<PAGE> 1
As filed with the Securities and Exchange Commission on September 30, 1997
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. 36 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 35 [x]
Armada Funds (formerly known as "NCC Funds")
(Exact Name of Registrant as Specified in Charter)
Oaks, Pennsylvania, 19456
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-622-FUND
W. Bruce McConnel, III, Esq.
DRINKER BIDDLE & REATH LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Thomas F. Harvey, Esq.
National City Bank
National City Center
P.O. Box 5756
Cleveland, Ohio 44101-0756
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on date pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (b)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(iii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
==================
<PAGE> 2
The Registrant has previously filed a declaration of indefinite
registration of its shares of beneficial interest pursuant to Rule 24f-2 under
the Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice
with respect to the Money Market, Government, Tax Exempt, Treasury, Fixed
Income, Enhanced Income, Total Return Advantage, Equity Growth, Equity Income,
Mid Cap Regional, GNMA, Intermediate Government, Pennsylvania Municipal,
Pennsylvania Tax Exempt and Ohio Tax Exempt Funds for the fiscal year ended May
31, 1997 was filed on July 29, 1997.
<PAGE> 3
The purpose of this post-effective amendment is to update financial and
other information of the Registrant. The prospectuses and statements of
additional information for the National Tax Exempt Fund, Equity Index Fund and
Real Return Advantage Fund are incorporated herein by reference to
Post-Effective Amendment Nos. 24 and 33, respectively.
<PAGE> 4
CROSS REFERENCE SHEET
---------------------
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Pennsylvania Tax Exempt Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
1. Cover Page......................................................... Cover Page
2. Synopsis........................................................... Expense Table
3. Condensed Financial Information.................................... Financial Highlights;
Yield
4. General Description of Registrant.................................. Risk Factors,
Investment Objectives
and Policies;
Investment Limitations;
Description of the
Trust and Its Shares
5. Management of the Trust............................................ Management of the
Trust; Custodian and
Transfer Agent
6. Capital Stock and Other Securities................................. How to Purchase and
Redeem Shares;
Dividends and
Distributions; Taxes;
Description of the
Trust and Its Shares;
Miscellaneous
7. Purchase of Securities............................................. Pricing of Shares; How
Being Offered to Purchase and Redeem
Shares; Distribution
Agreement
8. Redemption or Repurchase........................................... How to Purchase and
Redeem Shares
9. Pending Legal Proceedings.......................................... Inapplicable
</TABLE>
<PAGE> 5
CROSS REFERENCE SHEET
---------------------
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Pennsylvania Tax Exempt Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item.................................... Statement of Additional Information
- --------------------- -----------------------------------
Caption
-------
<S> <C>
1. Cover Page......................................................... Cover Page
2. Table of Contents.................................................. Table of Contents
3. General Information and History.................................... Statement of Additional
Information
4. Investment Objectives and Policies................................. Risk Factors, Investment
Objectives and Policies
5. Management of Registrant........................................... Trustees and Officers
6. Control Persons and Principal...................................... Description of Shares
Holders of Securities
7. Investment Advisory and Other...................................... Advisory, Administra-
Services Management tion, Distribution,
Custody and Transfer
Agency Agreements
8. Brokerage Allocation and Other..................................... Risk Factors, Investment
Practices Objectives and Policies
9. Capital Stock and Other Securities................................. Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing................................... Additional Purchase and
of Securities Being Offered ....................................... Redemption Information
11. Tax Status......................................................... Additional Information
Concerning Taxes
12. Underwriters....................................................... Not Applicable
13. Calculation of Performance Data.................................... Yield and Performance
Information
14. Financial Statements............................................... Financial Statements
</TABLE>
<PAGE> 6
ARMADA
FUNDS
MONEY
MARKET
SERIES
ARMADA FUNDS LOGO
Financial Power Close at Hand
PROSPECTUS
September 30, 1997
ARMADA MONEY MARKET FUND
ARMADA GOVERNMENT FUND
ARMADA TREASURY FUND
ARMADA TAX EXEMPT FUND
ARMADA PENNSYLVANIA TAX EXEMPT FUND
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expense Tables............................................................................ 2
Financial Highlights...................................................................... 4
Introduction.............................................................................. 9
Investment Objectives and Policies........................................................ 9
Investment Limitations.................................................................... 16
Yield and Performance Information......................................................... 18
Pricing of Shares......................................................................... 19
How to Purchase and Redeem Shares......................................................... 19
Distribution Agreement.................................................................... 24
Shareholder Services Plan................................................................. 24
Dividends and Distributions............................................................... 25
Taxes..................................................................................... 25
Management of the Trust................................................................... 27
Description of the Trust and its Shares................................................... 28
Custodian and Transfer Agent.............................................................. 30
Expenses.................................................................................. 30
Miscellaneous............................................................................. 30
</TABLE>
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL
CITY BANK OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY
BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and certain of its affiliates serve as investment advisers to
Armada Funds for which they receive an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
There can be no assurances the Armada Money Market, Government, Treasury, Tax
Exempt or Pennsylvania Tax Exempt Funds will be able to maintain a stable net
asset value of $1 per share. An investment in these funds is neither insured nor
guaranteed by the U.S. Government.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 8
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments,
Inc., please call your FINANCIAL Consultant for
information. For current performance, fund information,
account redemption information, and to purchase shares,
please call 1-800-622-FUND (3863).
</TABLE>
This Prospectus describes shares in the following five investment funds
(the "Funds") of Armada Funds (the "Trust"), each having its own investment
objective and policies:
MONEY MARKET FUND'S investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund invests in "money market" instruments such as bank certificates of deposit,
bankers' acceptances, and commercial paper (including variable and floating rate
notes) in addition to obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities and repurchase agreements relating to such
obligations.
GOVERNMENT FUND'S investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund invests in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities and repurchase agreements relating to such
obligations.
TREASURY FUND'S investment objective is to seek as high a level of current
income as is consistent with liquidity and stability of principal. The Fund
invests in U.S. Treasury bills and notes and other direct obligations of the
U.S. Treasury.
TAX EXEMPT FUND'S investment objective is to provide as high a level of
current interest income exempt from federal income tax as is consistent with
liquidity and stability of principal.
PENNSYLVANIA TAX EXEMPT FUND'S investment objective is to provide current
income exempt from regular federal income and Pennsylvania personal income
taxes, consistent with stability of principal. The Fund invests primarily in
high quality debt obligations issued by or on behalf of the Commonwealth of
Pennsylvania and its political subdivisions and financing authorities.
All securities or instruments in which the Funds invest have remaining
maturities of 397 calendar days or less, EXCEPT variable and floating rate
instruments and securities underlying certain repurchase agreements WHICH may
bear longer maturities.
National City Bank ("National City"), National City Bank of Columbus
("National City Columbus") and National City Bank of Kentucky ("National City
Kentucky") serve as investment advisers to the Money Market, Government,
Treasury and Tax Exempt Funds; National City serves as investment adviser to the
Pennsylvania Tax Exempt Fund. These investment advisers are referred to herein
individually as an "adviser" and collectively as the "advisers."
SEI INVESTMENTS DISTRIBUTION CO., FORMERLY SEI FINANCIAL SERVICES COMPANY
(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.
<PAGE> 9
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL CITY BANK OF
COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, THEIR PARENT COMPANY OR ANY OF THEIR
AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
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, 1997
<PAGE> 10
EXPENSE TABLES
<TABLE>
<CAPTION>
MONEY MONEY
MARKET MARKET GOVERNMENT GOVERNMENT TREASURY
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
SHARES(1) SHARES SHARES(1) SHARES SHARES(1)
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases....... None None None None None
Sales Charge Imposed on Reinvested
Dividends............................. None None None None None
Deferred Sales Charge................... None None None None None
Exchange Fee............................ None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net
assets)
Management Fees (after fee
waivers)(2)........................... .25% .25% .25% .25% .25%
---- ---- ---- ---- ----
12b-1 Fees(2,3)......................... .06% .06% .06% .06% .06%
---- ---- ---- ---- ----
Other Expenses.......................... .17% .07% .19% .09% .19%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(2)............ .48% .38% .50% .40% .50%
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA PENNSYLVANIA
TREASURY TAX EXEMPT TAX EXEMPT TAX EXEMPT TAX EXEMPT
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES SHARES(1) SHARES SHARES(1) SHARES
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases....... None None None None None
Sales Charge Imposed on Reinvested
Dividends............................. None None None None None
Deferred Sales Charge................... None None None None None
Exchange Fee............................ None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net
assets)
Management Fees (after fee
waivers)(2)........................... .25% .15% .15% .15% .15%
----- ----- ----- ----- -----
12b-1 Fees(2,3)......................... .06% .06% .06% .06% .06%
----- ----- ----- ----- -----
Other Expenses.......................... .09% .19% .09% .23% .13%
----- ----- ----- ----- -----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(2)............ .40% .40% .30% .44% .34%
=========== =========== =========== ============= =============
</TABLE>
- ---------------
(1) The Trust has implemented a Shareholder Services Plan (the "Services Plan")
with respect to Retail shares in each of the Funds. Pursuant to the Services
Plan, the Trust enters into shareholder servicing agreements with certain
financial institutions under which they agree to provide shareholder
administrative services to their customers who beneficially own Retail
shares in consideration for the payment of up to .10% (on an annualized
basis) of the net asset value of such shares. For further information
concerning the Services Plan, see "Shareholder Services Plan."
(2) The expense information in the table relating to each Fund has been restated
to reflect current fees. For the current fiscal year, the advisers will
voluntarily waive fees in the amount of .10% of the average daily net assets
of the Money Market and Government Funds, .05% of the average daily net
assets of the Treasury Fund, .20% of the average daily net assets of the Tax
Exempt Fund and .25% of the average daily net assets of the Pennsylvania Tax
Exempt Fund (the advisers are entitled to receive an advisory fee, computed
daily and payable monthly, at the annual rate of .35% of the average daily
net assets of each of the Money Market, Government and Tax Exempt Funds,
.30% of the average daily net assets of the Treasury Fund and .40% of the
average daily net assets of the Pennsylvania Tax Exempt Fund pursuant to
their Advisory Agreements with the Trust). Without such fee waivers, Total
Fund Operating Expenses would be .58% and .48% for the Retail and
Institutional shares of the Money Market Fund, respectively, .60% and .50%
for the Retail and Institutional shares of the Government Fund,
respectively, .55% and .45% for the Retail and Institutional Shares of the
2
<PAGE> 11
Treasury Fund, respectively, .60% and .50% for the Retail and Institutional
shares of the Tax Exempt Fund, respectively, and .69% and .59% for the
Retail and Institutional shares of the Pennsylvania Tax Exempt Fund,
respectively. Additionally, if the maximum distribution fee permitted under
the 12b-1 Plan were imposed, Total Fund Operating Expenses would be .62% and
.52%, .64% and .54%, .59% and .49%, .64% and .54% and .73% and .63% for the
Retail and Institutional shares of the Money Market Fund, Government Fund,
Treasury Fund, Tax Exempt Fund and Pennsylvania Tax Exempt Fund,
respectively.
(3) The Funds have in effect 12b-1 Plans pursuant to which each Fund may bear
fees in an amount of up to .10% of average daily net assets. As a result of
the payment of 12b-1 fees, long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. ("NASD"). The NASD has
adopted rules which generally limit the aggregate payments under the Trust's
Service and Distribution Plan ("Distribution Plan") and Services Plan to a
certain percentage of total new gross share sales, plus interest. The Trust
would stop accruing 12b-1 and related fees if, to the extent, and for as
long as, such limit would otherwise be exceeded.
- ---------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Money Market Retail Shares................ $5 $ 15 $ 27 $ 60
Money Market Institutional Shares......... $4 $ 12 $ 21 $ 48
Government Retail Shares.................. $5 $ 16 $ 28 $ 63
Government Institutional Shares........... $4 $ 13 $ 22 $ 51
Treasury Retail Shares.................... $5 $ 16 $ 28 $ 63
Treasury Institutional Shares............. $4 $ 13 $ 22 $ 51
Tax Exempt Retail Shares.................. $4 $ 13 $ 22 $ 51
Tax Exempt Institutional Shares........... $3 $ 10 $ 17 $ 38
Pennsylvania Tax Exempt Retail Shares..... $5 $ 14 $ 25 $ 55
Pennsylvania Tax Exempt Institutional
Shares.................................. $3 $ 11 $ 19 $ 43
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Trust will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution Agreement"
in this Prospectus and the financial statements and related notes incorporated
by reference into the Statement of Additional Information for the Money Market,
Government, Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds. Any fees
that are charged by affiliates of the advisers or other institutions directly to
their customer accounts for services related to an investment in shares of any
of the Funds are in addition to and are not reflected in the fees and expenses
described above.
3
<PAGE> 12
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
MONEY MARKET FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- ---------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income........ 0.05 0.05 0.05 0.05 0.05 0.05
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
Net Asset Value, End of
Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ========== ========
TOTAL RETURN................. 5.19% 5.09% 5.45% 5.35% 5.11% 5.01%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000s)................. $ 1,943,021 $346,172 $ 1,344,414 $343,087 $ 1,083,243 $175,192
---------- -------- ---------- -------- ---------- --------
Ratio of Expenses to Average
Net Assets................ 0.37%(4) 0.47%(5) 0.37%(4) 0.47%(5) 0.37%(4) 0.47%(5)
Ratio of Net Investment
Income to Average Net
Assets.................... 5.07%(4) 4.97%(5) 5.30%(4) 5.18%(5) 5.07%(4) 5.12%(5)
<CAPTION>
1994 1993 1992
------------------------- -------------------------- --------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- -------------- ------- -------------- -------
<S> <C><C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- -------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income........ 0.03 0.03 0.03 0.03 0.05 0.04
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.03) (0.03) (0.03) (0.03) (0.05) (0.04)
Net Asset Value, End of
Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======== ======= ======== =======
TOTAL RETURN................. 2.91% 2.81% 2.93% 2.82% 4.59% 4.50%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000s)................. $ 743,377 $67,229 $399,191 $57,710 $352,578 $28,497
-------- ------- -------- ------- -------- -------
Ratio of Expenses to Average
Net Assets................ 0.43%(4) 0.53%(5) 0.43% 0.53% 0.43% 0.53%
Ratio of Net Investment
Income to Average Net
Assets.................... 2.94%(4) 2.78%(5) 2.89% 2.79% 4.51% 4.41%
<CAPTION>
1991
--------------------------
INSTITUTIONAL RETAIL(1)
-------------- ------- 1990 1989 1988
-------- -------- --------
Net Asset Value, Beginning of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income........ 0.07 0.01 0.08 0.08 0.07
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.07) (0.01) (0.08) (0.08) (0.07)
Net Asset Value, End of
Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======== ======== ========
TOTAL RETURN................. 7.34% 5.64%(2) 8.69% 8.66% 6.87%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000s)................. $322,943 $22,658 $365,468 $387,631 $370,064
-------- ------- -------- -------- --------
Ratio of Expenses to Average
Net Assets................ 0.42% 0.52%(2) 0.42% 0.44% 0.44%(3)
Ratio of Net Investment
Income to Average Net
Assets.................... 7.52% 6.03%(2) 8.37% 8.35% 6.69%(3)
</TABLE>
- ---------------
(1) Retail class commenced operations on April 1, 1991.
(2) Annualized.
(3) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the year ended May 31, 1988 were .45% and 6.68%,
respectively.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been 0.47% and 4.97%, respectively. The operating
expense ratio and net investment income ratio before fee waivers by the
advisers and custodian for the Institutional class for the years ended May
31, 1996 and 1995 would have been .48% and 5.19% and .48% and 4.96%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the advisers for the Institutional class for the year
ended May 31, 1994 would have been .45% and 2.92%, respectively.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been 0.57% and 4.87%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .58% and 5.07% and .58% and 5.01%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Retail class for the year ended May 31, 1994 would
have been .55% and 2.76%, respectively.
4
<PAGE> 13
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
GOVERNMENT FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- -------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- -------- ------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.05 0.05 0.05 0.05 0.05 0.05
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======== ======== ======== ======== ========
TOTAL RETURN..................... 5.15% 5.04% 5.41% 5.31% 4.97% 4.87%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period in
000s)......................... $ 811,662 $159,129 $ 741,894 $131,194 $ 618,058 $19,174
--------- -------- -------- -------- -------- --------
Ratio of Expenses to Average Net
Assets........................ 0.36%(3) 0.47%(4) 0.36%(3) 0.46%(4) 0.39%(3) 0.51%(4)
Ratio of Net Investment Income
to Average Net Assets......... 5.03%(3) 4.93%(4) 5.27%(3) 5.13%(4) 4.83%(3) 5.01%(4)
<CAPTION>
1994 1993 1992
------------------------- -------------------------- -------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- -------------- ------- -------------- ------
<S> <C><C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------ -------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.03 0.03 0.03 0.03 0.05 0.04
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (0.03) (0.03) (0.03) (0.03) (0.05) (0.04)
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ====== ======== ======= ========
TOTAL RETURN..................... 2.91% 2.80% 2.91% 2.81% 4.65% 4.55%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period in
000s)......................... $ 768,337 $ 6,945 $272,809 $11,050 $148,389 $2,234
------- -------- ------ -------- ------- ------
Ratio of Expenses to Average Net
Assets........................ 0.42%(3) 0.52%(4) 0.45%(3) 0.55%(4) 0.45%(3) 0.55%(4)
Ratio of Net Investment Income
to Average Net Assets......... 2.92%(3) 2.75%(4) 2.84%(3) 2.74%(4) 4.49%(3) 4.39%(4)
<CAPTION>
1991
-------------------------
INSTITUTIONAL RETAIL
-------------- ------ 1990 1989 1988
-------- ------- -------
Net Asset Value, Beginning of
Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.07 0.01 0.08 0.08 0.06
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (0.07) (0.01) (0.08) (0.08) (0.06)
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ======== ====== ======== =======
TOTAL RETURN..................... 7.17% 5.63%(2) 8.53% 8.38% 6.59%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period in
000s)......................... $136,376 $3,671 $110,675 $74,684 $62,963
------- ------ ------- -------- -------
Ratio of Expenses to Average Net
Assets........................ 0.45%(3) 0.55%(2,4) 0.45% 0.45%(3) 0.41%(3)
Ratio of Net Investment Income
to Average Net Assets......... 6.81%(3) 5.47%(2,4) 8.16%(3) 8.20%(3) 6.42%(3)
</TABLE>
- ---------------
(1) Retail class commenced operations on April 1, 1991.
(2) Annualized.
(3) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .46% and 4.93%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
custodian for the Institutional class for the years ended May 31, 1996 and
1995 would have been .47% and 5.16% and .50% and 4.72%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Institutional class for the years ended May 31,
1994, 1993, 1992, 1991, 1990, 1989, and 1988 would have been .44% and 2.90%,
.46% and 2.82%, .46% and 4.48%, .47% and 6.79%, .46% and 8.15%, .48% and
8.17% and .55% and 6.28%, respectively.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .57% and 4.83%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .57% and 5.02% and .63% and 4.90%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Retail class for the years ended May 31, 1994, 1993
and 1992 would have been .54% and 2.73%, .56% and 2.72%, .56% and 4.38%, and
.56% and 5.46%, respectively.
5
<PAGE> 14
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
TREASURY FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE PERIOD ENDED
MAY 31, 1997 MAY 31, 1996 MAY 31, 1995
----------------------- ----------------------- -----------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(3) RETAIL(4)
------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- ------ --------- ------ --------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.05 0.05 0.05 0.05 0.05 0.02
LESS DISTRIBUTIONS
Dividends from Net
Investment Income........ (0.05) (0.05) (0.05) (0.05) (0.05) (0.02)
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ====== ========= ====== ========= ======
TOTAL RETURN.................. 4.89% 4.79% 5.07% 4.97% 4.86%(5) 5.41%(5)
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000's)............... $ 276,327 $5,680 $ 312,255 $4,355 $ 142,877 $ 366
Ratio of Expenses to Average
Net Assets............... 0.37%(1) 0.47%(2) 0.41%(1) 0.52%(2) 0.43%(1,5) 0.56%(2,5)
Ratio of Net Investment
Income to Average Net
Assets................... 4.79%(1) 4.68%(2) 4.88%(1) 4.77%(2) 4.78%(1,5) 5.35%(2,5)
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .42% and 4.74%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
custodian for the Institutional class for the year ended May 31, 1996 and
for the period ended May 31, 1995 would have been .47% and 4.82%, and .49%
and 4.72%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .52% and 4.63%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the year ended May 31, 1996 and for the
period ended May 31, 1995 would have been .58% and 4.71%, and .63% and
5.28%, respectively.
(3) Institutional class commenced operations on June 16, 1994.
(4) Retail class commenced operations on December 22, 1994.
(5) Annualized.
6
<PAGE> 15
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
TAX EXEMPT FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- ------- -------- ------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.03 0.03 0.03 0.03 0.03 0.03
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======= ======== ======= ======== =======
TOTAL RETURN..................... 3.23% 3.12% 3.40% 3.29% 3.14% 3.04%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000s)......................... $ 370,679 $71,917 $ 261,808 $85,928 $ 172,643 $51,916
Ratio of Expenses to Average Net
Assets........................ 0.29%(4) 0.39%(5) 0.30%(4) 0.40%(5) 0.35%(4) 0.46%(5)
Ratio of Net Investment Income
to Average Net Assets......... 3.18%(4) 3.08%(5) 3.33%(4) 3.23%(5) 3.15%(4) 3.17%(5)
<CAPTION>
1994 1993 1992
------------------------- ------------------------- -------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.02 0.02 0.02 0.02 0.04 0.03
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (0.02) (0.02) (0.02) (0.02) (0.04) (0.03)
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ======= =======
TOTAL RETURN..................... 2.06% 1.96% 2.18% 2.07% 3.57% 3.47%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000s)......................... $ 139,015 $17,819 $58,928 $17,791 $60,079 $10,745
Ratio of Expenses to Average Net
Assets........................ 0.33%(4) 0.43%(5) 0.36%(4) 0.46%(5) 0.28%(4) 0.38% (5)
Ratio of Net Investment Income
to Average Net Assets......... 2.05%(4) 1.94%(5) 2.16%(4) 2.06%(5) 3.45%(4) 3.35% (5)
<CAPTION>
1991
------------------------
INSTITUTIONAL RETAIL(3) 1990 1989(1)
------------- ------- ------- -------
Net Asset Value, Beginning of
Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.05 0.01 0.06 0.05
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (0.05) (0.01) (0.06) (0.05)
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ======= =======
TOTAL RETURN..................... 5.29% 4.24% (3) 5.96% 6.03%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000s)......................... $63,559 $4,922 $73,265 $87,770
Ratio of Expenses to Average Net
Assets........................ 0.20%(4) 0.28 (3,5) 0.21%(4) 0.31%(3,4)
Ratio of Net Investment Income
to Average Net Assets......... 5.14%(4) 4.15 (3,5) 5.82%(4) 5.93%(3,4)
</TABLE>
- ---------------
(1) The Tax Exempt Fund commenced operations on July 20, 1988.
