(k) Form of Purchase Agreement between Registrant and
440 Financial Distributors, Inc. with respect to the Intermediate
Government Fund is incorporated herein by reference to Exhibit
13(k) to Post-Effective
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<PAGE> 274
Amendment No. 26 to Registrant's Registration Statement filed on
May 15, 1996.
(l) Form of Purchase Agreement between Registrant and
440 Financial Distributors, Inc. with respect to the GNMA Fund is
incorporated herein by reference to Exhibit 13(l) to
Post-Effective Amendment No. 26 to Registrant's Registration
Statement filed on May 15, 1995.
(m) Form of Purchase Agreement between Registrant and
440 Financial Distributors, Inc. with respect to the Pennsylvania
Municipal Fund is incorporated herein by reference to Exhibit
13(m) to Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996.
(14) None.
(15) (a) Registrant's 12b-1 Plan is incorporated herein by
reference to Exhibit 15 to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement filed on January 13, 1986.
(b) Registrant's Revised Service and Distribution Plan,
dated March 1, 1993 is incorporated herein by reference to
Exhibit 15(b) to Post-Effective Amendment No. 16 to Registrant's
Registration Statement filed on March 1, 1993.
(16) (a) Schedules for Computation of Performance Quotations
are incorporated herein by reference to Exhibit 16 to
Post-Effective Amendment No. 15 to Registrant's Registration
Statement filed on September 18, 1992.
(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.
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<PAGE> 275
(17) Inapplicable.
(18) Plan Pursuant to Rule 18f-3 for Operation of a Dual-Class
System incorporated herein by reference to Registrant's
Registration Statement on Form N-14 filed on May 13, 1996.
(27) (a) Financial Data Schedule as of May 31, 1996 for the
Equity Fund (Institutional Class).
(b) Financial Data Schedule as of May 31, 1996 for the
Equity Fund (Retail Class).
(c) Financial Data Schedule as of May 31, 1996 for the
Fixed Income Fund (Institutional Class).
(d) Financial Data Schedule as of May 31, 1996 for the
Fixed Income Fund (Retail Class).
(e) Financial Data Schedule as of May 31, 1996 for the
Equity Income Fund (Institutional Class).
(f) Financial Data Schedule as of May 31, 1996 for the
Equity Income Fund (Retail Class).
(g) Financial Data Schedule as of May 31, 1996 for the
Mid Cap Regional Fund (Institutional Class).
(h) Financial Data Schedule as of May 31, 1996 for the
Mid Cap Regional Fund (Retail Class).
(i) Financial Data Schedule as of May 31, 1996 for the
Enhanced Income Fund (Institutional Class).
(j) Financial Data Schedule as of May 31, 1996 for the
Enhanced Income Fund (Retail Class).
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<PAGE> 276
(k) Financial Data Schedule as of May 31, 1996 for the
Total Return Advantage Fund (Institutional Class).
(l) Financial Data Schedule as of May 31, 1996 for the
Total Return Advantage Fund (Retail Class).
(m) Financial Data Schedule as of April 30, 1996 for the
GNMA Fund.
(n) Financial Data Schedule as of April 30, 1996 for the
Intermediate Government Fund.
Item 25. Persons Controlled By or Under
Common Control with Registrant
Registrant is controlled by its Board of Trustees.
McDonald & Company Securities, Inc. ("McDonald"), the former
distributor of NCC Funds, provided the initial capitalization of Registrant.