(2) Retail class commenced operations on April 1, 1991.
(3) Annualized.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .49% and 2.98%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
Custodian for the Institutional class for the years ended May 31, 1996 and
1995 would have been .51% and 3.12%, and .56% and 2.94%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Institutional class for the years ended May 31,
1994, 1993, 1992, 1991, 1990, and the period ended May 31, 1989 would have
been .53% and 1.85%, .56% and 1.96%, .54% and 3.20%, .55% and 4.79%, .27%
and 5.76%, and .51% and 5.73%, respectively.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .59% and 2.88%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
Custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .61% and 3.02% and .67% and 2.96%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Retail class for the years ended May 31, 1994, 1993,
1992, and for the period ended May 31, 1991 would have been .63% and 1.74%,
.66% and 1.86%, .64% and 3.10%, and .63% and 3.80%, respectively.
7
<PAGE> 16
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
PENNSYLVANIA TAX EXEMPT FUND
The Fund commenced operations on August 8, 1994 as a separate investment
portfolio (the "Predecessor Pennsylvania Tax Exempt Fund") of Inventor Funds,
Inc., which was organized as a Maryland corporation. On September 9, 1996, the
Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Pennsylvania Tax Exempt Fund offered and sold
Retail Shares that were similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Pennsylvania Tax Exempt
Fund's Retail Shares (the series that is similar to the Retail Shares of the
Pennsylvania Tax Exempt Fund) for the fiscal period from May 1, 1996 to May 31,
1996, the fiscal year ended April 30, 1996 and the fiscal period ended April 30,
1995. As part of the reorganization, the fiscal year of the Predecessor
Pennsylvania Tax Exempt Fund was changed to coincide with the Trust's May 31
fiscal year. A one-month financial report representing the Predecessor
Pennsylvania Tax Exempt Fund's operations from May 1, 1996 through May 31, 1996
is being presented. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Pennsylvania Tax Exempt Fund, whose reports thereon are contained in Inventor
Funds' Annual Reports to Shareholders for the fiscal year ended April 30, 1996
and the period ended May 31, 1996. Such financial highlights should be read in
conjunction with the financial statements and notes thereto contained in
Inventor Funds' Annual Reports to Shareholders and incorporated by reference
into the Statement of Additional Information relating to the Pennsylvania Tax
Exempt Fund.
THE INFORMATION PRESENTED BELOW RELATING TO THE FISCAL YEAR ENDED MAY 31,
1997 HAS BEEN DERIVED FROM FINANCIAL STATEMENTS AUDITED BY ERNST & YOUNG, LLP,
INDEPENDENT AUDITORS FOR THE PENNSYLVANIA TAX EXEMPT FUND, WHOSE REPORT IS
INCORPORATED BY REFERENCE IN THE STATEMENT OF ADDITIONAL INFORMATION. IT SHOULD
BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES WHICH ARE
INCORPORATED BY REFERENCE IN THE STATEMENT OF ADDITIONAL INFORMATION.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE FOR THE FOR THE
MAY 31, 1997(5) PERIOD ENDED YEAR ENDED PERIOD ENDED
----------------------- MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(6) 1996(5) 1996(5) 1995(5)
------------- ------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................... 0.03 0.02 0.00 0.03 0.02
LESS DISTRIBUTIONS
Distributions from Net Investment
Income................................ (0.03) (0.02) 0.00 (.03) (.02)
Net Asset Value, End of Period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN.............................. 3.26% 3.18% 0.28%(4) 3.36% 2.32%(4)
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's).... $60,876 $20,830 $68,472 $70,422 $56,668
Ratio of Expenses to Average Net
Assets................................ 0.41%(1) 0.46 (2,3) 0.55%(1,3) 0.55%(1) 0.55%(1,3)
Ratio of Net Investment Income to
Average Net Assets.................... 3.20%(1) 3.27 (2,3) 3.24%(1,3) 3.29%(1) 3.21%(1,3)
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and other affiliates for the Institutional class for
the periods ending May 31, 1997, May 31, 1996, April 30, 1996, and April 30,
1995 would have been .74% and 2.87%, .97% and 2.82%, .96% and 2.88%, and
1.04% and 2.72%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and other affiliates for the Retail class for the
period ended May 31, 1997 would have been .71% and 3.02%, respectively.
(3) Annualized.
(4) Not annualized.
(5) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(6) Retail class commenced operations on September 11, 1996.
8
<PAGE> 17
INTRODUCTION
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund consists
of a separate pool of assets with separate investment objectives and policies as
described below under "Risk Factors, Investment Objectives and Policies." Each
Fund is classified as a diversified investment company under the 1940 Act.
Shares of each Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in a Fund except that,
as described more fully under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares only. Under the
Services Plan, only the beneficial owners of Retail shares bear the expenses of
shareholder administrative services which are provided by financial institutions
for their benefit (not to exceed .10% annually). See "Shareholder Services
Plan," "Dividends and Distributions" and "Description of the Trust and Its
Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of a Fund may not be changed without the vote of
the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Except as noted below under "Investment Limitations," a Fund's
investment policies, however, may be changed without a vote of shareholders.
There can be no assurance that a Fund will achieve its objective.
Each Fund will only purchase "eligible securities" that present minimal
credit risks as determined by the advisers pursuant to guidelines established by
the Trust's Board of Trustees. Eligible securities generally include (i) U.S.
government obligations, (ii) securities that are rated (at the time of purchase)
by nationally recognized statistical rating organizations ("Rating Agencies") in
the two highest rating categories for such securities, and (iii) certain
securities that are not so rated but are of comparable quality to rated eligible
securities as determined by the advisers. See "Investment Objectives and
Policies" in the Statement of Additional Information for a more complete
description of eligible securities. A description of ratings is also contained
in the Statement of Additional Information.
Each Fund's assets have remaining maturities of 397 calendar days or less
(except for certain variable and floating rate instruments and securities
underlying certain repurchase agreements) as defined by the SEC and each Fund's
dollar-weighted average portfolio maturity may not exceed 90 days.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Fund seeks to achieve its objective by investing in "money
market" instruments such as certificates of deposit and other obligations issued
by domestic and foreign banks, and commercial paper (including variable and
floating rate instruments) rated high quality by an unaffiliated Rating Agency,
or determined to be of comparable quality by the advisers. The Money Market Fund
may also invest in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and repurchase agreements issued by financial
institutions such as banks and broker-dealers. See "Common Investment Policies
of the Funds -- Money Market Instruments."
GOVERNMENT FUND
The investment objective of the Government Fund is to seek as high a level
of current income as is consistent with liquidity and stability of principal.
The Fund seeks to achieve its objective by investing in obligations issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities, and repurchase agreements issued by financial
institutions such as banks
9
<PAGE> 18
and broker-dealers. See "Common Investment Policies of the Funds -- Government
Obligations."
TREASURY FUND
The investment objective of the Treasury Fund is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund seeks to achieve its objective by investing exclusively in direct
obligations of the U.S. Treasury, such as Treasury bills and notes. See "Common
Investment Policies of the Funds."
TAX EXEMPT FUND
The investment objective of the Tax Exempt Fund is to provide as high a
level of current interest income exempt from federal income tax as is consistent
with liquidity and stability of principal. The Fund seeks to achieve its
objective by investing substantially all of its assets in a diversified fund of
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their political subdivisions,
agencies, instrumentalities and authorities, the interest on which, in the
opinion of counsel issued on the date of the issuance thereof, is exempt from
regular federal income tax ("Municipal Securities").
Under normal market conditions, at least 80% of the value of the Tax Exempt
Fund's total assets will be invested in Municipal Securities. This policy is
fundamental and may not be changed without the affirmative vote of the holders
of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous"). The Fund may hold uninvested cash reserves pending investment,
during temporary defensive periods or if, in the opinion of the advisers,
desirable tax-exempt obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods; however, uninvested cash reserves will not earn income. See
"Common Investment Policies of the Funds."
Although the Tax Exempt Fund may invest 25% or more of its net assets in
(i) Municipal Securities whose issues are in the same state, (ii) Municipal
Securities the interest on which is paid solely from revenues of similar
projects, and (iii) private activity bonds (described below), it does not
presently intend to do so unless in the opinion of its advisers the investment
is warranted. To the extent that the Fund's assets are invested in Municipal
Securities that are payable from the revenues of similar projects or are issued
by issuers located in the same state or are invested in private activity bonds,
the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such states, projects and bonds to a greater
extent than it would be if its assets were not so invested.
PENNSYLVANIA TAX EXEMPT FUND
The investment objective of the Pennsylvania Tax Exempt Fund is to provide
current income exempt from regular federal income tax and Pennsylvania personal
income taxes, consistent with stability of principal. It is a fundamental policy
of the Fund to use its best efforts to maintain a constant net asset value of
$1.00 per share.
The Pennsylvania Tax Exempt Fund invests primarily in debt obligations
issued by or on behalf of the Commonwealth of Pennsylvania and its political
subdivisions and financing authorities, and obligations of the United States,
including territories and possessions of the United States, the income from
which is, in the opinion of qualified legal counsel, exempt from federal regular
income tax and Pennsylvania state income tax imposed upon non-corporate
taxpayers ("Pennsylvania Municipal Securities"). As a matter of fundamental
policy, the Fund invests its assets so that at least 80% of its annual interest
income is not only exempt from regular federal income tax and Pennsylvania
personal income taxes, but is not considered a preference item for purposes of
the alternative minimum tax.
The Pennsylvania Tax Exempt Fund is concentrated in securities issued by
the Commonwealth of Pennsylvania or entities within the Commonwealth of
Pennsylvania, and therefore investment in the Fund may be riskier than an
investment in other types of money market funds.
10
<PAGE> 19
The Fund may invest in variable and floating rate obligations, may purchase
securities on a "when-issued" basis and reserves the right to engage in
transactions involving stand-by commitments and repurchase agreements. The Fund
may invest up to 100% of its assets in securities which pay interest exempt only
from federal taxes and in taxable securities, during temporary defensive periods
when, in the opinion of the adviser, Pennsylvania Municipal Securities of
sufficient quality are unavailable. There is no percentage limitation on the
amount of assets which may be held uninvested during temporary defensive
periods; however, uninvested cash reserves will not earn income. See "Other
Investment Policies."
Special Risk Considerations -- Pennsylvania Tax Exempt Fund
Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food- related industries. Service industries
currently employ the greatest share of non-agricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth or its municipalities, and could adversely affect the ability of
the respective obligors to make payments of interest and principal due on the
obligations held by the Fund, and the market values of these obligations. Rising
unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth of Pennsylvania and court ordered increases in healthcare
reimbursement rates place increased pressures on the tax resources of the
Commonwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains
moderate. The recession in the early 1990s affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January 1995,
but the Commonwealth has continued to show fiscal restraint.
COMMON INVESTMENT POLICIES OF THE FUNDS
Illiquid Securities
The Funds will not knowingly invest more than 10% of the value of their
respective net assets in securities that are illiquid. Each Fund may purchase
securities which are not registered under the Securities Act of 1933, as amended
(the "1933 Act") but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
advisers 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 are managed with emphasis on safety and high credit quality. This
requires that liquidity risk and market risk or interest rate risk, as well as
credit risk, be held to minimal levels. The advisers have determined that many
types of floating rate and variable rate instruments, commonly referred to as
"derivatives," are considered to be potentially volatile. These derivative
instruments are structured in a way that may not allow them to reset to par at
an interest rate adjustment date. Accordingly, the advisers have adopted the
following policies on behalf of the Funds.
11
<PAGE> 20
The following types of derivative instruments ARE NOT permitted investments
for the Funds:
- - leveraged or deleveraged floaters (whose interest rate reset provisions are
based on a formula that magnifies the effect of changes in interest rates);
- - range floaters (which do not pay interest if market interest rates move
outside of a specified range);
- - dual index floaters (whose interest rate reset provisions are tied to more
than one index so that a change in the relationship between these indices may
result in the value of the instrument falling below face value);
- - inverse floaters (which reset in the opposite direction of their index); and
- - any other structured instruments having cash flow characteristics that can
create potential market volatility similar to the instruments listed above.
Additionally, the Funds may not invest in instruments indexed to longer
than one-year rates, or in instruments whose interest rate reset provisions are
tied to an index that materially lags short-term interest rates, such as "COFI
floaters."
At the present time, the only derivative investments that have been
determined to be suitable for investment by the Funds are:
- - securities based on short-term, fixed-rate contracts; and
- - floating-rate or variable-rate securities whose interest rates reset based on
changes in standard money market rate indices such as U.S. government Treasury
bills, London Interbank Offered Rate, published commercial paper rates, or
federal funds rates.
The risk to the Funds due to the use of derivatives will be limited to the
principal invested in such instruments. 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.
Repurchase and Reverse Repurchase Agreements
The Money Market, Government and Pennsylvania Tax Exempt Funds may agree to
purchase portfolio securities subject to the seller's agreement to repurchase
them at a mutually agreed-upon date and price ("repurchase agreements"). These
Funds may enter into repurchase agreements only with financial institutions such
as banks and broker-dealers which are deemed to be creditworthy by the advisers,
pursuant to guidelines approved by the Trust's Board of Trustees. None of the
Funds may enter into repurchase agreements with the advisers, Distributor, or
any of their affiliates. Although the securities subject to repurchase
agreements may bear maturities exceeding 397 days, the Funds presently intend to
enter only into repurchase agreements which terminate within seven days after
notice by the Funds. If a Fund were to enter into repurchase agreements which
provide for a notice period greater than seven days in the future, the Fund
would do so only if such investment, together with other illiquid securities,
did not exceed 10% of the Fund's net assets.
The seller under a repurchase agreement will be required to maintain the
value of the securities which a Fund holds subject to the agreement at not less
than the repurchase price, marked to market daily, by providing additional
securities or other collateral to the Fund if necessary. If the seller defaulted
on its repurchase obligation, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. Further, it is uncertain
whether the Trust would be entitled, as against a claim by such seller or its
receiver or trustee in bankruptcy, to retain the underlying securities.
The Money Market and Government Funds may also borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements the Funds will sell portfolio
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securities to financial institutions such as banks and broker-dealers and agree
to repurchase them at a particular date and price. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Fund may
decline below the price of the securities it is obligated to repurchase.
Lending Portfolio Securities
In order to generate additional income, the Money Market, Government and
Treasury Funds may, from time to time, lend their portfolio securities to
broker-dealers, banks or other institutional borrowers. A Fund must receive 100%
collateral in the form of cash or U.S. government securities. This collateral
must be valued daily by the advisers, and the borrower will be required to
provide additional collateral should the market value of the loaned securities
increase. During the time portfolio securities are on loan, the borrower pays
the Fund involved any dividends or interest paid on such securities. Loans are
subject to termination by the Funds or the borrower at any time. While a Fund
does not have the right to vote securities on loan, it intends to terminate the
loan and regain the right to vote if this is considered important with respect
to the investment. A Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which the advisers have determined
are creditworthy under guidelines established by the Trust's Board of Trustees.
Variable and Floating Rate Obligations
The Money Market, Government, Tax Exempt and Pennsylvania Tax Exempt Funds
may purchase variable and floating rate demand obligations (including variable
amount master demand notes) which are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. A Fund, however, may invest in such obligations which have a
stated maturity in excess of 397 days only if the Fund may demand repayment at
intervals in accordance with guidelines established by the Board of Trustees.
Because variable and floating rate obligations are direct lending arrangements
between the purchasing Fund and the issuer, they are not normally traded.
Although there may be no active secondary market in such instruments, a Fund may
demand payment of principal and accrued interest at a time specified in the
instrument or may resell them to a third party. Such obligations may be backed
by bank letters of credit or guarantees issued by banks, other financial
institutions or the U.S. government, its agencies or instrumentalities. The
quality of any letter of credit or guarantee will be rated high quality or, if
unrated, will be determined to be of comparable quality by the advisers.
Variable and floating rate obligations entered into by the Government Fund, such
as Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
government or its agencies or instrumentalities. In the event an issuer of a
variable or floating rate obligation defaulted on its payment obligation, a Fund
might be unable to dispose of the instrument because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
Money Market Instruments
The Money Market Fund may invest in "money market" instruments, including
bank obligations and commercial paper. The Pennsylvania Tax Exempt Fund may also
invest, from time to time, a portion of its assets for temporary defensive or
other purposes in such taxable money market instruments.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit, and non-negotiable time deposits issued for a definite period of time
and earning a specified return by a U.S. bank which is a member of the Federal
Reserve System. Bank obligations also include U.S. dollar denominated bankers'
acceptances, certificates of deposit and time deposits issued by foreign
branches of U.S. banks or foreign banks. Investment in bank obligations is
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase. The Money Market Fund may also make
interest bearing savings deposits in commercial and savings banks not in excess
of 5% of its total assets. Investment in non-negotiable time deposits is limited
to no more than 5% of the Fund's total assets at the time of purchase.
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Investments in commercial paper and other short-term promissory notes
issued by corporations (including variable and floating rate instruments) must
be rated at the time of purchase "A-2" or better by Standard & Poor's Ratings
Group ("S&P"), "Prime-2" or better by Moody's Investors Service, Inc.
("Moody's"), "F-2" or better by Fitch Investors Service, L.P. ("Fitch"), "Duff
2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or "A2" or better by
IBCA, Inc. or, if not rated, determined by the advisers to be of comparable
quality pursuant to guidelines approved by the Trust's Board of Trustees.
Investments may also include corporate notes. In addition, the Money Market Fund
may invest in Canadian Commercial Paper ("CCP"), which is U.S. dollar
denominated commercial paper issued by a Canadian corporation or a Canadian
counterpart of a U.S. corporation, and in Europaper, which is U.S. dollar
denominated commercial paper of a foreign issuer. The Money Market Fund may
acquire zero coupon obligations, which have greater price volatility than coupon
obligations and which will not result in the payment of interest until maturity.
Investments in the obligations of foreign branches of U.S. banks, foreign
banks and other foreign issuers may subject the Money Market Fund to additional
investment risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and foreign banks may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of U.S. banks. The Money Market Fund will invest in the obligations of
foreign banks or foreign branches of U.S. banks only when the advisers believe
that the credit risk with respect to the instrument is minimal.
The Money Market Fund may also make limited investments in guaranteed
investment contracts ("GICs") issued by U.S. insurance companies. The Fund will
purchase a GIC only when the advisers have determined, under guidelines
established by the Board of Trustees, that the GIC presents minimal credit risks
to the Fund and is of comparable quality to instruments that are rated high
quality by certain nationally recognized statistical rating organizations.
Government Obligations
The Treasury Fund may only invest in direct obligations of the U.S.
Treasury. The other Funds may invest in these obligations and other obligations
issued or guaranteed by the U.S. government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. government,
such as the Government National Mortgage Association, are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. Some of these
investments may be variable or floating rate instruments. See "Variable and
Floating Rate Obligations."
Types of Municipal Securities
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue or "special obligation" securities
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a specific excise tax or
other specific revenue source such as the user of the facility being financed.
"Private activity" bonds are revenue securities normally issued by industrial
development
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authorities to finance privately-owned facilities and are backed by private
entities. Any private activity bonds (including industrial development bonds)
held by a Fund are not payable from revenues of the issuer. Consequently, the
credit quality of private activity bonds is usually directly related to the
credit standing of the corporate or other user of the facility involved. Private
activity bonds are included in the terms "Municipal Securities" and
"Pennsylvania Municipal Securities" only if the interest paid thereon is exempt
from regular federal income tax and not treated as a specific tax preference
item under the federal alternative minimum tax. See "Taxes."
The Tax Exempt Fund and Pennsylvania Tax Exempt Fund may also invest in
"moral obligation" bonds, which are ordinarily issued by special purpose public
authorities . If the issuer of moral obligation bonds is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
In addition, the Tax Exempt Fund and Pennsylvania Tax Exempt Fund may
purchase short-term Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, and other forms of short-term loans. Such notes are issued
with a short-term maturity in anticipation of the receipt of tax or other funds,
the proceeds of bonds or other revenues. Municipal Securities purchased by the
Tax Exempt and Pennsylvania Tax Exempt Funds may include variable and floating
rate instruments (described above). The Tax Exempt and Pennsylvania Tax Exempt
Funds may also acquire zero coupon obligations, which have greater price
volatility than coupon obligations and which will not result in the payment of
interest until maturity.
Certain municipal obligations may be accompanied by a guaranty, letter of
credit or insurance. The Tax Exempt and Pennsylvania Tax Exempt Funds typically
evaluate the credit quality and ratings of such "credit enhanced" securities
based upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), in addition to the issuer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation certificate
in any of the above. Municipal lease obligations typically are not backed by the
municipality's credit, and their interest may become taxable if the lease is
assigned. Under guidelines established by the Board of Trustees, the credit
quality of municipal leases will be determined on an ongoing basis, including an
assessment of the likelihood that a lease will be canceled.
Participation interests are interests in Municipal Securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participations, beneficial interests in a trust, partnership interests or any
other form of indirect ownership that allows the Pennsylvania Tax Exempt Fund to
treat the income from the investment as exempt from federal income tax. This
Fund invests in these participation interests in order to obtain credit
enhancement or demand features that would not be available through direct
ownership of the underlying Municipal Securities.
A participation interest may be in the form of "certificates of
participation" which represents undivided proportional interests in lease
payments by a governmental or nonprofit entity. The municipal leases underlying
the certificates of participation in which the Pennsylvania Tax Exempt Fund
invests will be subject to the same quality rating standards applicable to
Municipal Securities.
Stand-by Commitments
The Tax Exempt and Pennsylvania Tax Exempt Funds may acquire stand-by
commitments with respect to Municipal Securities. Under a stand-by commitment, a
dealer agrees to purchase at the Fund's option specified Municipal Securities at
a specified price. Stand-by commitments must be
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of high quality as determined by any Rating Agency, or, if not rated, must be
deemed to be of comparable quality. The Funds acquire stand-by commitments
solely to facilitate fund liquidity and do not intend to exercise their rights
thereunder for trading purposes.
Tax-Exempt Derivatives and Other Municipal Securities
The Tax Exempt and Pennsylvania Tax Exempt Funds may invest in tax-exempt
derivative securities relating to Municipal Securities, including tender option
bonds, participations, beneficial interests in trusts and partnership interests.
(See generally "Risk Factors Associated with Derivative Instruments" above.)
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the Tax
Exempt Fund and Pennsylvania Tax Exempt Fund from tax-exempt derivative
securities are rendered by counsel to the respective sponsors of such
securities. The Funds and their investment advisers will rely on such opinions
and will not review independently the underlying proceedings relating to the
issuance of Municipal Securities, the creation of any tax-exempt derivative
securities, or the bases for such opinions.
When-Issued Securities
The Tax Exempt and Pennsylvania Tax Exempt Funds may purchase securities on
a "when-issued" or delayed delivery basis. These transactions are arrangements
in which a Fund purchases securities with payment and delivery scheduled for a
future time. These transactions involve the risk that the price or yield
obtained may be less favorable than the price or yield available when delivery
takes place. The Funds expect that commitments to purchase when-issued
securities will not exceed 25% of the value of their respective total assets
under normal market conditions. The Funds do not intend to purchase when-issued
securities for speculative purposes but only for the purpose of acquiring
portfolio securities. In when-issued and delayed delivery transactions, each
Fund relies on the seller to complete the transaction; its failure to do so may
cause the Fund to miss a price or yield considered to be attractive. For further
information, see "Risk Factors, Investment Objectives, and Policies" in the
Statement of Additional Information.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the advisers) which
invest in high-quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Funds may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the holders of
a majority of the Fund's outstanding shares (as defined under "Miscellaneous").
(Other investment limitations that also cannot be changed without a vote of
shareholders are contained in the Statement of
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Additional Information under "Investment
Objectives and Policies.")
No Fund may:
1. Make loans, except that each Fund may purchase or hold debt instruments
in accordance with its investment objective and policies, and each Fund (other
than the Tax Exempt and Pennsylvania Tax Exempt Funds) may lend portfolio
securities and each Fund (other than the Tax Exempt and Treasury Funds) may
enter into repurchase agreements in accordance with its investment objective and
policies.
2. (a) This paragraph does not apply to the Pennsylvania Tax Exempt Fund.
Borrow money or issue senior securities, except that each Fund may borrow from
banks for temporary purposes and each Fund (other than the Tax Exempt Fund) may
enter into reverse repurchase agreements for temporary purposes in amounts not
in excess of 10% of the value of its total assets at the time of such borrowing;
or mortgage, pledge, or hypothecate any assets except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time of such
borrowing (provided that each Fund other than the Tax Exempt Fund may invest in
reverse repurchase agreements in accordance with its investment objective and
policies). Borrowings are intended solely to facilitate the orderly sale of
portfolio securities to accommodate abnormally heavy redemption requests and not
for leverage purposes. A Fund will not purchase securities while borrowings
(including reverse repurchase agreements) in excess of 5% of the Fund's net
assets are outstanding.
(b) The Pennsylvania Tax Exempt Fund may not borrow money or issue senior
securities, except that the Fund may borrow from anyone for temporary purposes
in amounts not in excess of 5% of the value of its total assets at the time of
such borrowing; or the Fund may borrow from a bank for non-temporary purposes,
provided that the borrowing does not exceed 33 1/3% of the Fund's net assets. To
the extent that a bank borrowing exceeds 5% of the Fund's total assets, asset
coverage of at least 300% is required. The Fund will not purchase securities
while outstanding borrowings equal or exceed 5% of the Fund's total assets.
3. Invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days (other than the Tax Exempt Fund), non-negotiable time deposits
(other than the Tax Exempt Fund), and other securities which are not readily
marketable.
4. Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition or reorganization or where otherwise
permitted by the 1940 Act (but only in securities of other investment companies
which seek to maintain a constant net asset value per share and which are
permitted themselves to invest only in securities which may be acquired by the
Fund).
Additional investment limitations which are matters of fundamental policy
are as follows:
5. Neither the Money Market Fund nor the Pennsylvania Tax Exempt Fund may
purchase any securities which would cause 25% or more of the value of their
respective total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided, that
(a) there is no limitation with respect to obligations issued or guaranteed
by the U.S. government, or its agencies or instrumentalities or by domestic
branches of U.S. banks and repurchase agreements secured by such obligations;
(b) wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents;
(c) utilities will be classified according to their services, for example,
gas, gas transmission, electric and gas, electric, and telephone each will be
considered a separate industry; and
(d) with respect to the Pennsylvania Tax Exempt Fund, there is no
limitation with respect to securities issued by state and local governments.
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6. The Government Fund may not purchase securities other than obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities
(some of which may be subject to repurchase agreements) and securities of other
investment companies as permitted by investment limitation No. 4 above.
7. The Treasury Fund may not purchase securities other than direct
obligations of the U.S. Treasury, such as Treasury bills and notes and
securities of other investment companies as permitted by investment limitation
No. 4 above.
8. The Tax Exempt Fund may not purchase any securities other than
obligations the interest on which is exempt from federal income tax, stand-by
commitments with respect to such obligations, and securities of other investment
companies as permitted by investment limitation No. 4 above.
9. The Tax Exempt Fund may not purchase securities of any one issuer (other
than obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities) if, immediately after and as a result of such purchase, more
than 5% of the value of its total assets would be invested in such issuer,
except that up to 25% of the value of its total assets may be invested without
regard to this 5% limitation.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's securities will not constitute a violation of such limitation for
purposes of the 1940 Act. If a Fund exceeds the limitation on the holding of
illiquid securities it will sell illiquid securities as necessary to maintain
the required liquidity when the advisers believe that it is in the best
interests of the Fund to do so.
In order to permit the sale of the Funds' shares in certain states, the
Trust may make commitments more restrictive than the investment policies and
limitations described above. Should the Trust determine that any such commitment
is no longer in a Fund's best interests, it will revoke the commitment by
terminating sales of the Fund's shares to investors residing in the state
involved.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders each Fund's "yield" and "effective yield" and the Tax Exempt and
Pennsylvania Tax Exempt Funds' "tax-equivalent yield" for Institutional shares
and Retail shares. The "yield" quoted in advertisements refers to the income
generated by an investment in a class of shares of a Fund over a seven-day
period identified in the advertisement. This income is then "annualized." The
amount of income so generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" for a class of shares is calculated similarly
but, when annualized, the income earned by an investment in the class is assumed
to be reinvested. An effective yield for a class of shares will be slightly
higher than its yield because of the compounding effect of the assumed
reinvestment. The Tax Exempt and Pennsylvania Tax Exempt Funds' "tax-equivalent
yield" for a class of shares, which shows the level of taxable yield necessary
to produce an after-tax equivalent to the Funds' tax-free yield for that class,
may also be quoted from time to time. It is calculated by increasing the yield
(calculated as above) for a class of shares by the amount necessary to reflect
the payment of federal income tax and state income tax at stated tax rates. The
Tax Exempt and Pennsylvania Tax Exempt Funds' tax-equivalent yield for a class
of shares will always be higher than its yield.
Investors may compare the performance of each class of shares of a Fund to
the performance of other mutual funds with comparable investment objectives, to
various mutual fund or market indices, and to data or rankings prepared by
independent services such as Lipper Analytical Services, Inc. or other financial
or industry publications that monitor the performance of mutual funds.
Comparisons may also be made to indices or data published
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in IBC's Money Fund Report, a nationally recognized money market fund reporting
service, Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York
Times, Business Week, U.S.A. Today, CDA/Weisenberger, The American Banker,
Morningstar, Incorporated and other publications of a local, regional or
financial industry nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
Performance data may not provide a basis for comparison with bank deposits and
other investments which provide a fixed yield for a stated period of time. Yield
will be affected by fund quality, composition, maturity, market conditions and
the level of operating expenses for the class of shares. From time to time, the
advisers may voluntarily waive their investment advisory fees in order to reduce
such operating expenses, which will have the effect of enhancing the yield. Any
fees charged by financial institutions (as described in "How to Purchase and
Redeem Shares") are not included in the computation of performance data but will
reduce a shareholder's net return on an investment in a Fund.
Shareholders should note that the yield of the Retail shares will be
reduced by the amount of the shareholder servicing fees that are payable under
the Services Plan. See "Shareholder Services Plan."
Further information about the performance of the Funds is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain copies
from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For processing purchase and redemption orders, the net asset values per
share of the Money Market, Government, Treasury, Tax Exempt and Pennsylvania Tax
Exempt Funds are calculated on each business day first at 3:00 p.m. Eastern
time, then as of the close of trading of the New York Stock Exchange (the
"Exchange"), generally 4:00 p.m. Eastern time. Net asset value per share is
determined each day that both the Federal Reserve Bank of New York and the
Exchange are open for business.
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
The assets in all of the Funds are valued based upon the amortized cost
method, which has been determined by the Trust's Board of Trustees to represent
the fair value of the Funds' investments. Amortized cost valuation involves
valuing an instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium. Although the Trust seeks to
maintain the net asset value per share of the Funds at $1.00, there can be no
assurance that the net asset value will not vary.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at Oaks, Pennsylvania 19456.
From time to time, the Distributor, at its expense, may offer promotional
incentives to dealers. As of the date of this Prospectus, the Distributor
intends to offer certain promotional incentives, including trips and monetary
awards to NatCity Investments, Inc. and other affiliates of National City.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily through
financial institutions such
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as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. Financial institutions may
charge certain account fees depending on the type of account the Investor has
established with the institution. (For information on such fees, the Investor
should review his agreement with the institution or contact it directly.) In
addition, certain financial institutions may enter into shareholder servicing
agreements with the Trust whereby a financial institution would perform various
administrative support services for its customers who are the beneficial owners
of Retail shares and would receive fees from the Funds for such services of up
to .10% (on an annualized basis) of the average daily net asset value of such
shares. See "Shareholder Services Plan." For direct purchases of shares,
Investors should call 1-800-622-FUND(3863) or to speak with a NatCity
Investments professional, call 1-888-4NATCTY (462-8289).
With respect to the Money Market, Government and Treasury Funds, shares may
be purchased in conjunction with an individual retirement account ("IRA") and
rollover IRAs where a designated custodian acts as custodian. Investors should
contact NatCity Investments, Inc., the Distributor, or their financial
institutions for information as to applications and annual fees. Investors
should also consult their tax advisers to determine whether the benefits of an
IRA are available or appropriate.
The minimum investment for the initial purchase of Retail shares in a Fund
is $500. All subsequent investments for Retail shares and IRAs are subject to a
minimum investment of $250. Investments made in Retail shares by a sweep program
described below or through the Planned Investment Program ("PIP"), 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 PIP will be considered as contributions for the year in which the purchases
are made.
Customers of Banks may purchase Retail shares through procedures
established by the Banks or their financial institutions in connection with the
requirements of their customer accounts. These procedures may include
instructions under which a Bank or financial institution may automatically
"sweep" a customer account and invest amounts agreed to by the Bank or financial
institution and the customer in additional Retail shares of a Fund. Customers
may obtain information relating to the requirements of such accounts from their
Banks or financial institutions.
Under a PIP, Investors may add to their investment in the Retail shares of
a Fund, in a consistent manner each month, with a minimum amount of $50. Funds
may be automatically withdrawn from a shareholder's checking or savings account
available through an investor's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. An Investor may apply for participation in a monthly
program by completing an application obtained through a financial institution,
such as banks, brokers, or dealers selling Retail shares of the Funds, or by
calling 1-800-622-FUND(3863). The program may be modified or terminated by an
Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks, National Asset Management
Corporation ("NAM") customers that are large institutions, and investment
advisers and financial planners affiliated with National City ("RIAs") who
charge an advisory, consulting or other fee for their services and buy shares
for their own accounts or the accounts of their clients ("Customers"). Depending
on the
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terms governing the particular account, the Banks , NAM or RIAs may impose
account charges such as account maintenance fees, compensating balance
requirements or other charges based upon account transactions, assets or income
which will have the effect of reducing the net return on a shareholder's
investment in a Fund. There is no minimum investment.
Customers may purchase Institutional shares through procedures established
by the Banks , NAM or RIAs in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank , NAM or
RIAs 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 ,
NAM or RIA and the Customer in additional Institutional shares of a Fund.
Customers should obtain information relating to the requirements of such
accounts from their Banks, NAM or RIAs.
It is the responsibility of the Banks , NAM and RIAs to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will be held of record by the Banks, NAM or RIAs. Confirmations of share
purchases and redemptions will be sent to the Banks , NAM and RIAs. Beneficial
ownership of Institutional shares will be recorded by the Banks , NAM or RIAs or
the Transfer Agent and reflected in the account statements provided by them to
their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Money Market and Government Funds
received by the Transfer Agent by 3:00 pm Eastern time are processed that day.
Similarly, purchase orders for shares of the Treasury, Tax Exempt and
Pennsylvania Tax Exempt Funds received by the Transfer Agent by 1:00 pm Eastern
time are also processed that day. Purchase orders received after the above
listed times are processed the following business day.
Purchase orders are processed at the net asset value per share next
determined after an order is received by the Transfer Agent.
Purchases will be effected only when Federal funds or other funds are
immediately available to the Trust's custodian to make the purchase on the day
the Transfer Agent receives the purchase order. Orders for which funds have not
been received by the Transfer Agent by the prescribed deadline on a given day
will not be accepted and notice thereof will be given promptly to the Bank or
financial institution. In accordance with this policy, purchase orders which are
accompanied by a check will be executed on the second Business Day following
receipt of the order at the previous day's net asset value per share.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the same
financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND(3863). Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks, NAM and RIAs. It is the responsibility of the Banks, NAM and RIAs 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, NAM and RIAs may charge their Customers' accounts
for services. Information relating to such services and charges, if any, is
available from the Banks, NAM and RIAs.
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<PAGE> 30
If a Customer has agreed with a particular Bank, NAM or RIAs to maintain a
minimum balance in his account at the Bank, NAM or RIAs 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 who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to the Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. 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 $10,000
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 $10,000, 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 who purchased shares directly from the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares by telephone may
be modified or terminated at any time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Trust's transfer agent's
system. The Plan allows the shareholder to have a fixed minimum sum of $250
distributed at regular intervals. The shareholder's account must have a minimum
value of $5,000 to be eligible for the Plan. Additional information regarding
this service may be obtained from an investor's financial institution or the
Transfer Agent at 1-800-622-FUND(3863).
CHECKWRITING APPLICABLE TO RETAIL SHARES
Checkwriting is available from certain institutions with respect to the
Funds. No charge for the use of the checkwriting privilege is currently imposed
by the Trust, although a charge may be imposed in the future. With this service,
a shareholder may write a check in an amount of $250 or more. To obtain checks,
a shareholder must com-
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<PAGE> 31
plete the signature card that accompanies the account application. To establish
this checkwriting service after opening an account in one or more of the Funds,
the shareholder must contact the Trust by calling 1-800-622-FUND(3863) or by
sending a written request to the Armada Funds, P.O. Box 8421, Boston,
Massachusetts 02266- 8421 to obtain an application. A signature guarantee may be
required. A shareholder will receive daily dividends declared on the shares to
be redeemed up to the day that a check is presented to the Custodian for
payment. Upon 30 days written notice to shareholders, the checkwriting privilege
may be modified or terminated. An investor cannot close an account in a Fund by
writing a check.
OTHER REDEMPTION INFORMATION
Payment for redemption orders received by the Transfer Agent before 3:00 pm
Eastern time for the Money Market and Government Funds and received before 1:00
pm Eastern time for the Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds
will be wired the same day to the Bank or financial institution placing the
order. Payment for redemption orders received after such times will normally be
wired the next business day. The Trust reserves the right to wire redemption
proceeds within seven days after receiving the redemption orders if, in the
judgement of the advisers, an earlier payment could adversely affect the Trust.
Redemption orders are processed at the net asset value per share next
determined after receipt of the order by the Transfer Agent.
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 $500 due to redemptions where the
shareholder does not increase the amount in the account to at least $500 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 15 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by Federal funds, bank wire, or by
certified or cashier's check. Financial institutions normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and Federal funds.
The Trust may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of the
Trust's responsibilities under the 1940 Act. See "Net Asset Value" in the
Statement of Additional Information.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who own Retail
shares of the Funds (each a "no load Fund") may exchange those Retail shares for
Retail shares of an investment fund offered by the Trust which is sold with a
sales charge (each a "load Fund") subject to payment of the applicable sales
charge. (However, shareholders exchanging Retail shares of a no load Fund which
were received in a previous exchange transaction involving Retail shares of a
load Fund will not be required to pay an additional sales charge upon the
reinvestment of the equivalent amount into the Retail shares of a load Fund.)
Shareholders may also exchange Retail shares of a no load Fund for Retail shares
of another no load Fund at the net asset value per share without payment of a
sales charge. Shareholders contemplating an exchange should carefully review the
prospectus of the Fund into which the exchange is being considered. An Armada
Funds prospectus may be obtained from NatCity Investments, Inc., an Investor's
financial institution or by calling 1-800-622-FUND(3863).
Any Retail shares exchanged must have a value at least equal to the minimum
initial investment required by the particular investment fund into which the
exchange is being made. Investors should make their exchange requests in writing
or by telephone to the financial institutions through which they purchased their
original Retail shares. It
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<PAGE> 32
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 before 3:00 pm Eastern time for the
Money Market and Government Funds and before 1:00 pm Eastern time for the
Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds will be processed as of
the close of business on the day of receipt. Requests received by the Transfer
Agent after the above listed times 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.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified Funds over a specified period of time, an
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this prospectus. Because purchases of
Retail Shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent in connection with the systematic
exchange program. A shareholder may apply for participation in this program
through his financial institution or by calling 1-800-622-FUND (3863).
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act, the Trust pays the following
compensation to the Distributor for services provided and expenses assumed in
providing the Trust advertising, marketing, prospectus printing and other
distribution services : (i) an annual base fee of $1,250,000, plus (ii)
incentive fees related to asset growth. Such compensation is payable monthly and
accrued daily among the Trust's investment funds with respect to which the
Distributor is distributing shares. In the case of each such fund, such
compensation shall not exceed .10% per annum of the fund's average net assets.
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) 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
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<PAGE> 33
those shares than with respect to Institutional shares in the same Fund.
Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Funds on
behalf of customers, providing information periodically to customers showing
their position in Retail shares, and providing sub-transfer agent services or
the information necessary for sub-transfer agent services with respect to Retail
shares beneficially owned by customers. Since financial institutions may charge
their customers fees depending on the type of customer account the Investor has
established, beneficial owners of Retail shares should read this Prospectus in
light of the terms and fees governing their accounts with financial
institutions.
DIVIDENDS AND DISTRIBUTIONS
On each day that the net asset values per share of the Funds are
determined, each Fund declares a dividend from net investment income as of the
close of business on the day of declaration. Net investment income for the Money
Market, Government and Treasury Funds consists of (a) interest accrued and
discount earned (including both original issue and market discount) on the
Fund's assets, (b) less amortization of market premium on such assets, and the
accrued expenses of the Fund. Net investment income of the Tax Exempt and
Pennsylvania Tax Exempt Funds consists of interest accrued, original issue
discount earned, less amortization of any market premium and accrued expenses.
Fund shares begin earning dividends on the day the purchase order is executed
and continue earning dividends through and including the day before the
redemption order for the shares is executed.
Dividends are paid monthly by check, or by wire transfer if requested in
writing by the shareholder to his Bank or financial institution, within five
Business Days after the end of each calendar month or within five Business Days
after a shareholder's complete redemption of his shares in a Fund.
Shareholders of the Funds may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class of any Armada Funds
at the net asset value of such shares on the payment date. Shareholders must
make such election, or any revocation thereof, in writing to their Banks or
financial institutions. The election will become effective with respect to
dividends paid after its receipt.
Under the Services Plan, the amount of each Fund's net investment income
available for distribution to the holders of Retail shares is reduced by the
amount of shareholder servicing fees payable to financial institutions under the
Services Plan.
TAXES
IN GENERAL
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves each Fund of liability for federal income tax to the
extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Since all of each Fund's net investment income is expected to be
derived from earned interest, it is anticipated that no part of any distribution
will be eligible for the dividends received deduction for corporations.
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<PAGE> 34
The Money Market, Government and Treasury Funds intend to distribute
substantially all of their respective investment company taxable income and net
tax-exempt interest income each year. Such dividends will be taxable as ordinary
income to each Fund's shareholders who are not currently exempt from federal
income taxes, whether such income is received in cash or reinvested in
additional shares. (Federal income taxes for distributions to an IRA or to a
qualified retirement plan are deferred under the Code.)
The Tax Exempt and Pennsylvania Tax Exempt Funds intend to distribute
substantially all of their respective net tax-exempt income (such distributions
are known as "exempt-interest dividends") and investment company taxable income
(if any) each taxable year. Exempt-interest dividends may be treated by
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code unless under the circumstances applicable to the
particular shareholder the exclusion would be disallowed. See the Statement of
Additional Information under "Additional Information Concerning Taxes." To the
extent, if any, dividends paid to each Fund's shareholders are derived from
taxable income or from net long-term capital gains, such dividends will not be
exempt from federal income tax and may also be subject to state and local taxes.