Item 26. Number of Holders of Securities. The following information is as of
June 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) 40,374 19,547 20,827
Class B units of
beneficial interest
(Government Fund) 3,376 2,709 667
Class C units of
beneficial interest
(Treasury Fund) 2,682 2,438 244
</TABLE>
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<PAGE> 277
<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders Institutional Retail
-------------- ---------------- ------------- ------
<S> <C> <C> <C>
Class D units of
beneficial interest
(Tax Exempt Fund) 2,678 1,993 685
Class H units of
beneficial interest
(Equity Fund) 2,733 2,246 487
Class I units of
beneficial interest
(Fixed Income
Fund) 2,066 1,883 183
Class K units of
beneficial interest
(Ohio Tax Exempt
Fund) 910 795 115
Class M units of
beneficial interest
(Equity Income
Fund) 1,514 1,466 48
Class N units of
beneficial interest
(Mid Cap Regional
Fund) 1,904 1,306 598
Class O units of
beneficial interest
(Enhanced Income
Fund) 236 214 22
Class P units of
beneficial interest
(Total Return
Advantage Fund) 678 663 15
Class Q units of
beneficial interest
(Pennsylvania Tax
Exempt Fund) 0 0 0
Class R units of
beneficial interest
</TABLE>
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<PAGE> 278
<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders Institutional Retail
-------------- ---------------- ------------- ------
<S> <C> <C> <C>
(Intermediate
Government Fund) 0 0 0
Class S units of
beneficial interest
(GNMA Fund) 0 0 0
Class T units of
beneficial interest
(Pennsylvania
Municipal Fund) 0 0 0
</TABLE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter, custodian and
transfer agent against certain losses is provided for, respectively, in Section
1.14 of the Distribution Agreement, incorporated by reference as Exhibit (6)(g)
hereto, and Sections 12 and 17, respectively, of the Custodian Services and
Transfer Agency Agreements, incorporated by reference as Exhibits (8)(a) and
(9)(h) hereto. In Section 1.14 of the Distribution Agreement, the Fund agrees
to indemnify, defend and hold the Distributor, its several officers and
directors, and any person who controls the Distributor within the meaning of
Section 15 of the Securities Act of 1933, as amended, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers and directors, or any such controlling person, may incur under the
Securities Act of 1933, as amended, or under common law or otherwise, arising
out of or based upon any untrue statement, or alleged untrue statement, of a
material fact contained in any registration statement or any prospectus or
arising out of or based upon any omission, or alleged omission, to state a
material fact required to be stated in either any registration statement or any
prospectus or necessary to make the statements in either thereof not misleading;
provided, however, that the Trust's agreement to indemnify the Distributor, its
officers or directors, and any such controlling person shall not be deemed to
C-21
<PAGE> 279
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
C-22
<PAGE> 280
the indemnified person shall have provided a secured written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification.
The Trustees shall indemnify representatives and employees of the Trust
to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Section 12 of Registrant's Custodian Services Agreement provides as
follows:
12. Indemnification. The Trust, on behalf of each of the Funds, agrees
to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the 1933 Act,
the 1934 Act, the 1940 Act, the CEA, and any state and foreign
securities and blue sky laws, and amendments thereto), and expenses,
including (without limitation) reasonable attorneys' fees and
disbursements, arising directly or indirectly from any action which the
Custodian takes or does not take (i) at the request or on the direction
of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither the Custodian, nor any of its nominees,
shall be indemnified against any liability to 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
C-23
<PAGE> 281
misconduct, any Property at any time held for the account of the
relevant Fund or the Trust shall be security therefor.
Section 17 of Registrant's Transfer Agency Agreement provides as
follows:
17. Indemnification. The Trust agrees to indemnify and hold the
Transfer Agent harmless from all taxes, charges, expenses, assessments,
claims and liabilities (including, without limitation, liabilities
arising under the 1933 Act, the Securities Exchange Act of 1934, the
1940 Act, and any state and foreign securities and blue sky laws, all
as or as to be amended from time to time) and expenses, including
(without limitation) attorneys' fees and disbursements, arising
directly or indirectly from any action or thing which the Transfer
Agent takes or does or omits to take or do at the request or on the
direction of or in reliance on the advise of the fund, provided that
the Transfer Agent shall not be indemnified against any liability to
the Fund or to its Shareholders (or any expenses incident to such
liability) arising out of the Transfer Agent's negligent failure to
perform its duties under this Agreement.
Registrant has obtained from a major insurance carrier a directors' and
officers' liability policy covering certain 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
C-24
<PAGE> 282
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Advisers
(a) Investment Adviser: National City Bank
National City Bank performs investment advisory services for
Registrant and certain other investment advisory customers. National City Bank
has been in the business of managing the investments of fiduciary and other
accounts throughout Ohio since October 1919. In addition to its trust business,
National City Bank provides commercial banking services.
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.
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<PAGE> 283
NATIONAL CITY BANK
<TABLE>
<CAPTION>
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
Werner F. Bush Director Executive Vice Manufacturer
President and of specialty
and Chief Oper- chemicals
ating Officer
Ferro Corp.