The Funds do not intend to earn any investment company taxable income or net
long-term capital gains.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
If the Tax Exempt and Pennsylvania Tax Exempt Funds should hold certain
private activity bonds issued after August 7, 1986, shareholders must include,
as an item of tax preference, the portion of dividends paid by the Tax Exempt
Fund that is attributable to interest on such bonds in their federal alternative
minimum taxable income for purposes of determining liability (if any) for the
alternative minimum tax applicable to individuals and corporations. Corporate
shareholders must also take all exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum tax purposes.
Shareholders receiving Social Security benefits should note that all exempt-
interest dividends will be taken into account in determining the taxability of
such benefits.
PENNSYLVANIA TAXES
Under current Pennsylvania law, shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Pennsylvania Tax
Exempt Fund attributable to interest income from obligations of the Commonwealth
of Pennsylvania or its political subdivisions, the United States, its
territories or certain of its agencies and instrumentalities ("Exempt
Securities"). However, Pennsylvania Personal Income Tax will apply to
distributions from the Pennsylvania Tax Exempt Fund attributable to gain
realized on the disposition of any investment, including Exempt Securities, or
to interest income from investments other than Exempt Securities. Shareholders
also will be subject to the Pennsylvania Personal Income Tax in the unlikely
event that they realize any gain on the disposition of shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of shares in the Fund
that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended to
the extent that the Fund is comprised of Exempt Securities.
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MISCELLANEOUS
Shareholders of the Funds will be advised at least annually as to the
federal income tax and, in the case of the Pennsylvania Tax Exempt Fund,
Pennsylvania income tax consequences, of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes, other than Pennsylvania taxes, which may
differ from the tax consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Funds should consult their tax advisers with specific reference to their own
tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City, National City Columbus and National City Kentucky serve as
investment advisers to the Money Market Fund, Government Fund, Treasury Fund and
Tax Exempt Fund. National City serves as investment adviser to the Pennsylvania
Tax Exempt Fund. The advisers are wholly owned subsidiaries of National City
Corporation. The advisers provide trust and banking services to individuals,
corporations, and institutions both nationally and internationally, including
investment management, estate and trust administration, financial planning,
corporate trust and agency, and personal and corporate banking. The advisers are
member banks of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
On June 30, 1997, the Trust Departments of National City, National City
Columbus and National City Kentucky had approximately $10.7 billion, $1.5
billion and $5.6 billion, respectively, in assets under management, and National
City, National City Columbus and National City Kentucky had approximately $21.5
billion, $11.6 billion and $13.8 billion, respectively, in total trust assets.
The principal offices for each of the investment advisers are as follows:
National City
1900 East Ninth Street
Cleveland, Ohio 44114
National City Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Kentucky
National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with each Fund's investment policies, the advisers have agreed to
manage the Funds, make decisions with respect to and place orders for all
purchases and sales of the Funds' securities, and maintain the Trust's records
relating to such purchases and sales. For the services provided and expenses
assumed pursuant to the Advisory Agreement, the advisers are entitled to receive
an advisory fee, computed daily and payable monthly, at the annual rate of .35%
of the average net assets of the Money Market Fund, .35% of the average net
assets of the Government Fund, .30% of the average net assets of the Treasury
Fund, .35% of the average net assets of the Tax Exempt Fund, and .40% of the
average net assets of the Pennsylvania Tax Exempt Fund. The
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<PAGE> 36
advisers may from time to time waive all or a portion of the advisory fee
payable by one or more of the Funds.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
the Funds' net asset values per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive an administration fee,
accrued daily and paid monthly, computed on a combined basis for the Tax Exempt
and Pennsylvania Tax Exempt Funds and on a combined basis for all taxable money
market funds at an annual rate of .05% of the first $300,000,000 of aggregate
net assets of the Funds, .0325% of the next $300,000,000, .03% of the next
$400,000,000, .025% of the next $500,000,000, .02% of the next $1 billion of
aggregate net assets, and .015% of aggregate net assets in excess of $2.5
billion. PFPC is also entitled to be reimbursed for its out-of-pocket expenses
incurred on behalf of the Trust.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 42 separate classes or
series of shares of beneficial interest ("shares"). Ten of these classes or
series, which represent interests in the Money Market Fund (Class A and Class
A-Special Series 1), Government Fund (Class B and Class B-Special Series 1),
Treasury Fund (Class C and Class C-Special Series 1), Tax Exempt Fund (Class D
and Class D-Special Series 1) and Pennsylvania Tax Exempt Fund (Class Q and
Class Q -- Special Series 1), are described in this Prospectus. Class A, Class
B, Class C, Class D and Class Q shares constitute the Institutional class or
series of shares; and Class A-Special Series 1, Class B- Special Series 1, Class
C-Special Series 1, Class D-Special Series 1 and Class Q-Special Series 1 shares
constitute the Retail class or series of shares. The other Funds of the Trust
are:
Equity Growth Fund
(Class H and Class H-Special Series 1)
Fixed Income Fund
(Class I and Class I-Special Series 1)
Ohio Tax Exempt Fund
(Class K and Class K-Special Series 1)
National Tax Exempt Fund
(Class L and Class L-Special Series 1)
Equity Income Fund
(Class M and Class M-Special Series 1)
Mid Cap Regional Fund
(Class N and Class N-Special Series 1)
Enhanced Income Fund
(Class O and Class O-Special Series 1)
Total Return Advantage Fund
(Class P and Class P-Special Series 1)
Intermediate Government Fund
(Class R and Class R-Special Series 1)
GNMA Fund
(Class S and Class S-Special Series 1)
Pennsylvania Municipal Fund
(Class T and Class T-Special Series 1)
International Equity Fund
(Class U and Class U-Special Series 1)
Equity Index Fund
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<PAGE> 37
(Class V and Class V-Special Series 1)
Core Equity Fund
(Class W and Class W-Special Series 1)
Small Cap Growth Fund
(Class X and Class X-Special Series 1)
Real Return Advantage Fund
(Class Y and Class Y-Special Series 1)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such class or series as are declared in the discretion
of the Trust's Board of Trustees. The Trust's Declaration of Trust authorizes
the Board of Trustees to classify or reclassify any unissued shares into any
number of additional classes of shares and to classify or reclassify any class
of shares into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests of
the holders of a particular class or series of shares. Under the Services Plan,
only the holders of Retail shares in an investment fund are entitled to vote on
matters submitted to a vote of shareholders (if any) concerning the Services
Plan. Voting rights are not cumulative, and accordingly the holders of more than
50% of the aggregate shares of the Trust may elect all of the trustees
irrespective of the vote of the other shareholders.
As stated previously in the text of this document, the Trust is organized
as a trust under the laws of Massachusetts. Shareholders of such a trust may,
under certain circumstances, be held personally liable (as if they were
partners) for the obligations of the trust. The Declaration of Trust of the
Trust provides for indemnification out of the trust property for any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of September 2, 1997, nine bank subsidiaries of National City
Corporation held beneficially or of record approximately 97.24%, 95.30%, 98.04%
and 100.0% of the outstanding Institutional shares of the Money Market,
Government, Treasury and Tax Exempt Funds, respectively, and one bank subsidiary
of National City Corporation held of record approximately 100.0% of the
outstanding Institutional shares of the Pennsylvania Tax Exempt Fund. Neither
National City, National City Columbus, nor National City Kentucky has any
economic interest in such shares which are held solely for the benefit of its
customers, but may be deemed to be a controlling person of the Funds within the
meaning of the 1940 Act by reason of its record ownership of such shares. The
names of beneficial owners and record owners who are controlling shareholders
under the 1940 Act may be found in the Statement of Additional Information.
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<PAGE> 38
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to
P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust
for these services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's advisers bear all expenses in connection
with the performance of their services. Each Fund of the Trust bears its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses relating to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. Each Fund also pays for brokerage fees and
commissions (if any) in connection with the purchase of its portfolio
securities. Under the Services Plan, the Retail shares in the Funds also bear
the expense of shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
30
<PAGE> 39
ARMADA FUNDS
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES Robert D. Neary
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, Inc.
Leigh Carter
Retired President and Chief Operating
Officer,
B.F. Goodrich Company
Director:
Acromed Corporation
Adams Express Company
Kirtland Capital Corp.
Morrison Products
Petroleum & Resources Corp.
John F. Durkott
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
Richard W. Furst, Dean
Professor of Finance and Dean, Carol Martin
Gatton College of Business and Economics,
University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
Gerald L. Gherlein
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
Meridia Health System
WVIZ Educational Television
J. William Pullen
President and Chief Executive Officer,
Whayne Supply Company
Richard B. Tullis
Chairman Emeritus, Harris Corporation
Director:
Hamilton Beach/Proctor-Silex, Inc.
NACCO Materials Handling Group, Inc.
Waste-Quip, Inc.
<PAGE> 40
ARMADA FUNDS LOGO BULK RATE
Oaks, Pennsylvania 19456 U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
AF-811 (9/97)
<PAGE> 41
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1997
MONEY MARKET FUND
GOVERNMENT FUND
TREASURY FUND
TAX EXEMPT FUND
PENNSYLVANIA TAX EXEMPT FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 30, 1997 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at 1-800-622-FUND
(3863) , Oaks, Pennsylvania 19456.
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . 1
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . 16
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . 18
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 27
SHAREHOLDER SERVICES PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
STANDARDIZED YIELD QUOTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
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<PAGE> 43
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes
the Money Market Fund, Government Fund (the "Government Fund"), Treasury Fund
(the "Treasury Fund"), Tax Exempt Fund (the "Tax Exempt Fund"), and
Pennsylvania Tax Exempt Fund (the "Pennsylvania Tax Exempt Fund"). The
information contained in this Statement of Additional Information expands upon
matters discussed in the Prospectus. No investment in shares of a Fund should
be made without first reading the Prospectus.
The Pennsylvania Tax Exempt Fund commenced operations on
August 8, 1994 as a separate investment portfolio (the "Predecessor Fund") of
Inventor Funds, Inc, which was organized as a Maryland corporation. On
September 9, 1996, the Predecessor Fund was reorganized as a new portfolio of
the Trust. Prior to the reorganization, the Predecessor Fund offered and sold
shares of stock that were similar to the Trust's Retail Shares of beneficial
interest.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the advisers' investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Standardized Yield Quotations" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P,
Fitch, Duff, IBCA and Moody's for municipal bonds, short term notes and other
securities which may be held by the Funds.
ELIGIBLE SECURITIES
The Funds may purchase "eligible securities" that present
minimal credit risks as determined by the advisers pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities generally
include: (1) securities that are rated by two or more Rating Agencies (or the
only Rating Agency which has issued a rating) in one of the two highest rating
categories for short term debt securities; (2) securities that have no short
term rating, if the issuer has other outstanding short term obligations that
are comparable in priority and security as determined by the advisers
("Comparable Obligations") and that have been rated in accordance with (1)
above; (3) securities that have no short term rating, but are determined to be
of comparable quality to a security satisfying (1) or (2) above, and the issuer
does not have
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<PAGE> 44
Comparable Obligations rated by a Rating Agency; and (4) obligations that carry
a demand feature that complies with (1), (2) or (3) above, and are
unconditional (i.e., readily exercisable in the event of default) or, if
conditional, either they or the obligations of the issuer of the demand
obligation are (a) rated by two or more Rating Agencies (or the only Rating
Agency which has issued a rating) in one of the two highest categories for long
term debt obligations, or (b) determined by the advisers to be of comparable
quality to securities which are so rated. The Board of Trustees will approve
or ratify any purchases by the Money Market, Government, Treasury, Tax Exempt
and Pennsylvania Tax Exempt Funds of securities that are rated by only one
Rating Agency or that qualify under (3) above as long as required by applicable
regulations or Trust procedures.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Funds may purchase variable rate and floating rate
obligations as described in the Prospectus. The Trust's advisers will consider
the earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such notes and will continuously monitor their financial status
to meet payment on demand. In determining average weighted portfolio maturity,
a variable or floating rate instrument issued or guaranteed by the U.S.
government or an agency or instrumentality thereof will be deemed to have a
maturity equal to the period remaining until the obligation's next interest
rate adjustment. Other variable and floating rate obligations will be deemed
to have a maturity equal to the longer or shorter of the periods remaining to
the next interest rate adjustment or the demand notice period in accordance
with applicable regulations or Trust procedures.
Variable and floating rate obligations held by a Fund may have
maturities of more than 397 days, provided: (a) (i) the Fund is entitled to
payment of principal and accrued interest upon not more than 30 days' notice or
at specified intervals not exceeding one year (upon not more than 30 days'
notice) and (ii) the rate of interest on such instrument is adjusted
automatically at periodic intervals which normally will not exceed 31 days, but
may extend up to one year, or (b) if the obligation is an asset-backed
security, and if permitted under Trust procedures and applicable regulations,
the security has a feature permitting the holder unconditionally to receive
principal and interest within 13 months of making demand.
GUARANTEED INVESTMENT CONTRACTS
As stated in the Prospectus, the Money Market Fund may invest
in GICs issued by insurance companies. Pursuant to such contracts, the Fund
makes cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits to the Fund on a monthly basis
guaranteed interest which is based on an index. The GICs provide that this
guaranteed
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<PAGE> 45
interest will not be less than a certain minimum rate. The insurance company
may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. The Fund will only purchase a GIC when the advisers have determined,
under guidelines established by the Board of Trustees, that the GIC presents
minimal credit risks to the Fund and is of comparable quality to instruments
that are rated high quality by Rating Agencies. The Fund's investments in GICs
will not exceed 10% of the Fund's net assets. In addition, because the Fund
may not receive the principal amount of a GIC from the insurance company on
seven days' notice or less, the GIC is considered an illiquid investment, and,
together with other instruments in the Fund which are not readily marketable,
will not exceed 10% of the Fund's net assets. The term of a GIC will be one
year or less. In determining average weighted portfolio maturity, a GIC will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.
BANK OBLIGATIONS AND COMMERCIAL PAPER
The Pennsylvania Tax Exempt and Money Market Funds may invest
in bank obligations. Bank obligations include bankers' acceptances generally
having a maturity of six months or less and negotiable certificates of deposit.
Bank obligations also include U.S. dollar denominated bankers' acceptances and
certificates of deposit. Investment in bank obligations is limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase. For purposes of the Money Market Fund's
investment policy with respect to bank obligations, the assets of a bank or
savings institution will be deemed to include the assets of its domestic and
foreign branches.
Investments by the Pennsylvania Tax Exempt Fund include
commercial paper and other short term promissory notes issued by corporations,
municipalities and other entities (including variable and floating rate
instruments).
REPURCHASE AGREEMENTS; REVERSE REPURCHASE AGREEMENTS;
LENDING OF PORTFOLIO SECURITIES
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Funds purchase
securities from financial institutions such as banks and broker-dealers which
the Funds' advisers deem creditworthy under guidelines approved by the Board
of Trustees, subject to the seller's agreement to repurchase such securities at
a mutually agreed-upon date and price. The repurchase price generally equals
the price paid 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
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<PAGE> 46
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer
a loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price under the agreement, or to the
extent that the disposition of such securities by the Fund were delayed pending
court action. Although there is no controlling legal precedent confirming that
a Fund would be entitled, as against a claim by such seller or its receiver or
trustee in bankruptcy, to retain the underlying securities, the Board of
Trustees of the Trust believes that, under the regular procedures normally in
effect for custody of a Fund's securities subject to repurchase agreements and
under federal laws, a court of competent jurisdiction would rule in favor of
the Trust if presented with the question. Securities subject to repurchase
agreements will be held by the Trust's 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 are considered to be borrowings
by the Funds under the 1940 Act. Whenever a Fund enters into a reverse
repurchase agreement as described in the Prospectus, it will place in a
segregated custodial account liquid assets at least equal to the repurchase
price marked to market daily (including accrued interest) and will subsequently
monitor the account to ensure such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Portfolio may decline below the price of the securities it is
obligated to repurchase.
With respect to loans by the Government or Treasury Fund of
its portfolio securities as described in the Prospectus, the Fund would
continue to accrue interest on loaned securities and would also earn income on
loans. Any cash collateral received by the Funds in connection with such loans
would be invested in short-term U.S. Government obligations.
GOVERNMENT SECURITIES
Examples of the types of U.S. government obligations that may
be held by the Money Market, Government and Pennsylvania Tax Exempt Funds
include, in addition to U.S. Treasury Bills, the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks and Maritime Administration.
Some of these obligations are supported by the full faith and credit of the
U.S. Treasury, such as
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<PAGE> 47
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 Money Market,
Government and Tax Exempt Funds will invest in the obligations of such agencies
or instrumentalities only when the advisers believe that their credit risk with
respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the advisers) which
invest in high quality, short term debt securities and which determine their
net asset value per share based on the amortized cost or penny-rounding method.
Each Fund currently intends to limit such investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund; and (d) not more than 10% of the outstanding
voting stock of any one investment company will be owned in the aggregate by
the Fund and other investment companies advised by the advisers. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in connection with its own operations.
Investment companies in which a Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders.
MUNICIPAL SECURITIES
As described in the Prospectus, the Tax Exempt and
Pennsylvania Tax Exempt Funds may purchase Municipal Securities . The two
principal classifications of Municipal Securities consist of "general
obligation" and "revenue" issues. The Funds also may invest in "moral
obligation" issues, which are normally issued by special purpose authorities.
Municipal Securities
-5-
<PAGE> 48
include debt obligations issued by governmental entities to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities. Private activity bonds may be purchased if the interest paid is
excludable from federal income tax. Private activity bonds are issued by or on
behalf of states or political subdivisions thereof to finance privately owned
or operated facilities for business and manufacturing, housing, sports, and
pollution control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public
facilities such as airports, mass transit systems, ports, parking and low
income housing. The payment of the principal and interest on private activity
bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and may be secured by a pledge of real and personal
property so financed.
Pennsylvania Municipal Securities which are payable only from
the revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the
particular facility to generate revenues sufficient to pay such interest and
principal, including, among others, laws and regulations which limit the amount
of fees, rates or other charges which may be imposed for use of the facility or
which increase competition among facilities of that type or which limit or
otherwise have the effect of reducing the use of such facilities generally,
thereby reducing the revenues generated by the particular facility.
Pennsylvania Municipal Securities, the payment of interest and principal on
which is insured in whole or in part by a Pennsylvania governmentally created
fund, may be adversely affected by Pennsylvania laws or regulations which
restrict the aggregate proceeds available for payment of principal and interest
in the event of a default on such municipal securities. Similarly,
Pennsylvania Municipal Securities, the payment of interest and principal on
which is secured, in whole or in part, by an interest in real property may be
adversely affected by Pennsylvania laws which limit the availability of
remedies or the scope of remedies available in the event of a default on such
municipal securities. Because of the diverse nature of such laws and
regulations and the impossibility of either predicting in which specific
Pennsylvania Municipal Securities the Pennsylvania Tax Exempt Fund will invest
from time to time or predicting the nature or extent of future changes in
existing laws or regulations or the future enactment or adoption of additional
laws or regulations, it is not presently possible to determine the impact of
such laws and regulations on the securities in which the Pennsylvania Tax
Exempt Fund may invest and, therefore, on the shares of that Fund.
There are, of course, variations in the quality of Municipal
Securities both within a particular classification and between classifications,
and the yields on Municipal Securities
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<PAGE> 49
depend upon a variety of factors, including the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue. The ratings of Rating Agencies represent their opinions as to the
quality of Municipal Securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and Municipal
Securities with the same maturity, interest rate and rating may have different
yields while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by
either the Tax Exempt or Pennsylvania Tax Exempt Fund, an issue of Municipal
Securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Tax Exempt or Pennsylvania Tax Exempt
Funds. The Tax Exempt and Pennsylvania Tax Exempt Funds' adviser(s) will
consider such an event in determining whether they should continue to hold the
obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Tax Exempt and Pennsylvania Tax Exempt Funds will
depend upon the ability of the issuers to meet their obligations. An issuer's
obligations under its Municipal Securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. The
power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Securities may be materially
adversely affected by litigation or other conditions.
Certain Municipal Securities held by the Tax Exempt or
Pennsylvania Tax Exempt Fund may be insured at the time of issuance as to the
timely payment of principal and interest. The insurance policies will usually
be obtained by the issuer of the Municipal Bond at the time of its original
issuance. In the event that the issuer defaults on interest or principal
payments, the insurer of the bond is required to make payment to the
bondholders upon proper notification. There is, however, no guarantee that the
insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors. The Tax Exempt and Pennsylvania Tax Exempt Funds may, from time
to time, invest more than 25% (subject to diversification requirements for
unconditional puts) of their respective assets in Municipal Securities covered
by insurance policies.
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<PAGE> 50
Municipal notes in which the Tax Exempt and Pennsylvania Tax
Exempt Funds may invest include, but are not limited to, general obligation
notes, tax anticipation notes (notes sold to finance working capital needs of
the issuer in anticipation of receiving taxes on a future date), revenue
anticipation notes (notes sold to provide needed cash prior to receipt of
expected non-tax revenues from a specific source), bond anticipation notes,
certificates of indebtedness, demand notes and construction loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 or SP-2 by S&P, F-2 by Fitch or
Prime-2, MIG-2 or VMIG-2 by Moody's at the time of investment or which are of
equivalent quality as determined by the advisers. Investments in floating rate
instruments will normally involve industrial development or revenue bonds which
provide that the investing Fund can demand payment of the obligation at all
times or at stipulated dates on short notice (not to exceed 30 days) at par
plus accrued interest. A Fund must use the shorter of the period required
before it is entitled to prepayment under such obligations or the period
remaining until the next interest rate adjustment date for purposes of
determining the maturity. Such obligations are frequently secured by letters
of credit or other credit support arrangements provided by banks. The quality
of the underlying credit or of the bank, as the case may be, must, in the
opinion of the Fund's adviser(s) be equivalent to the commercial paper ratings
stated above. The adviser(s) will monitor the earning power, cash flow and
liquidity ratios of the issuers of such instruments and the ability of an
issuer of a demand instrument to pay principal and interest on demand. Other
types of tax-exempt instruments may also be purchased as long as they are of a
quality equivalent to the bond or commercial paper ratings stated above.