Duane E. Collins Director President and Manufacturer
Chief Executive of hydraulic and
Officer, Parker and automotive
Hannifin Corp. equipment
David A. Daberko Director, Chairman and Bank holding
Vice Chairman of Chief Executive Company
Executive Officer, National
Committee City Corporation
</TABLE>
C-26
<PAGE> 284
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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
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.
</TABLE>
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<PAGE> 285
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Gordon D. Harnett Director President, Manufacturer of
Chairman and Engineered
Chief Executive Material
Officer, Brush
Wellman, Inc.
Preston B. Director Retired Electronic
Heller, Jr. Chairman and Chief Component
Executive Officer, Distributor
Pioneer Standard
Electronics, Inc.
Leon J. Hendrix, Director Partner, Private
Jr. Clayton, Dubilier Investment
& Rice, Inc. Firm
J. Peter Kelly Director President and Manufacturer
Chief Operating of
Officer, LTV Steel Steel
Company
William E. Chairman, Director and Execu-
MacDonald III President, Chief tive Vice President,
Bank holding
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 manufacturer
President and Chief
Executive Officer,
The Geon Company
William R. Robertson Director, President Bank holding
Chairman of National City company
Trust Committee, Corporation
</TABLE>
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<PAGE> 286
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Member of
Executive
Committee
Shelley B. Roth Director President Ice Cream
Pierre's French
Ice Cream Company
Thomas C. Sullivan Director Chairman of the Manufacturer
Board and Chief of protective
Executive Officer, coatings, roofing
RPM, Inc. material and paint
Dr. Jerry S. Director President, Education
Thornton Cuyahoga
Community
College
Morry Weiss Director Chairman and Greeting cards
Chief Executive
Officer, American
Greetings
Corporation
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
</TABLE>
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<PAGE> 287
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Corporation
Bruce T. Muddell Executive Vice None
President, Credit
Administration
Harold B. Todd, Jr. Executive Vice Executive Vice Bank Holding
President, President, company
Institutional National City
Trust and Asset Corporation
Management
</TABLE>
(b) Investment Adviser: National City Bank of Columbus ("National
City") performs investment advisory services for Registrant and certain other
investment advisory customers. National City Bank of Columbus has been in the
business of managing the investments of fiduciary and other accounts throughout
Ohio since 1915. In addition to its trust business, National City provides
commercial banking services.
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.
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<PAGE> 288
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
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
</TABLE>
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<PAGE> 289
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Richard E. Disbrow Director Retired, Chairman Electric
and Chief Executive Utility
Officer, American
Electric Power
Company, Inc.
Daniel E. Evans Director Chairman, Food Proc-
Bob Evans Farms, essing
Inc. Wholesale &
Retail
Director, National Bank
City Corporation holding company
Thomas J. Fitzpatrick Director Chairman and General
Chief Executive Contractor
Officer, Elford,
Inc.
James H. Gilmour Director Chairman, Credit Card
National City Card company
Services
Gary A. Glaser Director, Executive Vice Bank holding
President President, Company
and Chief National City
Executive Officer Corporation
Director, Bank
National City
Bank, Dayton
Arthur D. Herrmann Director Retired Chairman, Bank
National City Bank
of Columbus
William G. Kelley Director Chairman and Retail
Chief Executive,
Officer, Consoli-
dated Stores Corp.
James H. Miller Director Retired, Tire Manu-
Gencorp. Inc. facturer
J. Frederick Reid Director Retired Chairman, Insurance
Grange Insurance
Companies
</TABLE>
C-32
<PAGE> 290
<TABLE>
<S> <C> <C> <C>
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,
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<PAGE> 291
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
</TABLE>
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<PAGE> 292
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
David A. Daberko Director Chairman and Chief Bank holding
Executive Officer, company
National City
Corporation,
Vice Chairman of
Executive Committee
Director, Bank
National City
Bank of Columbus
Director, Bank
National City
Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director, Bank
National City
Bank of Indiana
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,
</TABLE>
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<PAGE> 293
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
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
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.
</TABLE>
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<PAGE> 294
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Dr. John W. Shumaker Director President, Education
University of
Louisville
William M. Street Director Vice Chairman, Consumer Products
Brown-Forman
Corporation
James E. Barber President, None
Bowling Green
Area
William I. Executive Vice None
Cornett, Jr. President,
Corporate Banking
Roger M. Dalton President, None
Lexington Area
Robert E. Hawkins Executive Vice None
President,
Credit Admin-
istration
Harvey E. Hensley President, None
Southeast Area
David E. Jones President, None
Ashland Area
Larry R. Mayfield President, None
Owensboro Area
Barbara K. Pence Executive None
Vice President,
Retail Banking
Charles R. Stoess President, None
Crestwood Area
Lawrence A. Warner Executive None
Vice President,
Trust
John W. Woods, III Executive None
Vice President,
Trust
</TABLE>
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<PAGE> 295
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
</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
Member, Indiana
State Office
Building Commission
William E. Corley Director President, Community Hospital
Hospitals of Indiana,
Inc.
President, Community Healthcare
Health Services, Inc.
</TABLE>
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<PAGE> 296
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
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 City Bank
Bank
Director, National Bank
City Bank of Kentucky
</TABLE>
C-39
<PAGE> 297
<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
</TABLE>
C-40
<PAGE> 298
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Director, Indiana Utility
Gas Company
Director, Indiana Utility
Energy, Inc. Holding
Company
Director, American Insurance
United Life Insurance
Co.
Director, Baldwin & Insurance
Lyons, Inc.
Director, Indianapolis
Ballet
Director, Indianapolis Art Museum
Museum of Art
Director, Indianapolis Non-profit
Humane Society organization
Chairman, Riley
Memorial Association
Inc.
Edwin J. Goss Director Director, American Insurance
States Insurance Co.
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.
</TABLE>
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<PAGE> 299
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Director, IPALCO Utility
Enterprises, Inc. Holding
Co.
Director, Indianapolis Utility
Power & Light Co.
J. Christopher Director, Director, Greater
Graffeo President Indianapolis Progress
and Chief Committee
Executive
Officer
Director, Corporate
Community Council
Director, Indiana
Community Business
Credit Corp.
Director, Community
Hospital Foundation
Board
Director, Indianapolis Art Museum
Museum of Art
Director, Indiana
Repertory Theater
John A. Hillenbrand II Director Vice-Chairman of Manufacturing
Board, Pri-Pak Inc.
Director, Physicians
Practices Management
Director, PSI Energy Utility
Chairman of Board,
Able Body Corp.
Director, Manufacturing
Hillenbrand
Industries, Inc.
</TABLE>
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<PAGE> 300
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
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
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.
</TABLE>
C-43
<PAGE> 301
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
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
N. Clay Robbins Director President, Charitable
Lilly Endowment, Inc. foundation
</TABLE>
C-44
<PAGE> 302
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
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
</TABLE>
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<PAGE> 303
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
Donald W. Tanselle Director Chairman, MSA Realty Real Estate
Inc.
Chairman, Indiana State Fair
Fair Commission
Partner, Washington Real Estate
Square Associates
Eiteljorg Museum Museum
Childrens Museum Museum
Methodist Hospital Hospital
Partner, L. H. Chaney
Associates
Director, Pooled
Certificates Inc.
Randolph P. Wilson Director None
Michael C. Rechin Executive Vice None
President,
Corporate
Banking
Administration
Janice L. Faherty Executive Vice None
President,
Statewide Bank
Administration
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>
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<PAGE> 304
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Indiana Connections Business
- ---- ------------ ----------- --------
<S> <C> <C> <C>
</TABLE>
(e) Investment Adviser: National Asset Management Corporation
("National Asset Management")
To the knowledge of Registrant, none of the directors or officers of
National Asset Management, except those set forth below, is or has been at any
time during the past two calendar years engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers of National Asset Management also hold positions with
National City Corporation or its subsidiaries. Set forth below are the names and
principal business of the directors and certain of the senior executive officers
of National Asset Management who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
NATIONAL ASSET MANAGEMENT
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- -------------- ----------- --------
<S> <C> <C> <C>
James R. Bell, III Director
Morton Boyd Director Chairman and Chief Bank
Executive Officer,
National City Bank of
Kentucky
Executive Vice President Bank Holding
National City Company
Corporation
William F. Director, None
Chandler, Jr. Managing Director
and Principal
Leonard V. Hardin Director
William R. Robertson Director
Harold B. Todd, Jr. Director
</TABLE>
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<PAGE> 305
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- -------------- ----------- --------
<S> <C> <C> <C>
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
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.