STAND-BY COMMITMENTS
The Tax Exempt and Pennsylvania Tax Exempt Funds may acquire
stand-by commitments (also known as put options) with respect to Municipal
Securities held in their portfolios. The Tax Exempt and Pennsylvania Tax
Exempt Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Tax Exempt and Pennsylvania Tax Exempt Funds may
pay for a stand-by commitment either separately in cash or by paying a higher
price for portfolio securities which are acquired subject to the commitment
(thus reducing the yield to maturity otherwise available for the same
securities). The Tax Exempt and Pennsylvania Tax Exempt Funds will not acquire
stand-by commitments unless immediately after the acquisition, not more than 5%
of their respective total assets will be invested in instruments subject to
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<PAGE> 51
a demand feature, or in stand-by commitments, with the same institution.
The Tax Exempt and Pennsylvania Tax Exempt Funds' right to
exercise stand-by commitments will be unconditional and unqualified. A
stand-by commitment will be transferable only with the underlying Municipal
Securities which may be sold to a third party at any time. Until a Fund
exercises its stand-by commitment, it owns the securities in its portfolio
which are subject to the commitment.
The amount payable to the Tax Exempt or Pennsylvania Tax
Exempt Fund upon its exercise of a stand-by commitment will normally be (i) the
Fund's acquisition cost of the Municipal Securities (excluding any accrued
interest which the Fund paid on its acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Under
normal market conditions, in determining net asset value the Tax Exempt and
Pennsylvania Tax Exempt Funds value the underlying Municipal Securities on an
amortized cost basis. Accordingly, the amount payable by a dealer upon
exercise of a stand-by commitment will normally be substantially the same as
the portfolio value of the underlying Municipal Securities.
The Tax Exempt and Pennsylvania Tax Exempt Funds intend to
enter into stand-by commitments only with dealers, banks and broker-dealers
which, in the adviser(s)' opinion, present minimal credit risks. The Funds'
reliance upon the credit of these dealers, banks and broker-dealers will be
secured by the value of the underlying Municipal Securities subject to the
commitment. Thus, the risk of loss to the Tax Exempt and Pennsylvania Tax
Exempt Funds in connection with a stand-by commitment will not be qualitatively
different from the risk of loss faced by a person that is holding securities
pending settlement after having agreed to sell the securities in the ordinary
course of business.
WHEN-ISSUED SECURITIES
The Tax Exempt and Pennsylvania Tax Exempt Funds may purchase
Municipal 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 the Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitment, marked to market daily. It is likely that a Fund's net assets will
fluctuate to a greater
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degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Funds will set aside
cash or liquid assets to satisfy the Funds' purchase commitments in the manner
described, their liquidity and ability to manage their portfolios might be
affected in the event the Funds' commitments to purchase when-issued securities
ever exceeded 25% of the value of their respective total assets.
When the Funds engage in when-issued transactions, they rely
on the seller to consummate the trade. Failure of the seller to do so may
result in a Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of
securities, or maintain a short position, except, in the case of the
Pennsylvania Tax Exempt Fund, to obtain short-term credits as necessary for the
clearance of security transactions in accordance with its investment objective.
2. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities.
3. Purchase or sell real estate, except that each Fund
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein. The Pennsylvania Tax Exempt Fund will not purchase or sell real
estate limited partnership interests.
4. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs,
except, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell financial commodity
contracts or invest in real estate.
5. Write or purchase put options except stand-by
commitments, call options, straddles, spreads, or any combination
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thereof. This fundamental limitation does not apply to the Pennsylvania Tax
Exempt Fund.
6. Invest in any issuer for the purpose of exercising
control or management.
7. Purchase or retain securities of any issuer if the
officers or trustees of the Trust or the officers or directors of its
investment advisers owning beneficially more than one-half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities. This fundamental limitation does not apply to the Pennsylvania Tax
Exempt Fund.
In addition, the Tax Exempt Fund may not invest in private
activity bonds where the payment of principal and interest is the
responsibility of a company (including its predecessors) with less than three
years of continuous operation and may not purchase common stock or voting
securities, except it may purchase securities of other investment companies
which seek to maintain a constant net asset value per share and which are
permitted themselves to invest only in securities which may be acquired by the
Fund.
In addition, the Pennsylvania Tax Exempt Fund may not :
1. 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.
2. Acquire more than 10% of the voting securities of any
one issuer, provided that this limitation shall apply only as to 75% of the
Fund's net assets.
3. Purchase securities of other investment companies,
except as permitted by the 1940 Act and the rules and regulations thereunder.
4. Issue senior securities (as defined in the 1940 Act),
except in connection with permitted borrowings as described above or as
permitted by rule, regulation or order of the SEC.
* * *
The Trust intends to treat unconditional bank letters or lines
of credit, guarantees or commitments to lend as separate securities for
purposes of concentration. Guarantees will only be treated as separate
securities for diversification purposes to the extent required by Rule 5b-2.
Letters or lines of credit and commitments to lend will not be treated as
separate securities with
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<PAGE> 54
regard to diversification as the Trust does not consider these latter
instruments to be securities.
In addition, the Funds may not purchase common stocks, or
voting securities or state, municipal, or private activity bonds, except each
Fund may purchase securities of other investment companies which seek to
maintain a constant net asset value per share and which are permitted
themselves to invest only in securities which may be acquired by the Fund.
The following limitations, which apply to the Pennsylvania Tax
Exempt Fund, are considered non-fundamental and therefore may be changed
without a shareholder vote. The Fund may not purchase puts, calls, options or
combinations thereof, except that the Fund may purchase puts as described in
its Prospectus.
The foregoing percentages will apply at the time of purchase
of a security.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA BONDS
Potential shareholders should consider the fact that the
Pennsylvania Tax Exempt Fund's portfolio consists primarily of securities
issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize that such Fund's performance
is closely tied to general economic conditions within the Commonwealth as a
whole and to economic conditions within particular industries and geographic
areas located within the Commonwealth.
Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending deceases have resulted in surpluses the last
four years; as of June 30, 1996, the General Fund had a surplus of $635.2
million.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and livestock
products, but substantial economic activity in agribusiness and food-related
industries. Service industries currently employ the greatest share of
non-agricultural workers, followed by the categories of trade and
manufacturing. Future economic difficulties in any of these industries could
have an adverse impact on the finances of the Commonwealth or its
municipalities, and could adversely affect the market value of the Bonds in the
Pennsylvania Trust or the ability of the respective obligors to make payments
of interest and principal due on such Bonds.
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Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU and the parties are proceeding with discovery; (ii) in 1987, the Supreme
Court of Pennsylvania held the statutory scheme for country funding of the
judicial system to be in conflict with the constitution of the Commonwealth,
but it stayed judgment pending enactment by the legislature of funding
consistent with the opinion, and the legislature has yet to consider
legislation implementing the judgment. In 1992, a new action in mandamus was
filed seeking to compel the Commonwealth to comply with the original decision.
The Court issued a writ in mandamus and appointed a special master in 1996 to
submit a plan for implementation, which it intended to require by January 1,
1998. In January 1997, the Court established a committee, consisting of the
special master and representatives of the Executive and Legislative branches,
to develop an implementation plan; (iii) litigation was filed in both state and
federal court by an association of rural and small schools and several
individual school districts and parents challenging the constitutionality of
the Commonwealth's system for funding local school districts -- the federal
case has been stayed pending the resolution of the state case; a trial in the
state case commenced in January 1997 and has recessed; no briefing schedule or
date for oral argument has yet been set; (iv) Envirotest/Synterra Partners
("Envirotest") filed suit against the Commonwealth asserting that it sustained
damages in excess of $350 million, as a result of investments it made in
reliance on a contract to conduct emissions testing before the emission testing
program was suspended. Envirotest entered into a Standstill Agreement with the
Commonwealth pursuant to which the parties will attempt to resolve Envirotest
will receive $145 million, with interest at 6 percent per annum; and (v) in
1995, the Commonwealth, the Governor of Pennsylvania, the City of Philadelphia
and the Mayor of Philadelphia were joined as additional respondents in an
enforcement action commenced in Commonwealth Court in 1973 by the Pennsylvania
Human Relations Commission against the School District of Philadelphia pursuant
to the Pennsylvania Human Relations Act. The Commonwealth and the City were
joined to determine their liability, if any, to pay additional costs necessary
to remedy segregation-related conditions found to exist in Philadelphia public
schools. In January 1997, the Pennsylvania Supreme Court ordered the parties
to brief certain issues, but no decision by the Supreme Court has been issued.
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<PAGE> 56
A disaster emergency was declared by the Governor and a
federal major disaster declaration was made by the President of the United
States for certain counties in the Commonwealth for a blizzard and subsequent
flooding in January 1996. The General Assembly authorized $123 million to
provide for the Commonwealth's share of the required match for federal public
assistance and disaster mitigation funds.
Although there can be no assurance that such conditions will
continue, the Commonwealth's general obligation bonds are currently rated AA-
by S&P and A1 by Moody's and Philadelphia's and Pittsburgh's general obligation
bonds are currently rated BBB- and BBB+, respectively, by S&P and Baa and Baa1,
respectively, by Moody's.
The City of Philadelphia (the "City") experienced a series of
General Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term
solution for its economic difficulties. The audited balance of the City's
General Fund as of June 30, 1996 was a surplus of $118.5 million.
In recent years, an authority of the Commonwealth, the
Pennsylvania Intergovernmental Cooperation Authority ("PICA"), has issued
approximately $1.76 billion of Special Revenue Bonds on behalf of the City to
cover budget shortfalls, to eliminate projected deficits and to fund capital
spending. As one of the conditions of issuing bonds on behalf of the City,
PICA exercises oversight of the City's finances. The City is currently
operating under a five year plan approved by PICA in 1995. PICA's power to
issue further bonds to finance capital projects expired on December 31, 1994.
PICA's authority to issue bonds to finance cash flow deficits expired on
December 31, 1996, but its authority to refund existing debt will not expire.
NET ASSET VALUE
The Trust uses the amortized cost method to value shares in
the Funds. Pursuant to this method, a security is valued at its cost initially
and thereafter a constant amortization to maturity of any discount or premium
is assumed, regardless of the impact of fluctuating interest rates on the
market value of the security. Where it is not appropriate to value a security
by the amortized cost method, the security will be valued either by market
quotations, or by fair value as determined by the Board of Trustees. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
each respective Fund would receive if it sold the security. The value of the
portfolio securities held by each respective Fund will vary inversely to
changes in prevailing interest rates. Thus, if
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<PAGE> 57
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its purchase cost. In
either instance, if the security is held to maturity, no gain or loss will be
realized.
Each Fund invests only in high-quality instruments and
maintains a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that a
Fund will neither purchase any security deemed to have a remaining maturity of
more than 397 calendar days within the meaning of the 1940 Act nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Trust's
Board of Trustees has established procedures pursuant to rules promulgated by
the SEC, that are intended to help stabilize the net asset value per share of
each Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Board of Trustees, at such intervals as it deems
appropriate, to determine the extent, if any, to which the net asset value per
share of each Fund calculated by using available market quotations deviates
from $1.00 per share. In the event such deviation exceeds one-half of one
percent, the Board of Trustees will promptly consider what action, if any,
should be initiated. If the Board of Trustees believes that the extent of any
deviation from a Fund's $1.00 amortized cost price per share may result in
material dilution or other unfair results to investors or existing
shareholders, it has agreed to take such steps as it considers appropriate to
eliminate or reduce, to the extent reasonably practicable, any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity; shortening the average portfolio maturity; withholding or reducing
dividends; redeeming shares in kind; reducing the number of a Fund's
outstanding shares without monetary consideration; or utilizing a net asset
value per share determined by using available market quotations.
DIVIDENDS
As stated, the Trust uses its best efforts to maintain the net
asset value per share of the Funds at $1.00. As a result of a significant
expense or realized or unrealized loss incurred by the Funds, it is possible
that a Fund's net asset value per share may fall below $1.00. Should the Trust
incur or anticipate any unusual or unexpected significant expense or loss which
would affect disproportionately the income of a Fund for a particular period,
the Board of Trustees would at that time consider whether to adhere to the
present dividend policy with respect to the Funds or to revise it in order to
ameliorate to the extent possible the disproportionate effect of such expense
or loss on the income of the Fund experiencing such effect. Such expense or
loss may result
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in a shareholder's receiving no dividends for the period in which he holds
shares of a Fund and/or in his receiving upon redemption a price per share
lower than the price he paid.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co., formerly SEI Financial Services Company (the
"Distributor"), which has agreed to use appropriate efforts to solicit all
purchase orders. The issuance of shares is recorded on the books of the Trust.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to an investor's financial institution
at its principal office. Such requests must be signed by each shareholder,
with each signature guaranteed by a U.S. commercial bank or trust company or by
a member firm of a national securities exchange. Guarantees must be signed by
an authorized signatory and "Signature Guaranteed" must appear with the
signature. An investor's financial institution may request further
documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from
foreign investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
EXCHANGE PRIVILEGE
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived)
to reduce the sales load applicable to an exchange, as may be provided in a
Fund Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
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<PAGE> 59
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 42 classes
of shares. Ten of these classes, which represent interests in the Money Market
Fund (Class A and Class A -Special Series 1), Government Fund (Class B and
Class B - Special Series 1), Treasury Fund (Class C and Class C - Special
Series 1), Tax Exempt Fund (Class D and Class D - Special Series 1) and
Pennsylvania Tax Exempt Fund (Class Q and Class Q - Special Series 1) are
described in this Statement of Additional Information and the related
Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in
the matter are substantially identical or the matter does not affect any
interest of the fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to an investment fund only if approved by a majority of
the outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting without regard to a
particular fund. In addition, shareholders of each class in a particular
investment fund have equal voting rights except that only Retail
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shares of an investment fund will be entitled to vote on matters submitted to a
vote of shareholders (if any) relating to shareholder servicing fees that are
allocable to such shares.
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Trust or its shareholders or possible legislative changes,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisers with specific reference to their own tax situation.
GENERAL
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax
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treatment as a regulated investment company under the Code, each Fund must
satisfy, in addition to the distribution requirement described in the
Prospectus and above, certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or
foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by a Fund from a partnership or trust is
treated as derived with respect to the Fund's business of investing in stock,
securities or currencies only to the extent that such income is attributable to
items of income which would have been qualifying income if realized by the Fund
in the same manner as by the partnership or trust.
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
(the "short-short test"): (1) stock and securities (as defined in Section
2(a)(36) of the 1940 Act); (2) options, futures and forward contracts other
than those on foreign currencies; and (3) foreign currencies (and options,
futures and forward contracts on foreign currencies) that are not directly
related to the Fund's principal business of investing in stock and securities
(and options and futures with respect to stocks and securities). Interest
(including original issue discount and, with respect to taxable debt securities
and non-taxable debt securities acquired after April 30, 1993, accrued market
discount) received by a Fund upon maturity or disposition of a security held
for less than three months will not be treated as gross income derived from the
sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized
market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose. Effective for taxable years
beginning after August 4, 1997, the recently enacted Taxpayer Relief Act of
1997 repeals the short-short test.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital
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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 Securities
with respect to the Tax Exempt and Pennsylvania Tax Exempt Funds) would be
taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits, and would be eligible for
the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
Depending upon the extent of a Fund's activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, such Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of a Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Under state or local law,
distributions of net investment income may be taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
TAX EXEMPT FUND AND PENNSYLVANIA TAX EXEMPT FUND
As described above and in the Prospectus, the Tax Exempt and
Pennsylvania Tax Exempt Funds are designed to provide investors with tax-exempt
interest income. The Funds are not intended to constitute a balanced
investment program and are not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Funds would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and IRAs since such plans and accounts
are generally tax-exempt and, therefore, would not gain
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any additional benefit from the Funds' dividends being tax-exempt.
The policy of the Tax Exempt and Pennsylvania Tax Exempt Funds
is to pay each year as federal exempt-interest dividends substantially all the
Funds' Municipal Securities interest income net of certain deductions. In
order for the Funds to pay federal exempt- interest dividends with respect to
any taxable year, at the close of each taxable quarter at least 50% of the
aggregate value of their respective portfolios must consist of tax-exempt
obligations. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the
aggregate amount of dividends so designated by the Funds cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Funds during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of
total dividends paid by the Funds with respect to any taxable year which
qualifies as federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the Funds with respect to such year.
The Tax Exempt and Pennsylvania Tax Exempt Funds do not expect
to realize long-term capital gains and, therefore, do not expect to distribute
any capital gain dividends.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any
of the tax-exempt obligations held by the Tax Exempt and Pennsylvania Tax
Exempt Funds. A "substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. A "related
person" includes certain related natural persons, affiliated corporations,
partners and partnerships, and S corporations and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase
or carry Tax Exempt and Pennsylvania Tax Exempt Fund shares is not deductible
for federal income tax purposes if the Funds distribute exempt-interest
dividends during the shareholder's taxable year. In addition, if a shareholder
holds Fund shares for six months or less, any loss on the sale or exchange of
those
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shares will be disallowed to the extent of the amount of exempt-interest
dividends received with respect to the shares. The Treasury Department,
however, is authorized to issue regulations reducing the six months holding
requirement to a period of not less than the greater of 31 days or the period
between regular dividend distributions where the investment company regularly
distributes at least 90% of its net tax- exempt interest. No such regulations
had been issued as of the date of this Statement of Additional Information.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board and Retired Co-Chairman of Ernst & Young,
32980 Creekside Drive Trustee April 1984-September 1993; Director,
Pepper Pike, OH 44124 Cold Metal Products, Inc., since
Age 64 March 1994; Director, Zurn
Industries, Inc. (building products
and construction services), since
June 1995.
Leigh Carter* Trustee Retired President and Chief Operating
13901 Shaker Blvd., #6B Officer, B.F. Goodrich Company,
Cleveland, OH 44120 August 1986 to September 1990;
Age 72 Director, Adams Express Company
(closed-end investment company),
since April 1982; Director, Acromed
Corporation (producer of spinal
implants), since June 1992; Director,
Petroleum & Resources Corp., since
April 1987; Director, Morrison
Products (manufacturer of blower fans
and air moving equipment), since
April 1983; Director, Kirtland
Capital Corp. (privately funded
investment group), since January
1992.
John F. Durkott Trustee President and Chief Operating
8600 Allisonville Road Officer, Kittle's Home Furnishings
Indianapolis, IN 46250 Center, Inc., since January 1982;
Age 53 partner, Kittles Bloomington Property
Company, since January 1981; partner,
KK&D (Affiliated Real Estate
Companies of Kittle's Home
Furnishings Center), since January
1989.
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol
600 Autumn Lane Martin GattonCollege of Business and
Lexington, KY 40502 Economics, University of Kentucky,
Age 59 since 1981; Director, The Seed
Corporation (restaurant group), since
1990; Director, Foam Design, Inc.
(manufacturer of industrial and
commercial foam products), since
1993.
Gerald L. Gherlein Trustee Executive Vice-President and General
3679 Greenwood Drive Counsel, Eaton Corporation, since
Pepper Pike, OH 44124 1991 (global manufacturing); Trustee,
Age 59 Meridia Health System (four hospital
health system); Trustee, WVIZ
Educational Television (public
television).
J. William Pullen Trustee President and Chief Executive
Whayne Supply Company Officer, Whayne Supply Co. (engine
1400 Cecil Avenue and heavy equipment distribution),
P.O. Box 35900 since 1986; President and Chief
Louisville, KY 40232-5900 Executive Officer, American
Age 58 Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
Richard B. Tullis Trustee Chairman Emeritus, Harris Corporation
5150 Three Village Drive (electronic communication and
Lyndhurst, Ohio 44124 information processing equipment),
Age 84 since October 1985; Director, NACCO
Materials Handling Group, Inc.
(manufacturer of industrial fork lift
trucks), since 1984; Director,
Hamilton Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990; Director,
Waste-Quip, Inc. (waste handling
equipment), since 1989.
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
---------------- -------------- ----------------------
<S> <C> <C>
Herbert R. Martens, Jr. President Executive Vice President, National
c/o NatCity Investments City Corporation (bank holding
1965 E. Sixth Street company), since July 1997; Chairman
Cleveland, OH 44114 and Chief Executive Officer, NatCity
Age 45 Investments, Inc., since July 1995
(investment banking); President and
Chief Executive Officer,
Raffensperger, Hughes & Co., from
1993 until 1995 (broker-dealer);
President, Reserve Capital Group,
from 1990 until 1993.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath LLP,
Bank Building Philadelphia, Pennsylvania
1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and Director of
PFPC Inc. Investment Accounting, PFPC Inc.,
400 Bellevue Parkway since 1992; prior thereto, Senior
Wilmington, DE 19809 Auditor, Price Waterhouse, LLP
Age 31
</TABLE>
- ------------------
* Mr. Carter is considered by the Trust to be an "interested person" of the
Trust as defined in the 1940 Act.
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as Administrator 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,
1997, the Trust's trustees and officers as a group received aggregate fees of
$125,000. The trustees and officers of the Trust own less than 1% of the
shares of the Trust.
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<PAGE> 68
The following table summarizes the compensation for each of
the trustees of the Trust for the fiscal year ended May 31, 1997:
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<PAGE> 69
<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>
Robert D. Neary, Trustee, $18,750 $0 $0 $18,750
Chairman
Thomas R. Benua, Jr., $17,500 $0 $0 $17,500
Trustee*
Leigh Carter, Trustee $17,500 $0 $0 $17,500
John F. Durkott, Trustee $17,500 $0 $0 $17,500
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
J. William Pullen, Trustee $17,500 $0 $0 $17,500
Richard B. Tullis, Trustee $18,750 $0 $0 $18,750
</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
- ----------------------
* Mr. Benua resigned as trustee as of July 17,1997.
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<PAGE> 70
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
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Money Market, Government, Treasury
and Tax Exempt Funds and National City serves as investment adviser to the
Pennsylvania Tax Exempt Fund, as described in the Prospectus. The advisers
are affiliates of National City Corporation, a bank holding company with $52
billion in assets, and headquarters in Cleveland, Ohio and nearly 900 branch
offices in four states. Through its subsidiaries, National City Corporation
has been managing investments for individuals, pension and profit-sharing plans
and other institutional investors for over 75 years and currently manages over
$41 billion in assets. From time to time, the advisers may voluntarily waive
fees or reimburse the Trust for expenses.