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<PAGE> 306
WEISS, PECK & GREER, LLC
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ------------- -------------- --------
<S> <C> <C> <C>
Samuel H. Armacost Principal Director, Oil and Gas;
Chevron; Scientific
Director, Consulting;
Failure Group; Technology
Director,
Scios Nova
Annette Bianchi Principal 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
Philip Greer* Principal Director, Technology;
Network Package
Computing Delivery;
Devices; Wine
Director,
Federal
Express;
Director,
Robert Mondavi
Ronald M. Hoffner* Principal None
</TABLE>
C-49
<PAGE> 307
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ------------- -------------- --------
<S> <C> <C> <C>
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
Stuart W. Porter Principal None
Francis H. Powers Principal None
</TABLE>
C-50
<PAGE> 308
<TABLE>
<CAPTION>
Position with
Weiss, Peck & Other Business Type of
Name Greer, LLC Connections Business
- ---- ------------- -------------- --------
<S> <C> <C> <C>
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
</TABLE>
* Member - Executive Committee
** Chairman - Executive Committee
Item 29. Principal Underwriter
(a) In addition to Registrant, 440 Financial Distributors, Inc.
(the "Distributor") currently acts as distributor for The Galaxy Fund,
The Galaxy VIP Fund and Galaxy Fund II; The Kent Funds and The One
Group(R). The Distributor is registered with the Securities and
Exchange Commission as a broker-dealer and is a member of the National
Association of Securities Dealers. The Distributor, a wholly-owned
subsidiary of First Data Corp., is located at 290 Donald Lynch
Boulevard, Marlboro, Massachusetts 01752.
C-51
<PAGE> 309
(b) The information required by this Item 29 (b) with respect to
each director, officer, or partner of the Distributor is incorporated
by reference to Schedule A of Form BD filed by the Distributor with
the Securities and Exchange Commission pursuant to the Securities Act
of 1934 (File No. 8-45467).
(c) The Distributor is an affiliated person of First Data
Investor Services Group, Inc. (formerly, The Shareholder Services
Group, Inc., d/b/a 440 Financial), the Registrant's transfer agent,
which receives transfer agency fees as described in Parts A and B.
Item 30. Location of Accounts and Records
(1) National City Bank, 1900 East Ninth Street, Cleveland, Ohio,
44114-3484, National City Bank, Columbus, 155 East Broad Street,
Columbus, Ohio 43251, and National City Bank, Trust Operations, 4100
West 150th Street, Cleveland, Ohio 44135, (records relating to their
functions as investment advisers and custodian); National City Bank,
Kentucky, 101 South 5th Street, Louisville, Kentucky 40202; National
City Bank, Indiana, 101 West Washington Street, Suite 645,
Indianapolis, IN 46255; and National Asset Management Corporation, 101
South Fifth Street, Louisville, KY 40202.
(2) 440 Financial Distributors, Inc., 290 Donald Lynch Boulevard,
Marlboro, Massachusetts 01752 (records relating to its functions as
distributor).
(3) Allmerica Investments, Inc., 440 Lincoln Street, Worcester,
Massachusetts 01653 (records relating to its former functions as
distributor).
(4) Drinker Biddle & Reath, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496 (Registrant's Declaration of Trust, Code of
Regulations, and Minute Books).
C-52
<PAGE> 310
(5) PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 (records relating to its former
functions as custodian).
(6) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as accounting agent and
administrator).
(7) First Data Investor Services Group, Inc., 4400 Computer Drive,
Westboro, Massachusetts 02109 (records relating to its functions as
transfer agent).
(8) First Data Investor Services Group (formerly The Shareholder
Services Group, Inc. d/b/a 440 Financial) 4400 Computer Drive,
Westboro, Massachusetts 02109 (records relating to its former
functions as transfer agent).
(9) Weiss, Peck & Greer, LLC, One New York Plaza, New York, New York
10004 (records relating its functions as sub-adviser).
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of the Registrant's most recent annual report to shareholders,
upon request and without charge.
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<PAGE> 311
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 31st day of July, 1996.
ARMADA FUNDS
Registrant
/s/Leigh Carter
---------------
President
Leigh Carter
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 28 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 31, 1996
- -----------------------
Richard B. Tullis
*Thomas R. Benua, Jr. Trustee July 31, 1996
- -----------------------
Thomas R. Benua, Jr.
/s/Leigh Carter Trustee, President and July 31, 1996
- ----------------------- Treasurer (Principal
Leigh Carter Executive, Financial and
Accounting Officer)
*John F. Durkott Trustee July 31, 1996
- -----------------------
John F. Durkott
*Richard W. Furst Trustee July 31, 1996
- -----------------------
Richard W. Furst
*Robert D. Neary Trustee July 31, 1996
- -----------------------
</TABLE>
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<PAGE> 312
Robert D. Neary
* J. William Pullen Trustee July 31, 1996
- ------------------------
J. William Pullen
*By: /s/Leigh Carter
------------------
Leigh Carter
Attorney-in-Fact
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<PAGE> 313
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(11)(a) Consent of Drinker Biddle and Reath
(b) Consent of Ernst & Young LLP
(c) Consent of Coppers & Lybrand L.L.P.
(27)(a) Financial Data Schedule as of May 31, 1996 for the Equity Fund
(Institutional Class).
(b) Financial Data Schedule as of May 31, 1996 for the Equity Fund
(Retail Class).
(c) Financial Data Schedule as of May 31, 1996 for the Fixed
Income Fund (Institutional Class).
(d) Financial Data Schedule as of May 31, 1996 for the Fixed
Income Fund (Retail Class).
(e) Financial Data Schedule as of May 31, 1996 for the Equity
Income Fund (Institutional Class).
(f) Financial Data Schedule as of May 31, 1996 for the Equity
Income Fund (Retail Class).
(g) Financial Data Schedule as of May 31, 1996 for the Mid Cap
Regional Fund (Institutional Class).
(h) Financial Data Schedule as of May 31, 1996 for the Mid Cap
Regional Fund (Retail Class).
(i) Financial Data Schedule as of May 31, 1996 for the Enhanced
Income Fund (Institutional Class).
(j) Financial Data Schedule as of May 31, 1996 for the Enhanced
Income Fund (Retail Class).
(k) Financial Data Schedule as of May 31, 1996 for the Total
Return Advantage Fund (Institutional Class).
(l) Financial Data Schedule as of May 31, 1996 for the Total
Return Advantage (Retail Class).
(m) Financial Data Schedule as of April 30, 1996 for the GNMA
Fund.
<PAGE> 314
(n) Financial Data Schedule as of April 30, 1996 for the
Intermediate Government Fund.
<PAGE> 1
EXHIBIT (11)(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
Firm under the caption "Counsel" in the Statements of Additional Information
that are included in Post-Effective Amendment No. 30 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 31, 1996
<PAGE> 1
Exhibit 11(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and "Auditors" in the Statement of Additional
Information and to the incorporation by reference in this Post-Effective
Amendment No. 30 to the Registration Statement (Form N-1A) (No.
33-488/811-4416) dated July 31, 1996, of Armada Funds of our report dated July
2, 1996, included in the 1996 Annual Report to Shareholders of Armada Funds.
Philadelphia, Pennsylvania
July 31, 1996
<PAGE> 1
Exhibit 11c
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 30 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 Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which also constitutes parts of this Registration Statement. We also
consent to the reference to our Firm under the caption "Financial Highlights"
in the Prospectus and "Financial Statements" in the Statement of Additional
Information.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 31, 1996
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<CIK> 0000778202
<NAME> ARMADA FUNDS
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<NAME> ARMADA ENHANCED INCOME FUND - RETAIL CLASS
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<TABLE> <S> <C>
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<CIK> 0000778202
<NAME> ARMADA FUNDS
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<NAME> ARMADA TOTAL RETURN ADVANTAGE FUND - INSTITUTIONAL CLASS
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000778202
<NAME> ARMADA FUNDS
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<NAME> ARMADA TOTAL RETURN ADVANTAGE FUND - RETAIL CLASS
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> INVENTOR FUNDS
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<NAME> INTERMEDIATE GOVERNMENT SECURITIES CLASS A
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<S> <C>
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<CIK> 0000778202
<NAME> INVENTOR FUNDS
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<NAME> GNMA SECURITIES CLASS A
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<S> <C>
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