Pursuant to the Advisory Agreement, the Trust incurred
advisory fees in the following amounts for the fiscal years ended May 31, 1997,
1996 and 1995: (i) $5,067,456 (after waivers of $2,026,982), $3,686,919 (after
waivers of $1,473,398) and $2,827,383 (after waivers of $1,128,026),
respectively, for the Money Market Fund; (ii) $2,415,282 (after waivers of
$966,112), $1,654,730 (after waivers of $661,292) and $1,766,159 (after waivers
of $706,463), respectively, for the Government Fund, and (iii) $573,529 (after
waivers of $764,704), $444,402 (after waivers of $592,531) and $307,159 (after
waivers of $410,198), respectively, for the Tax Exempt Fund. Advisory fees in
the amounts of $794,834 (after waivers of $158,966), $527,698 (after waivers of
$105,510) and $313,967 (after waivers of $62,648) were
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<PAGE> 71
incurred for the fiscal year ended May 31, 1997, 1996 and for the period from
June 16, 1994 (commencement of operations) through May 31, 1995 with respect to
the Treasury Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, National City, the adviser of the
Pennsylvania Tax Exempt Fund, earned advisory fees of $224,379 and waived fees
in the amount of $140,237 with respect to that Fund. For the period from June
1, 1996 until September 9, 1996, for the one-month period ended May 31, 1996,
for the fiscal year ended April 30, 1996 and for the period from August 8, 1994
(commencement of operations) through April 30, 1995, Integra Trust Company
("Integra"), the investment adviser to the Predecessor Fund, earned advisory
fees of $85,768, $26,907, $310,912 and $76,582, respectively, and Integra
waived fees in the amount of $51,068, $9,868, $110,272 and $84,075,
respectively.
Each Advisory Agreement provides that the advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Trust in connection with the performance of the Advisory Agreement,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the advisers in the
performance of their duties or from reckless disregard by them of their duties
and obligations thereunder. In addition, the advisers have undertaken in their
Advisory Agreements to maintain their policy and practice of conducting their
Trust Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Money Market,
Government, Treasury and Tax Exempt Funds was approved by the shareholders of
each Fund on September 26, 1990. The Advisory Agreement relating to the
Pennsylvania Tax Exempt Fund was approved by the sole shareholder prior to that
Fund's commencement of operations. Unless sooner terminated, the Advisory
Agreement will continue in effect with respect to a particular Fund until
September 30, 1998, and from year to year thereafter, subject to annual
approval by the Trust's Board of Trustees, or by a vote of a majority of the
outstanding shares of such Fund (as defined in the Funds' Prospectus) and a
majority of the trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any party by votes cast in person at a
meeting called for such purpose. Each Advisory Agreement may be terminated by
the Trust or the advisers on 60 days written notice, and 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
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<PAGE> 72
regulations, the advisers will reimburse the Trust for any such excess with
respect to the Fund to the extent described in any written undertaking provided
by the advisers to such state. To the Trust's knowledge, as of the date of
this Statement of Additional Information, the most restrictive expense
limitation applicable to the Trust provides that annual expenses (as defined by
statute) may not exceed 2.5% of the first $30 million, 2% of the next $70
million and 1.5% of the remaining average net assets of a particular Fund.
Such amount, if any, will be estimated, reconciled and paid on a monthly basis.
The fees Banks may charge to Customers for services provided in connection with
their investments in the Trust are not covered by the state securities expense
limitations described above.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit
such a bank holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company. The advisers
believe that they may perform the services contemplated by their Advisory
Agreements with the Trust as described in such agreements and this Prospectus
without violation of applicable banking laws or regulations. However, there
are no controlling judicial precedents and future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well
as future interpretations of present and future requirements, that could
prevent the advisers 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
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<PAGE> 73
advisers, or an affiliate of the advisers, would consider the possibility of
offering to perform additional services for the Trust. Legislation modifying
such restrictions has been proposed in past Sessions of Congress. It is not
possible, of course, to predict whether or in what form such legislation might
be enacted or the terms upon which the advisers, or such an affiliate, might
offer to provide such services.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC
for the fiscal years ended May 31, 1997, 1996 and 1995: (i) $502,464,
$421,493, $322,722, respectively, for the Money Market Fund; (ii) $239,708,
$187,373 and $210,983, respectively, for the Government Fund; and (iii)
$170,489, $145,303 and $102,395, respectively, for the Tax Exempt Fund.
Administration fees in the amounts of $79,005, $37,703 and $59,255 were
incurred for the fiscal years ended May 31, 1997, 1996 and for the period from
June 16, 1994 (commencement of operations) through May 31, 1995 with respect to
the Treasury Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, PFPC earned administration fees of
$24,531 with respect to the Pennsylvania Tax Exempt Fund. For the period from
June 1, 1996 until September 9, 1996, for the one-month period ended May 31,
1996, for the fiscal year ended April 30, 1996 and for the period from August
8, 1994 (commencement of operations) through April 30, 1995, SEI Financial
Management Corporation, a wholly-owned subsidiary of SEI Corporation, served as
administrator to the Predecessor Fund and earned the following fees: $28,589;
$8,969 ; $103,634; and $53,552, respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENTS
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by
Rule 12b-1, the Trust's 12b-1 Plan and related agreement have been approved,
and are subject to annual approval by, a majority of the Trust's Board of
Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of
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<PAGE> 74
the Plan or any agreement related to the Plan, by vote cast in person at a
meeting called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the
Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial
interest in the Plan or related agreement. The Plan and related agreement may
be terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by a vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has
been committed to the discretion of such disinterested trustees as required by
the Rule.
The Trust's Plan provides that each fund will compensate 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. The Plan provides that the
Trust will pay the Distributor an annual base fee of $1,250,000 plus incentive
fees based upon asset growth payable monthly and accrued daily by all of the
Trust's investment funds with respect to which the Distributor is distributing
shares.
The Plan has been approved by the Board of Trustees 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.
For the period from March 10, 1997 to May 31, 1997, the Trust paid the
Distributor $121,188 with respect to the Money Market Fund, $51,393 with
respect to the Government Fund,
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<PAGE> 75
$14,929 with respect to the Treasury Fund, and $23,431 with respect to the Tax
Exempt Fund. Of the aggregate amounts paid to the Distributor by the Trust
with respect to the Money Market Fund, $36,356 was attributable to the
distribution services and $84,832 was attributable to marketing/consultation.
Of the aggregate amount paid to the Distributor by the Trust with respect to the
Government Fund, $15,418 was attributable to distribution services and $35,975
was attributable to marketing/consultation. Of the aggregate amounts
paid to the Distributor by the Trust with respect to the Treasury Fund,
$4,479 was attributable to distribution services and $10,450 was attributable
to marketing/consultation. Of the aggregate amounts paid to the Distributor by
the Trust with respect to the Tax-Exempt Fund, $7,029 was attributable to
distribution services and $16,401.49 was attributable to
marketing/consultation. Distribution services include broker/dealer and
investor support, voice response development, wholesaling services, legal
review and NASD filings and transfer agency management. Marketing/Consultation
includes planning and development, market and industry research and analysis
and marketing strategy and planning.
For the period from June 1, 1996 through March 7, 1997, the
Trust paid 440 Financial Distributors, Inc. ("440 Financial") $545,381 with
respect to the Money Market Fund, $265,479 with respect to the Government Fund,
$97,651 with respect to the Treasury Fund, and $103,376 with respect to the Tax
Exempt Fund.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $4,325 with respect to the Pennsylvania Tax-Exempt Fund.
Of the aggregate amounts paid to the Distributor by the Trust with respect to
the Pennsylvania Tax-Exempt Fund, $1,298 was attributable to distribution
services and $3,028 was attributable to marketing/consultation. Distribution
services include broker/dealer and investor support, voice response
development, wholesaling services, legal review and NASD filings and transfer
agency management. Marketing/Consultation includes planning and development,
market and industry research and analysis and marketing strategy and planning.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) through March 7, 1997, the Trust paid 440 Financial
$11,576 after waivers of $______ with respect to the Pennsylvania Tax-Exempt
Fund.
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<PAGE> 76
Class A Shares of the Predecessor Fund were subject to a Plan
adopted pursuant to rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor, SEI
Investments Distribution Co., of the Predecessor Fund's distribution expenses,
including (1) the cost of prospectuses, reports to shareholders, sales
literature and other materials for potential investors; (2) advertising; (3)
expenses incurred in connection with the promotion and sale of Inventor's
shares including the distributor's expenses for travel, communication,
compensation and benefits for sales personnel; and (4) any other expenses
reasonably incurred in connection with the distribution and marketing of Class
A shares subject to approval by a majority of disinterested directors of
Inventor. For the period from June 1, 1996 until September 9, 1996, the
distributor of the Predecessor Fund received $0 from the fund (after waivers
of $47,649).
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City
Bank has agreed to: (i) maintain a separate account or accounts in the name of
each Fund; (ii) hold and disburse portfolio securities on account of each Fund;
(iii) collect and make disbursements of money on behalf of each Fund; (iv)
collect and receive all income and other payments and distributions on account
of each Fund's portfolio securities; (v) respond to correspondence by security
brokers and others relating to its duties; and (vi) make periodic reports to
the Board of Trustees concerning the Funds' operations. National City Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Funds, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services Agreement
and shall hold the Funds harmless from the acts and omissions of any bank or
trust company serving as sub-custodian. The Funds reimburse National City Bank
for its direct and indirect costs and expenses incurred in rendering custodial
services, except that the costs and expenses borne by each Fund in any year may
not exceed $.225 for each $1,000 of average gross assets of such Fund.
State Street Bank and Trust Company (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
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accounts; and (v) make periodic reports to the Board of Trustees concerning the
Funds' operations. The Transfer Agent sends each shareholder of record a
monthly statement showing the total number of shares owned as of the last
business day of the month (as well as the dividends paid during the current
month and year), and provides each shareholder of record with a daily
transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Services Plan with respect to Retail shares in each of the Funds. Pursuant to
the Services Plan, the Trust may enter into agreements with financial
institutions pertaining to the provision of administrative services to their
customers who are the beneficial owners of Retail shares in consideration for
the payment of up to .10% (on an annualized basis) of the net asset value of
such shares. Such services may include: (i) aggregating and processing
purchase and redemption requests from customers; (ii) providing customers with
a service that invests the assets of their accounts in Retail shares; (iii)
processing dividend payments from the Fund; (iv) providing information
periodically to customers showing their position in Retail shares; (v)
arranging for bank wires; (vi) responding to customer inquiries relating to the
services performed with respect to Retail shares beneficially owned by
customers; (vii) forwarding shareholder communications; and (viii) other
similar services requested by the Trust. Agreements between the Trust and
financial institutions will be terminable at any time by the Trust without
penalty.
PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreement relating to the Money
Market, Government, Treasury and Tax Exempt Funds, National City, National City
Columbus and National City Kentucky are responsible for, make decisions with
respect to and place orders for all purchases and sales of portfolio securities
for the Funds. Pursuant to the Advisory Agreement between the Trust and
National City relating to the Pennsylvania Tax Exempt Fund, National City is
responsible for, makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for that Fund. 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
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<PAGE> 78
stated commission in the case of securities traded in the over-the-counter
market, but the price includes an undisclosed commission or mark-up.
While the advisers generally seek competitive spreads or
commissions, they may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the advisers in their best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the advisers may receive orders for transactions by a Fund.
Information so received is in addition to and not in lieu of services required
to be performed by the advisers and does not reduce the fees payable to them by
the Funds. Such information may be useful to the advisers in serving both the
Trust and other clients, and, conversely, supplemental information obtained by
the placement of business of other clients may be useful to the advisers in
carrying out its obligations to the Trust.
While serving as advisers to the Trust, National City,
National City Columbus and National City Kentucky have agreed to maintain their
policy and practice of conducting their Trust Departments independently of
their Commercial Departments. In making investment recommendations for the
Trust, Trust Department personnel will not inquire or take into consideration
whether the issuer of securities proposed for purchase or sale for the Trust's
account are customers of the Commercial Departments. In dealing with
commercial customers, the Commercial Departments will not inquire or take into
consideration whether securities of those customers are held by the Trust.
Portfolio securities will not be purchased from or sold to the
Trust's advisers, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Trust will not give preference
to its advisers' correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
Under certain circumstances, the Trust may be at a disadvantage because of
these limitations compared with the portfolios of other investment companies
with similar objectives that are not subject to such limitations.
The Trust is required to identify any securities of its
"regular brokers or dealers" that it has acquired during its most recent fiscal
year. At May 31, 1997, (a) the Money Market Fund had entered into repurchase
transactions with: First Boston in the amount of $90,000,000 to be repurchased
on June 2, 1997 at
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<PAGE> 79
$90,042,150 and with Prudential-Bache Securities in the amount of $45,000,000
to be repurchased on June 2, 1997 at $45,020,963; (b) the Government Fund had
entered into a repurchase transaction with First Boston in the amount of
$159,000,000 to be repurchased on June 2, 1997 at $159,074,465.
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, 1997, for the Money Market, Government,
Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds, which are incorporated
by reference in this Statement of Additional Information, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report referred
to under "Financial Statements," and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements for periods or years prior to May 31,
1997 with respect to the Predecessor Fund, which are incorporated by reference
in this Statement of Additional Information, were audited by Coopers & Lybrand,
L.L.P., independent accountants for the Predecessor Fund, whose report dated
July 26, 1996 expressed an unqualified opinion on such financial statements,
and are included in reliance upon such report given upon the authority of such
firm in accounting and auditing.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345
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Chestnut Street, Philadelphia, Pennsylvania 19107, are counsel to the Trust and
will pass upon the legality of the shares offered hereby.
STANDARDIZED YIELD QUOTATIONS
"Yields," as described in the Prospectus, are calculated
according to formulas prescribed by the SEC. The standardized seven-day yield
for a class of Fund shares is computed by determining the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account in the
class having a balance of one share at the beginning of the period, subtracting
a hypothetical charge reflecting deductions from shareholder accounts, dividing
the difference by the value of the account at the beginning of the base period
to obtain the base period return, and then multiplying the base period return
by (365/7). The net change in the value of an account in a class includes the
value of additional shares purchased with dividends from the original share,
and dividends declared on both the original share and any such additional
shares, net of all fees, other than nonrecurring account or sales charges, that
are charged to all shareholder accounts in proportion to the length of the base
period and the class' mean or median account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The "effective yield" for a class of Fund shares is computed by
compounding the unannualized base period return (calculated as above) by adding
1 to the base period return, raising the sum to a power equal to 365 divided by
7, and subtracting 1 from the result.
The Tax Exempt and Pennsylvania Tax Exempt Funds'
"tax-equivalent yields" are computed by dividing the portion of those Funds'
yields (calculated as above) that is exempt from federal income tax by one
minus a stated federal income tax rate (using 39.6% tax bracket) and adding
that figure to that portion, if any, of the respective Fund's yield that is not
exempt from federal income tax.
For the seven-day period ended May 31, 1997, the yields of the
Retail and Institutional shares of the Money Market Fund, Government Fund,
Treasury Fund, Tax Exempt Fund and Pennsylvania Tax Exempt Fund were 5.14% and
5.24%, 5.08% and 5.18%, 4.79% and 4.89%, 3.39% and 3.49%, and 3.48% and 3.58%,
respectively, and their respective effective yields were 5.27% and 5.38%, 5.21%
and 5.31%, 4.91% and 5.01%, 3.44% and 3.55%, and 3.54% and 3.65%, respectively.
For the Tax Exempt and Pennsylvania Tax Exempt Funds, the
tax-equivalent effective yields (assuming a 39.6% federal tax rate in the case
of both Funds and a 2.8% Pennsylvania tax rate in the
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<PAGE> 81
case of the Pennsylvania Tax Exempt Fund) for their Retail and Institutional
shares for the seven-day period ended May 31, 1997 were 5.70% and 5.88%, and
6.03% and 6.22%, respectively.
The current yield for each class of shares in a Fund may be
obtained by calling the Trust at the telephone number provided on the cover
page. Quoted yields are not indicative of future yields. Yields will depend
upon factors such as fund maturity, the Fund's expenses and the types of
instruments held by the Fund.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or
capital appreciation of a Fund would increase the value, not only of the
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Funds may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as
a whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the advisers as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related 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
-39-
<PAGE> 82
other material which highlight or summarize the information discussed in more
detail therein.
MISCELLANEOUS
As used in the Prospectus, "assets belonging to a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to
a particular Fund are charged with the liabilities in respect of that Fund.
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As of September 2, 1997, the following bank subsidiaries of
National City Corporation held of record 5% or more of the outstanding
Institutional shares of the Money Market, Government, Treasury, Tax Exempt and
Pennsylvania Tax Exempt Funds acting as agent or custodian for their customers,
but did not own such shares beneficially:
<TABLE>
<CAPTION>
Percentage of Outstanding
Institutional Shares
Money Tax Pennsylvania
Market Government Treasury Exempt Tax Exempt
Fund Fund Fund Fund Fund
------ ---------- -------- ------ ------------
<S> <C> <C> <C> <C> <C>
National City Bank, 4.10% 2.01% 22.11% 6.43% 0%
Northeast
One Cascade Plaza
Akron, OH 44308
National City Bank of 3.12 2.54% 12.34% 8.51% 0%
Dayton
Gem Plaza, 6 N. Main
Dayton, OH 45412
National City Bank 50.88% 25.3% 6.32% 29.81% 0%
1900 East Ninth Street
Cleveland, OH 44114-3484
</TABLE>
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<PAGE> 83
<TABLE>
Money Tax Pennsylvania
Market Government Treasury Exempt Tax Exempt
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
National City Bank of 3.20% 6.83% 17.91% 23.41% 0%
Columbus
155 East Broad Street
Columbus, OH 43251
National City Bank of 11.09% 46.17% 4.11% 11.78% 0%
Kentucky
National City Tower
101 South Fifth Street
Louisville, KY 40202
National City Bank of 11.76% 3.88% 28.16% 12.68% 0%
Indiana
101 W. Washington Street
Indianapolis, IN 46255
National City Bank, 3.60% 0% 3.97% 3.12% 0%
Northwest
405 Madison Avenue
Toledo, OH 43603
National City Bank of 9.36% 7.78% 2.95% 2.41% 100.00%
Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Government Fund as of August 31,
1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Government Fund Shares Shares
--------------- ------------- -------------
<S> <C> <C>
National City Corporation 251,026,602 27.19%
Noreen Wasserbauer
Corporate 14th Fl.
M.O. #2145
1900 East 9th
Cleveland, OH 44114
Mr. Douglas H. Ilgen 177,105,681 7.39%
P&P National Pension Funds
2200 Defense Highway
Suite 400
Crofton, MD 21114-2472
</TABLE>
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<PAGE> 84
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Treasury Fund as of August 31,
1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Treasury Fund Shares Shares
------------- ---------------- -------------
<S> <C> <C>
Mr. Richard Schwartz 14,818,813 5.37%
DAPSCO, Inc.
3110 Kettering Blvd.
Dayton, OH 45439
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Tax Exempt Fund as of August 31,
1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Tax Exempt Fund Shares Shares
--------------- ------------- -------------
<S> <C> <C>
American Electric Power Service Corp. 37,201,887 10.29%
Joseph H. Shepard, Jr.
One Riverside Plaza
Columbus, OH 43215
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Money Market Fund as of August 31,
1997:
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<PAGE> 85
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Money Market Fund Shares Shares
----------------- ---------------- -------------
<S> <C> <C>
Mr. Marion Lee 177,105,681 7.39%
P&P National Pension Funds
2200 Defense Highway
Suite 400
Crofton, MD 21114-2472
Mr. Marion Lee 168,854,196 7.05%
P&P National Pension Funds
2200 Defense Highway
Suite 400
Crofton, MD 21114-2472
Church of God, Inc. 167,858,235 7.01%
Jeffrey Jenness
Board of Pension
P.O. Box 2559
Indianapolis, IN 46204
</TABLE>
The following shareholders beneficially owned 5% or more of the outstanding
Institutional shares of the Pennsylvania Tax Exempt Fund as of August 31, 1997:
<TABLE>
<CAPTION> Percentage of
Number of Outstanding
Institutional Institutional
Pennsylvania Tax Exempt Fund Shares Shares
- ---------------------------- ---------------- -------------
<S> <C> <C>
Keith James, Vice President 4,156,503 6.83%
Polycom Huntsman, Inc.
90 West Chestnut St.
Washington, PA 15301
Mr. Henry E. Haller 3,447,508 5.66%
Park Mansions
5023 Drew Ave.
Pittsburgh, PA 15213
</TABLE>
To the Trust's knowledge, no shareholder beneficially owned 5%
or more of the outstanding Retail shares of the Government or Money Market
Funds as of August
31, 1997.
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Treasury Fund as of August 31, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Retail Outstanding Retail
Treasury Fund Shares Shares
------------- ---------------- ------------------
<S> <C> <C>
Doctors Hospital Development Corporation 562,907.10 9.4%
1100 Dennison Ave.
Columbus, OH 43201-3262
Estate of Barbara Cass 379,343.30 6.3%
Anita Fellner Executirix
c/o Richard Crone
1500 PPG Place
Cleveland, OH 44193-0001
Doraty Chevrolet 323,393.20 5.4%
c/o National City
Locator 2067
Attn: Charles Martis
P.O. Box 5756
Cleveland, OH 44193-0001
</TABLE>
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<PAGE> 86
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Tax Exempt Fund as of September 23, 1997:
<TABLE>
<CAPTION>
Number of Retail Percentage of
Tax Exempt Fund Shares Outstanding Shares
--------------- ---------------- ------------------
<S> <C> <C>
Wheat First Securities 42,902,717.10 66.06%
P.O Box 6629
Glen Allen, VA 23058-6629
FBO PCG/Retail Sweep Customers 5,741,643.77 8.84%
c/o National City Bank of Cleveland
770 W. Broad St., LOC 16-0347
Columbus, OH 43222-1419
National City Bank, Northeast 5,011,575.28 7.72%
FBO PCG/Retail Sweep Customers
Cash Management Operations
770 W. Broad St., LOC 16-0347
Columbus, OH 43222-1419
National City Bank of Indiana 3,292,645.32 5.07%
FBO PCG/Retail Sweep Customers
Cash Management Operations
770 W. Broad St., LOC 16-0347
Columbus, OH 43222-1419
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Tax Exempt Fund as of August 31, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Retail Outstanding Retail
Tax Exempt Fund Shares Shares
--------------- ---------------- -------------
<S> <C> <C> <C>
Samtec, Inc. 5,410,113 8.7%
P.O. Box 1147
New Albany, IN 47151-1147
David & Edris Weis 4,337,060 6.9%
JT Ten
144 Thornberry
Pittsburgh, PA 44130-2643
Martin Dean and 3,508,551 5.6%
Mary Jean Walker
c/o Morwall Investments
24500 Center Ridge Road
Suite 275
Westlake, OH 44145-5690
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Pennsylvania Tax Exempt Fund as of
September 23, 1997:
<TABLE>
<CAPTION>
Pennsylvania Tax Number of Percentage of
Exempt Fund Institutional Shares Outstanding Shares
--------------- --------------------- ------------------
<S> <C> <C>
National City Bank 63,701,228.03 99.65%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Pennsylvania Tax Exempt Fund as of August
31, 1997.
<TABLE>
<CAPTION>
Percentage of
Pennsylvania Tax Exempt Number of Retail Outstanding Retail
Fund Shares Shares
----------------------- ---------------- ------------------
<S> <C> <C>
Dr. Abel J. Soster 1,314,143.63 6.11%
3702 Millstone Ct.
Murrysville, PA 15668-1068
Jane M. Johnson 1,160,604.44 5.40%
14 W. Woodland Road
Pittsburgh, PA 15323-2825
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Pennsylvania Tax Exempt Fund as of
September 23, 1997:
<TABLE>
<CAPTION>
Pennsylvania Tax Number of Percentage of
Exempt Fund Retail Shares Outstanding Retail Shares
--------------- --------------------- --------------------------
<S> <C> <C>
FBO Corporate Auto Sweep 13,079,000.00 71.10%
Customers
c/o National City Bank of PA
300 Fourth Street, 2-191
Pittsburgh, PA 15278-0001
National City Bank of PA 3,643,781.54 19.81%
FBO PCG/Retail Sweep Customers
Cash Management Operations
770 W. Broad St., LOC 16-0347
Columbus, OH 43222-1419
</TABLE>
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<PAGE> 87
FINANCIAL STATEMENTS
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1997 are hereby incorporated herein by
reference. Copies of the Funds' annual reports may be obtained by calling the
Trust at 1-800-622-FUND (3863) or by writing to the Trust, Oaks, Pennsylvania
19456.
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<PAGE> 88
APPENDIX A
DESCRIPTION OF RATINGS
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB- " rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt
A-1
<PAGE> 89
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating and is
currently highly vulnerable to nonpayment.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest-only and principal- only mortgage securities. The absence of an
"r" symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
A-2
<PAGE> 90
referred to as "gilt edged." Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
A-3
<PAGE> 91
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA"
A-4
<PAGE> 92
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" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the instrument.
"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of
interest seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified
A-5
<PAGE> 93
by the addition of a plus (+) or minus (-) sign to show relative standing
within these major rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the
A-6
<PAGE> 94
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-7
<PAGE> 95
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions have a
strong ability for repayment of senior 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, may be more
subject to
A-8
<PAGE> 96
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions 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" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
A-9
<PAGE> 97
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
ratings.
"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.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of
A-10
<PAGE> 98
likelihood that principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment.
"A3" - Obligations are supported by an adequate capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
MUNICIPAL NOTE RATINGS AND VARIABLE RATE DEMAND OBLIGATIONS RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
A-11
<PAGE> 99
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess
very strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
<PAGE> 100
CROSS REFERENCE SHEET
---------------------
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
<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
6. Capital Stock and Other
Securities....................................... How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes;
Description of the Trust and
Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered.................................... Pricing of Shares; How to
Purchase and Redeem Shares;
Distribution Agreement
8. Redemption Repurchase............................ How to Purchase and Redeem
Shares
9. Pending Legal Proceedings........................ Inapplicable
</TABLE>
<PAGE> 101
CROSS REFERENCE SHEET
---------------------
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
1. Cover Page......................................................... Cover Page
2. Table of Contents.................................................. Table of Contents
3. General Information and History.................................... Statement of Additional
Information
4. Investment Objectives and Policies................................. Risk Factors, Investment
Objectives and Policies
5. Management of Registrant........................................... Trustees and Officers
6. Control Persons and Principal...................................... Description of Shares
Holders of Securities
7. Investment Advisory and Other...................................... Advisory, Administra-
Services Management tion, Distribution,
Custody and Transfer
Agency Agreements
8. Brokerage Allocation and Other..................................... Risk Factors, Investment
Practices Objectives and Policies
9. Capital Stock and Other Securities................................. Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing................................... Additional Purchase
of Securities Being Offered ....................................... and Redemption
Information
11. Tax Status......................................................... Additional Information
Concerning Taxes
12. Underwriters....................................................... Not Applicable
13. Calculation of Performance Data.................................... Yield and Performance
Information
14. Financial Statements............................................... Financial Statements
</TABLE>
<PAGE> 102
ARMADA
FUNDS
TAX
EXEMPT
SERIES
ARMADA FUNDS LOGO
Financial Power Close at Hand
PROSPECTUS
September 30, 1997
ARMADA OHIO TAX EXEMPT FUND
ARMADA PENNSYLVANIA MUNICIPAL FUND
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expense Table............................................................................. 2
Financial Highlights...................................................................... 4
Introduction.............................................................................. 7
Investment Objectives and Policies........................................................ 7
Investment Limitations.................................................................... 13
Yield and Performance Information......................................................... 14
Pricing of Shares......................................................................... 15
How to Purchase and Redeem Shares......................................................... 16
Distribution Agreement.................................................................... 21
Shareholder Services Plan................................................................. 21
Dividends and Distributions............................................................... 21
Taxes..................................................................................... 22
Management of the Trust................................................................... 24
Description of the Trust and its Shares................................................... 26
Custodian and Transfer Agent.............................................................. 27
Expenses.................................................................................. 28
Miscellaneous............................................................................. 28
</TABLE>
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK; NATIONAL
CITY BANK, COLUMBUS; NATIONAL CITY BANK, KENTUCKY; NATIONAL ASSET MANAGEMENT
CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and certain of its affiliates serves as investment advisers
to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 104
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments,
Inc., please call your Financial Consultant for
information. For current performance, fund information,
account redemption information, and to purchase shares,
please call 1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following two investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
OHIO TAX EXEMPT FUND'S investment objective is to provide as high a level
of interest income exempt from federal income tax and, to the extent possible,
from Ohio personal income tax, as is consistent with conservation of capital.
The Fund normally invests in tax-exempt obligations having average remaining
maturities of two to ten years.
PENNSYLVANIA MUNICIPAL FUND'S investment objective is to provide current
income exempt from both regular federal income and Pennsylvania personal income
taxes while preserving capital. The Fund invests primarily in investment grade
debt obligations issued by or on behalf of the Commonwealth of Pennsylvania.
Each Fund's net asset value per share will fluctuate as the value of its
assets changes in response to changing market prices and other factors.
National City Bank ("National City"), National City Bank of Columbus
("National City Columbus") and National City Bank of Kentucky ("National City
Kentucky") serve as investment advisers to the Ohio Tax Exempt Fund; National
City serves as investment adviser to the Pennsylvania Municipal Fund. These
investment advisers are referred to herein individually as an "adviser" and
collectively as the "advisers."
SEI Investments Distribution Co., formerly SEI Financial Services Company
(the "Distributor"), serves as the Trust's sponsor and distributor. Each Fund
pays a fee to the Distributor for distributing its shares. See "Distribution
Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL CITY BANK OF
COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, THEIR PARENT COMPANY OR ANY OF THEIR
AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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, 1997
<PAGE> 105
EXPENSE TABLE
<TABLE>
<CAPTION>
OHIO OHIO PENNSYLVANIA PENNSYLVANIA
TAX EXEMPT TAX EXEMPT MUNICIPAL MUNICIPAL
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES SHARES(1) SHARES
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases........................ 3.00% None 3.00% None
Sales Charge Imposed on Reinvested Dividends... None None None None
Deferred Sales Charge.......................... None None None None
Redemption Fee................................. None None None None
Exchange Fee................................... None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee waivers)(2)......... .0% .0% .54% .54%
12b-1 Fees(2,3)................................ .06% .06% .02% .02%
Other Expenses................................. .30% .20% .38% .28%
---- ---- ---- ----
TOTAL FUND OPERATING
Expenses (after fee waivers)(2)............. .36% .26% .94% .84%
==== ==== ==== ====
</TABLE>
- ---------------
(1) The Trust has implemented a Shareholder Services Plan (the "Services Plan")
with respect to Retail shares in the Pennsylvania Municipal Fund and, in the
future, may implement the Services Plan with respect to Retail shares of the
Ohio Tax Exempt Fund. Pursuant to the Services Plan, the Trust enters into
shareholder servicing agreements with certain financial institutions under
which they agree to provide shareholder administrative services to their
customers who beneficially own Retail shares in consideration for the
payment of up to .10% (on an annualized basis) of the net asset value of
such shares. For further information concerning the Services Plan, see
"Shareholder Services Plan."
(2) The expense information in the table relating to each Fund has been restated
to reflect current fees. During the current fiscal year the adviser(s)
intend to waive their entire fee of .55% of the Ohio Tax Exempt Fund's
average daily net assets and .01% of the fee of .55% of the Pennsylvania
Municipal Fund's average daily net assets. Without such fee waivers, the
Total Fund Operating Expenses would be .91% and .81% and .95% and .85% for
the Retail and Institutional shares of the Ohio Tax Exempt Fund and
Pennsylvania Municipal Fund, respectively. Additionally, if the maximum
distribution fee permitted under the 12b-1 Plan were imposed, Total Fund
Operating Expenses would be .95% and .85% and 1.03% and .93% for the Retail
and Institutional shares of the Ohio Tax Exempt Fund and Pennsylvania
Municipal Fund, respectively.
(3) The Trust has in effect a 12b-1 Plan pursuant to which each Fund may bear
fees in an amount of up to .10% of its average daily net assets. As a result
of the payment of sales charges and 12b-1 fees, long-term shareholders may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD").
The NASD has adopted rules which generally limit the aggregate sales charges
and payments under the Trust's Service and Distribution Plan ("Distribution
Plan") and Services Plan to a certain percentage of total new gross share
sales, plus interest. The Trust would stop accruing 12b-1 and related fees
if, to the extent, and for as long as, such limit would otherwise be
exceeded.
2
<PAGE> 106
- ---------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (the Funds do not charge a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ohio Tax Exempt Fund Retail Shares..................... $ 34 $ 41 $ 50 $ 74
Ohio Tax Exempt Fund Institutional Shares ............. $ 3 $ 8 $ 15 $ 33
Pennsylvania Municipal Fund Retail Shares.............. $ 39 $ 59 $ 80 $142
Pennsylvania Municipal Fund Institutional Shares....... $ 9 $ 27 $ 47 $104
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution Agreement"
in this Prospectus and the financial statements and related notes incorporated
by reference into the Statement of Additional Information for the Funds. Any
fees that are charged by affiliates of the advisers or other institutions
directly to their customer accounts for services related to an investment in
shares of any of the Funds are in addition to and not reflected in the fees and
expenses described above.
3
<PAGE> 107
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
OHIO TAX EXEMPT FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose reports are incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Ohio Tax Exempt Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Value, Beginning of
Period......................... $ 10.70 $10.66 $ 10.74 $10.70 $ 10.57 $10.53
-------- ------- -------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.......... 0.51 0.51 0.50 0.50 0.50 0.50
Net Gains (Losses) on
Securities (Realized and
Unrealized).................. 0.16 0.16 (0.04) (0.04) 0.17 0.17
-------- ------- -------- ------- -------- -------
Total from Investment
Operations................... 0.67 0.67 0.46 0.46 0.67 0.67
-------- ------- -------- ------- -------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income....................... (0.51) (0.51) (0.50) (0.50) (0.50) (0.50)
Dividends in Excess of Net
Investment Income............ (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Dividends in Excess of Net
Realized Capital Gains....... (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
-------- ------- -------- ------- -------- -------
Total Distributions............. (0.51) (0.51) (0.50) (0.50) (0.50) (0.50)
-------- ------- -------- ------- -------- -------
Net Asset Value, End of
Period......................... $ 10.86 $10.82 $ 10.70 $10.66 $ 10.74 $10.70
======== ======= ======== ======= ======== =======
TOTAL RETURN.................... 6.37%..... 6.38%(4) 4.36% 4.35%(4) 6.61% 6.64%(4)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000s)....................... $91,366 $3,535 $82,886 $2,869 $71,996 $3,168
Ratio of Expenses to Average
Net Assets (after fee
waivers)..................... 0.24%(5) 0.24%(6) 0.26%(5) 0.26%(6) 0.24%(5) 0.24%(6)
Ratio of Net Investment Income
to Average Net Assets (after
fee waivers)................. 4.71%(5) 4.71%(6) 4.68%(5) 4.68%(6) 4.82%(5) 4.82%(6)
Portfolio Turnover Rate........ 23% 23% 10% 10% 3% 3%
<CAPTION>
1994 1993 1992
------------------------ ------------------------ -----------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL(2) 1991
------------- ------ ------------- ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Value, Beginning of
Period......................... $ 10.84 $10.80 $ 10.33 $10.30 $ 10.14 $10.14 $ 9.93
-------- ------- -------- ------- -------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.......... 0.52 0.52 0.51 0.51 0.19 0.46 0.50
Net Gains (Losses) on
Securities (Realized and
Unrealized).................. (0.26) (0.26) 0.56 0.54 0.15 0.16 0.22
-------- ------- -------- ------- -------- ------ ------
Total from Investment
Operations................... 0.26 0.26 1.07 1.05 0.34 0.62 0.72
-------- ------- -------- ------- -------- ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income....................... (0.52) (0.52) (0.51) (0.51) (0.15) (0.46) (0.50)
Dividends in Excess of Net
Investment Income............ (0.00) (0.00) (0.05) (0.04) (0.00) (0.00) (0.01)
Dividends in Excess of Net
Realized Capital Gains....... (0.01) (0.01) (0.00) (0.00) (0.00) (0.00) (0.00)
-------- ------- -------- ------- -------- ------ ------
Total Distributions............. (0.53) (0.53) (0.56) (0.55) (0.15) (0.46) (0.51)
-------- ------- -------- ------- -------- ------ ------
Net Asset Value, End of
Period......................... $ 10.57 $10.53 $ 10.84 $10.80 $ 10.33 $10.30 $10.14
======== ======= ======== ======= ======== ====== ======
TOTAL RETURN.................... 2.28% 2.29%(4) 10.36% 10.27%(4) 8.23% 6.22%(3,4) 7.40%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000s)....................... $63,133 $2,725 $40,080 $1,466 $10,453 $ 437 $ 246
Ratio of Expenses to Average
Net Assets (after fee
waivers)..................... 0.33%(5) 0.33%(6) 0.09%(5) 0.09%(6) 0.73%(5) 0.93%(3,6) 1.25%(5)
Ratio of Net Investment Income
to Average Net Assets (after
fee waivers)................. 4.54%(5) 4.54%(6) 5.00%(5) 5.00%(6) 4.56%(5) 4.49%(3,6) 4.89%(5)
Portfolio Turnover Rate........ 2% 2% 11% 11% 1% 1% 25%
<CAPTION>
1990(1)
------
<S> <C>
Asset Value, Beginning of
Period......................... $10.00
------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.......... 0.13
Net Gains (Losses) on
Securities (Realized and
Unrealized).................. (0.11)
------
Total from Investment
Operations................... 0.02
------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income....................... (0.09)
Dividends in Excess of Net
Investment Income............ (0.00)
Dividends in Excess of Net
Realized Capital Gains....... (0.00)
------
Total Distributions............. (0.09)
------
Net Asset Value, End of
Period......................... $ 9.93
======
TOTAL RETURN.................... 0.50%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000s)....................... $ 582
Ratio of Expenses to Average
Net Assets (after fee
waivers)..................... 1.20%(3,5)
Ratio of Net Investment Income
to Average Net Assets (after
fee waivers)................. 3.82%(3,5)
Portfolio Turnover Rate........ 0%
</TABLE>
- ---------------
(1) The Fund commenced operations on January 5, 1990.
(2) Retail class commenced operations on April 15, 1991.
(3) Annualized.
(4) Total Return excludes sales charge.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .79% and 4.16%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the advisers
and custodian for the Institutional class for the years ended May 31, 1996
and 1995 would have been .83% and 4.11%, and .80% and 4.26%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the Institutional class for the years ended May
31, 1994, 1993, 1992, 1991 and for the period ended 1990 would have been
.88% and 3.99%, .64% and 4.45%, 1.28% and 4.01%, 1.80% and 4.34% and 1.75%
and 3.72%, respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .79% and 4.16%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .83% and 4.11% and .78% and 4.27%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the Retail class for the years ended May 31,
1994, 1993 and for the period ended May 31, 1992 would have been .88% and
3.99%, .64% and 4.45%, and 1.48% and 3.94%, respectively.
4
<PAGE> 108
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
PENNSYLVANIA MUNICIPAL FUND
The Fund commenced operations on August 10, 1994 as a separate investment
portfolio (the "Predecessor Pennsylvania Municipal Fund") of Inventor Funds,
Inc., which was organized as a Maryland corporation. On September 9, 1996, the
Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Pennsylvania Municipal Fund offered and sold
Retail Shares that were similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Fund's Retail Shares (the
series that is similar to the Retail Shares of the Pennsylvania Municipal Fund)
for the fiscal period from May 1, 1996 to May 31, 1996, the fiscal year ended
April 30, 1996 and the fiscal period ended April 30, 1995. As part of the
reorganization, the fiscal year of the Predecessor Pennsylvania Municipal Fund
was changed to coincide with the Trust's May 31 fiscal year. A one-month
financial report representing the Predecessor Pennsylvania Municipal Fund's
operations from May 1, 1996 through May 31, 1996 is being presented. The
information was audited by Coopers & Lybrand L.L.P., independent accountants for
the Predecessor Fund, whose reports thereon are contained in Inventor Funds'
Annual Report to Shareholders for the fiscal year ended April 30, 1996 and the
period ended May 31, 1996. Such financial highlights should be read in
conjunction with the financial statements and notes thereto contained in
Inventor Funds' Annual Reports to Shareholders and incorporated by reference
into the Statement of Additional Information relating to the Pennsylvania
Municipal Fund. Additional information about the performance of the Predecessor
Pennsylvania Municipal Fund is contained in Inventor Funds' Annual Reports to
Shareholders, which may be obtained without charge by contacting the Trust at
its telephone number or address provided on page 1.
The information presented below relating to the fiscal year ended May 31,
1997 has been derived from financial statements audited by Ernst & Young, LLP,
independent auditors for the Pennsylvania Municipal Fund, 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.
5
<PAGE> 109
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE FOR THE FOR THE
MAY 31, 1997(5) PERIOD ENDED YEAR ENDED PERIOD ENDED
------------------------- MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(6) 1996(5) 1996(5) 1995(5)
------------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............ $ 10.08 $ 10.13 $ 10.12 $ 10.04 $ 10.00
------- ---- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.......... 0.44 0.31 0.04 0.43 0.29
Net gain/(loss) on Securities
(realized and unrealized)... 0.17 0.12 (0.04) 0.08 0.04
------- ---- ----- ----- -----
Total from Investment
Operations.................. 0.61 0.43 (0.00) 0.51 0.33
------- ---- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from Net Investment
Income...................... (0.44) (0.31) (0.04) (0.43) (0.29)
Dividends from Net Realized
Capital Gains............... (0.02) (0.02) (0.00) (0.00) (0.00)
Dividends in Excess of Net
Realized Capital Gains...... (0.01) (0.01) (0.00) (0.00) (0.00)
------- ---- ----- ----- -----
Total Distributions......... (0.47) (0.34) (0.04) (0.43) (0.29)
------- ---- ----- ----- -----
Net Asset Value, End of Period... $ 10.22 $ 10.22 $ 10.08 $ 10.12 $ 10.04
======= ==== ===== ===== =====
TOTAL RETURN..................... 6.21% 6.13%(7) (0.03)%(4,7) 5.06%(7) 3.38%(4,7)
RATIOS/SUPPLEMENTAL DATA NET
Assets, End of Period (000).... $36,769 $ 81 $ 38,733 $ 38,809 $ 34,638
Ratio of Expenses to Average
Net Assets (after fee
waivers)(4)................. .87%(1) .99%(2,3) .85%(1,3) .85%(1) .85%(1,3)
Ratio of Net Investment Income
to Average Net Assets....... 4.35%(1) 4.26%(2,3) 4.32%(1,3) 4.16%(1) 4.05%(1,3)
Portfolio Turnover Rate........ 42% 42% 0% 22% 4%
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and other service providers for the Institutional
class for the year ended May 31, 1997, for the period ended May 31, 1996,
for the year ended April 30, 1996, and for the period ended April 30, 1995
would have been 1.02% and 4.20%, 1.31% and 3.86%, 1.24% and 3.77%, and 1.36%
and 3.54%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser for the Retail class for the period ended May 31,
1997 would have been 1.00% and 4.25%, respectively.
(3) Annualized.
(4) Not Annualized.
(5) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(6) Retail class commenced operations on September 11, 1996.
(7) Total Return excludes sales charge.
6
<PAGE> 110
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 Objective and Policies." Under the 1940 Act,
each Fund is classified as a non-diversified investment fund.
Shares of the Funds have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Funds except
that, as described more fully below under "Shareholder Services Plan," the Trust
may implement the Services Plan with respect to the Retail shares only. As of
the date of this Prospectus, the Trust has implemented the Services Plan with
respect to the Retail shares of the Pennsylvania Municipal Fund and not the Ohio
Tax Exempt Funds. Under the Services Plan, only the beneficial owners of Retail
shares bear or would bear the expenses of shareholder administrative services
which are provided by financial institutions for their benefit (not to exceed
.10% annually). See "Shareholder Services Plan," "Dividends and Distributions"
and "Description of the Trust and Its Shares" for a description of the impact
that the Services Plan may have on holders of Retail shares.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of a Fund may not be changed without the vote of
the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Except as noted below under "Investment Limitations," a Fund's
investment policies, however, may be changed without a vote of shareholders.
There can be no assurance that a Fund will achieve its objective. For further
information, see "Investment Objectives and Policies" in the Statement of
Additional Information for further information on these instruments.
OHIO TAX EXEMPT FUND
The investment objective of the Ohio Tax Exempt Fund is to provide as high
a level of interest income exempt from federal income tax and, to the extent
possible, from Ohio personal income tax, as is consistent with conservation of
capital. The Fund seeks to achieve its objective by investing substantially all
of its assets in a portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies, instrumentalities and authorities, the
interest on which, in the opinion of counsel issued on the date of the issuance
thereof, is exempt from regular federal income tax ("Municipal Securities").
Under normal market conditions, at least 80% of the value of the Fund's
total assets will be invested in Municipal Securities. This policy is
fundamental and may not be changed without the affirmative vote of the holders
of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous"). In addition, under normal market conditions, at least 65% of
the value of the Fund's total assets will be invested in Municipal Securities of
the State of Ohio and its political subdivisions, as well as of certain other
governmental issuers in Ohio ("Ohio Bonds"). Dividends paid by the Fund which
are derived from interest properly attributable to Ohio Bonds will be exempt
from regular federal income tax and Ohio personal income tax. Dividends derived
from interest on Municipal Securities of other governmental issuers will be
exempt from regular federal income tax but may be subject to Ohio personal
income tax. See "Taxes." The Fund may hold uninvested cash reserves, pending
investment, during temporary defensive periods. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods; however, uninvested cash reserves will not earn income. The
Fund may invest in other investments as described below under "Other Investment
Policies" including stand-by commitments, variable and floating rate
obligations, certificates of participation, other investment com-
7
<PAGE> 111
panies, illiquid securities, Taxable Money Market Instruments (as defined below)
and zero coupon obligations and engage in when-issued transactions.
Although the Fund's average weighted maturity will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors, the Fund anticipates that Municipal
Securities it acquires will normally have average remaining maturities of two to
ten years.
PENNSYLVANIA MUNICIPAL FUND
The investment objective of the Pennsylvania Municipal Fund is to provide
current income exempt from both regular federal income and Pennsylvania personal
income tax while preserving capital. The Fund seeks to achieve its objective by
investing primarily in investment grade Pennsylvania Municipal Securities.
Pennsylvania Municipal Securities are debt obligations and municipal lease
obligations issued by or on behalf of the Commonwealth of Pennsylvania and its
political subdivisions and financing authorities, obligations of the United
States, including territories and possessions of the United States, the income
from which is, in the opinion of qualified legal counsel, exempt from federal
regular income tax and Pennsylvania state income tax imposed upon non-corporate
taxpayers, and securities of money market investment companies that invest
primarily in ("Pennsylvania Municipal Securities"). Dividends paid by the Fund
which are derived from interest properly attributable to Pennsylvania Municipal
Securities will be exempt from regular federal income tax and Pennsylvania
personal income tax. Dividends derived from interest on Municipal Securities of
other governmental issuers will be exempt from regular federal income tax but
may be subject to Pennsylvania personal income tax. See "Taxes."
Under normal market conditions, the Fund will be fully invested in
Pennsylvania Municipal Securities. This policy is fundamental and may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as defined under "Miscellaneous"). The Fund may invest up to
10% of its assets in Pennsylvania Municipal Securities the interest on which is
a preference item for purposes of the alternative minimum tax. For temporary
defensive or liquidity purposes when, in the opinion of the Fund's adviser,
Pennsylvania Municipal Securities of sufficient quality are not readily
available, the Fund may invest up to 100% of its assets in securities which pay
interest exempt only from federal income taxes and in taxable securities. The
Fund also may hold uninvested cash reserves, pending investment, during
temporary defensive periods. There is no percentage limitation on the amount of
assets which may be held uninvested during temporary defensive periods; however,
uninvested cash reserves will not earn income. The Fund may invest in other
investments as described below under "Other Investment Policies" including
municipal leases, stand-by commitments, variable and floating rate obligations,
certificates of participation, other investment companies, illiquid securities,
Taxable Money Market Instruments (as defined below) and zero coupon obligations
and engage in when-issued transactions.
Although the Fund's average weighted maturity will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors, the Fund anticipates that it will
maintain a dollar-weighted average portfolio maturity of seven years or less.
Each security purchased by the Fund will have a maximum maturity of fifteen
years.
SPECIAL RISK CONSIDERATIONS
Investment return on a non-diversified portfolio typically is dependent
upon the performance of a smaller number of securities relative to the number
held in a diversified portfolio. Consequently, the change in value of any one
security may affect the overall value of a non-diversified portfolio more than
it would a diversified portfolio, and thereby subject the market-based net asset
value per share of the non-diversified portfolio to greater fluctuations. In
addition, a non-diversified portfolio may be more susceptible to economic,
political and regulatory developments than a diversified investment portfolio
with similar objectives may be.
8
<PAGE> 112
Ohio Tax Exempt Fund
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
six years, the State rates were below the national rates (4.9% versus 5.4% in
1996).
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio Bonds
held in the Fund or the ability of particular obligors to make timely payments
of debt service on (or lease payments relating to) those Bonds. A more detailed
summary of the more significant conditions affecting the financial situation in
Ohio is contained in the Statement of Additional Information.
Although the Fund may invest 25% or more of its net assets in Municipal
Securities the interest on which is paid solely from revenues of similar
projects, and may invest up to 20% of its total assets in private activity bonds
when added together with any taxable investments held by the Fund, it does not
presently intend to do so unless in the opinion of its advisers the investment
is warranted. To the extent that the Fund's assets are invested in Municipal
Securities that are payable from the revenues of similar projects or are
invested in private activity bonds, the Fund will be subject to the peculiar
risks presented by the laws and economic conditions relating to such projects
and bonds to a greater extent than it would be if its assets were not so
invested.
Pennsylvania Municipal Fund
Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food-related industries. Service industries
currently employ the greatest share of non-agricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth of Pennsylvania or its municipalities, and could adversely affect
the market value of the securities in the Fund or the ability of the respective
obligors to make payments of interest and principal due on the obligations held
by the Fund. Rising unemployment, a relatively high proportion of persons 65 and
older in the Commonwealth of Pennsylvania and court ordered increases in
healthcare reimbursement rates place increased pressures on the tax resources of
the Commonwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains
moderate. The recession in the early 1990s affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more high-
paid manufacturing positions. A new governor took office in January 1995, but
the Commonwealth has continued to show fiscal restraint.
OTHER INVESTMENT POLICIES
Types of Municipal Securities
The two principal classifications of Municipal Securities which may be held
by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing
9
<PAGE> 113
power for the payment of principal and interest. Revenue or "special obligation"
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a specific excise
tax or other specific revenue source such as the user of the facility being
financed. "Private activity" bonds are revenue securities normally issued by
industrial development authorities to finance privately-owned facilities and are
backed by private entities. Any private activity bonds (including industrial
development bonds) held by the Funds are not payable from revenues of the
issuer. Consequently, the credit quality of private activity bonds is usually
directly related to the credit standing of the corporate or other user of the
facility involved and/or of a provider of credit enhancement on the bonds.
Private activity bonds are included in the term "Municipal Securities" only if
the interest paid thereon is exempt from regular federal income tax and not
treated as a specific tax preference item under the federal alternative minimum
tax. See "Taxes."
Each Fund may also invest in "moral obligation" bonds, which are ordinarily
issued by special purpose public authorities . If the issuer of moral obligation
bonds is unable to meet its debt service obligations from current revenues, it
may draw on a reserve fund, the restoration of which is a moral commitment but
not a legal obligation of the state or municipality which created the issuer.
The Funds may also purchase municipal leases. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to be illiquid.
They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate in any of the above.
Municipal lease obligations typically are not backed by the municipality's
credit, and their interest may become taxable if the lease is assigned. If funds
are not appropriated for the following year's lease payments, a lease may
terminate, with a possibility of default on the lease obligation and significant
loss to the Fund. Under guidelines established by the Board of Trustees, the
credit quality of municipal leases will be determined on an ongoing basis,
including an assessment of the likelihood that a lease will be canceled.
The Funds may also invest in unsecured short-term promissory notes issued
by municipalities and other entities.
Ratings Criteria
The Funds invest in Municipal Securities which at the time of purchase are
rated the following or higher:
(a) for the Ohio Tax Exempt Fund -- "A" by Standard and Poor's Ratings
Group ("S&P"), Fitch Investors Service, L.P. ("Fitch"), Duff & Phelps Credit
Rating Co. ("Duff"), or Moody's Investors Service, Inc. ("Moody's") in the case
of bonds; "SP-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, or "MIG-2" ("VMIG-2"
for variable rate demand notes) by Moody's in the case of notes; or "A-2" by
S&P, "F-2" by Fitch, "Duff 2" by Duff, or "Prime-2" by Moody's in the case of
tax-exempt commercial paper;
(b) Pennsylvania Municipal Fund -- "BBB" by S&P or Fitch, "Baa" by Moody's,
or "A" by Duff in the case of bonds; "SP-2" by S&P, "F-2" by Fitch, "Duff 2" by
Duff, or "MIG-2" ("VMIG-2" for variable rate demand notes) by Moody's in the
case of notes; or "A-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, Baa or
"Prime-2" by Moody's in the case of tax-exempt commercial paper.
Securities that are unrated at the time of purchase will be determined to
be of comparable quality by the Funds' adviser(s) pursuant to guidelines
approved by the Trust's Board of Trustees. If the rating of an obligation held
by a Fund is reduced below its rating requirements, the Fund will sell the
obligation when the adviser(s) believe that it is in the best interests of the
Fund to do so. The applicable ratings are more fully described in the Appendix
to the Statement of Additional Information.
Stand-by Commitments
Each Fund may acquire stand-by commitments with respect to Municipal Bonds
held in its portfolio. Under a stand-by commitment, a dealer
10
<PAGE> 114
agrees to purchase at a Fund's option specified Municipal Securities at a
specified price. Stand-by commitments acquired by the Funds must be of high
quality as determined by any Rating Agency, or, if not rated, must be of
comparable quality as determined by each Fund's adviser(s). Each Fund acquires
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes.
Variable and Floating Rate Obligations
Each Fund may purchase variable and floating rate obligations (including
variable amount master demand notes) which are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Because variable and floating rate obligations are direct lending
arrangements between a Fund and the issuer, they are not normally traded.
Although there may be no active secondary market in such instruments, a Fund may
demand payment of principal and accrued interest at a time specified in the
instrument or may resell them to a third party. Such obligations may be backed
by bank letters of credit, guarantees or other forms of credit and/or liquidity
enhancements issued by banks, other financial institutions or the U.S.
government, its agencies or instrumentalities. The quality of any credit or
liquidity enhancement will be rated high quality or, if unrated, will be
determined to be of comparable quality by the Funds' adviser(s). In the event an
issuer of a variable or floating rate obligation defaulted on its payment
obligation, the Funds might be unable to dispose of the instrument because of
the absence of a secondary market and could, for this or other reasons, suffer a
loss to the extent of the default.
Certificates of Participation
Each Fund may purchase Municipal Securities in the form of "certificates of
participation" which represent undivided proportional interests in lease
payments by a governmental or nonprofit entity. The municipal leases underlying
the certificates of participation in which a Fund invests will be subject to the
same quality rating standards applicable to Municipal Securities. Certificates
of participation may be purchased from a bank, broker-dealer or other financial
institution. The lease payments and other rights under the lease provide for and
secure the payments on the certificates.
Lease obligations may be limited by law, municipal charter or the duration
or nature of the appropriation for the lease and may be subject to periodic
appropriation. In particular, lease obligations, may be subject to periodic
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. Furthermore, a
lease may provide that the certificate trustee cannot accelerate lease
obligations upon default; in such event, the trustee would only be able to
enforce lease payments as they became due. In the event of a default or failure
of appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In addition, certificates of
participation are less liquid than other bonds because there is a limited
secondary trading market for such obligations.
To alleviate potential liquidity problems with respect to these
investments, the Funds may enter into remarketing agreements which may provide
that the seller or a third party will repurchase the obligation within seven
days after demand by a Fund and upon certain conditions (such as a Fund's
payment of a fee). Investments in certificates of participation will not exceed
5% of the Ohio Tax Exempt Fund's net assets.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. These transactions
involve the risk that the price or yield obtained may be less favorable than the
price or yield available when delivery takes place. The Funds expect that
commitments to purchase when-issued securities will not exceed 25% of the value
of their respective total assets under normal market conditions. The Funds do
not intend to purchase when-issued securities for speculative purposes but only
for the pur-
11
<PAGE> 115
pose of acquiring portfolio securities. In when-issued and delayed delivery
transactions, each Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
attractive.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Funds may invest in securities issued by other investment
companies (including other investment companies advised by the advisers) which
invest in high-quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, the Funds would bear, along with
other shareholders, their 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 a Fund and, therefore, will be borne indirectly by its shareholders.
Illiquid Securities
The Ohio Tax Exempt Fund and the Pennsylvania Municipal Fund will not
knowingly invest more than 10% and 15% of the value of their respective net
assets in securities that are illiquid. Illiquid securities would generally
include repurchase agreements and guaranteed investment contracts with
notice/termination dates in excess of seven days and certain securities which
are subject to trading restrictions because they are not registered under the
Securities Act of 1933, as amended (the "1933 Act").
The Funds may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long as it is determined by the Board of Trustees or the Funds' adviser(s),
acting under guidelines approved and monitored by the Board, that an adequate
trading market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in the Funds during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop.
Taxable Money Market Instruments
Each Fund may invest, from time to time, a portion of its assets for
temporary defensive or liquidity purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the highest rating category of S&P, Fitch,
Duff, or Moody's; certificates of deposit; bankers' acceptances; and repurchase
agreements with respect to such obligations. Under normal market conditions,
Taxable Money Market Instruments will not exceed 20% of the total assets of a
Fund.
Zero Coupon Obligations
Zero coupon obligations are discount debt obligations that do not make
periodic interest payments although income is generally imputed to the holder on
a current basis. Such obligations may have higher price volatility than those
which require the payment of interest periodically. The adviser(s) will consider
the liquidity needs of the Funds when any investment in zero coupon obligations
is made.
Repurchase Agreements
The Funds may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). The Fund may enter into repurchase agreements only
with financial institutions such as banks and broker-dealers which
12
<PAGE> 116
are deemed to be creditworthy by its adviser pursuant to guidelines approved by
the Trust's Board of Trustees. The Fund is not permitted to enter into
repurchase agreements with the adviser, Distributor, or any of their affiliates.
Although the securities subject to repurchase agreements may bear maturities
exceeding 397 days.
The seller under a repurchase agreement will be required to maintain the
value of the securities which the Fund holds subject to the agreement at not
less than the repurchase price, marked to market daily, by providing additional
securities or other collateral to the Fund if necessary. If the seller defaulted
on its repurchase obligation, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying securities (including accrued
interest) were less than the repurchase price (including accrued interest) under
the agreement. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Further, it is uncertain whether the Trust would be
entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the holders of
a majority of the Fund's outstanding shares (as defined under "Miscellaneous").
(Other investment limitations that also cannot be changed without a vote of
shareholders are contained in the Statement of Additional Information under
"Investment Objectives and Policies.")
Neither Fund may:
1. Make loans, except that each Fund may purchase or hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies; and the Ohio Tax Exempt Fund may lend portfolio securities.
2. Purchase securities of any one issuer (other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities) if,
immediately after and as a result of such purchase, (a) more than 5% of the
value of its total assets would be invested in such issuer, or (b) more than 10%
of the outstanding voting securities of such issuer would be held by the Fund,
except that up to 50% of the value of its total assets may be invested without
regard to these 5% and 10% limitations, respectively, provided that no more than
25% of the value of the Fund's total assets may be invested in the securities of
any one issuer.
3. Purchase any securities (except securities issued or guaranteed by the
United States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions) which would cause 25% or more of a Fund's total assets
at the time of purchase to be invested in the securities of issuers conducting
their principal business activities in the same industry.
For purposes of investment limitation Nos. 2 and 3, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to a private activity bond that
is backed only by the assets and revenues of a nongovernmental user, a security
is considered to be issued by such nongovernmental user.
The Ohio Tax Exempt Fund may not:
a. Invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days, non-negotiable time deposits, certificates of participation
without corresponding remarketing agreements, and other securities which are not
readily marketable.
b. Borrow money or issue senior securities, except that the Fund may borrow
from banks and enter into reverse repurchase agreements for temporary purposes
in amounts not in excess of 10% of the
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value of its total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Fund's total assets at the time of such borrowing. Borrowings are
intended solely to facilitate the orderly sale of portfolio securities to
accommodate abnormally heavy redemption requests and not for leverage purposes.
The Fund will not purchase securities while borrowings (including reverse
repurchase agreements) in excess of 5% of its total assets are outstanding.
The Pennsylvania Municipal Fund may not borrow money or issue senior
securities, except that the Fund may borrow from anyone for temporary purposes
in amounts not in excess of 5% of the value of its total assets at the time of
such borrowing; or the Fund may borrow from a bank for non-temporary purposes,
provided that the borrowing does not exceed 33 1/3% of the Fund's net assets. To
the extent that a bank borrowing exceeds 5% of the Fund's total assets, asset
coverage of at least 300% is required. The Fund will not purchase securities
while outstanding borrowings equal or exceed 5% of the Fund's total assets.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's securities will not constitute a violation of such limitation for
purposes of the 1940 Act. If a Fund exceeds the limitation on the holding of
illiquid securities it will sell illiquid securities as necessary to maintain
the required liquidity when the adviser(s) believe that it is in the best
interests of the Fund to do so.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal and state income taxes are rendered
by qualified legal counsel to the respective issuers at the time of issuance.
Neither the Funds nor their adviser(s) will review the proceedings relating to
the issuance of Municipal Securities or the basis for such opinions.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders each Fund's yield and total return data for its Institutional
shares and Retail shares. The "yield" quoted in advertisements refers to the
income generated by an investment in a class of shares over a 30-day period
identified in the advertisement. This income is then "annualized." The amount of
income generated by an investment during a 30-day period is assumed to be earned
and reinvested at a constant rate and compounded semi-annually; the annualized
income is then shown as a percentage of the investment. Each Fund's
"tax-equivalent" yield for a class of shares, which shows the level of taxable
yield necessary to produce an after-tax equivalent to a Fund's tax-free yield
for that class, may also be quoted from time to time. It is calculated by
increasing the yield (calculated as above) for a class of shares by the amount
necessary to reflect the payment of federal and Ohio or Pennsylvania income tax
at stated tax rates. A Fund's tax-equivalent yield for a class of shares will
always be higher than its yield.
Each Fund calculates its total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
class. When considering average total return figures for periods longer than one
year, it is important to note that the annual total
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<PAGE> 118
return of a class for any one year in the period might have been greater or less
than the average for the entire period. Each Fund may also advertise, from time
to time, the total returns of one or more classes of shares on a year-by-year or
other basis for various specified periods by means of quotations, charts, graphs
or schedules.
Shareholders should note that the yield and total return on Retail shares
will be reduced by the amount of shareholder servicing fees that are payable
under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares of each Fund
to the performance of other mutual funds with comparable investment objectives,
to various mutual fund or market indices, and to data or rankings prepared by
independent services such as Lipper Analytical Services, Inc. or other financial
or industry publications that monitor the performance of mutual funds.
Comparisons may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar, Incorporated
and other publications of a local, regional or financial industry nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in the net asset value of a class should be
considered in ascertaining the total return to shareholders for a given period.
Yield and total return data should also be considered in light of the risks
associated with a Fund's portfolio composition, quality, maturity, operating
expenses and market conditions. Any fees charged by financial institutions (as
described in "How to Purchase and Redeem Shares") are not included in the
computation of performance data but will reduce a shareholder's net return on
his investment in a Fund.
Further information about the performance of each Fund is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain copies
from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For processing purchase and redemption orders, the net asset value per
share of each Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined each day that the Exchange is open
for business.
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
With respect to each Fund, investments in securities are valued at their
closing sales price if the principal market is an exchange. Other securities,
and temporary cash investments acquired more than 60 days from maturity, are
valued at the mean between quoted bid and asked prices. Such valuations are
provided by one or more independent pricing services when such valuations are
believed to reflect fair market value. When valuing securities, pricing services
consider institutional size trading in similar groups of securities and any
developments related to specific issues, among other things. Short-term
investments with maturities of 60 days or less are generally 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 will fluctuate as the value of its investment portfolio changes.
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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 Oaks, Pennsylvania 19456.
From time to time, the Distributor, at its expense, may offer promotional
incentives to dealers. As of the date of this Prospectus, the Distributor
intends to offer certain promotional incentives, including trips and monetary
awards to NatCity Investments, Inc. and other affiliates of National City.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily through
financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. (For
information on such fees, the Investor should review his agreement with the
institution or contact it directly.) In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby a
financial institution would perform various administrative support services for
its customers who are the beneficial owners of Retail shares and would receive
fees from the Funds for such services of up to .10% (on an annualized basis) of
the average daily net asset value of such shares. See "Shareholder Services
Plan." For direct purchases of shares, Investors should call 1-800-
622-FUND(3863) or to speak with a NatCity Investments, Inc. professional, call
1-888-4NATCTY (462-8289).
The minimum investment is $500 for the initial purchase of Retail shares in
a Fund. All subsequent investments for Retail shares are subject to a minimum
investment of $250. Investments made in Retail shares of the Fund through a
Planned Investment Program ("PIP"), a monthly savings program, described below
are not subject to the minimum initial and subsequent investment requirements or
any minimum account balance requirements described in "Other Redemption
Information" below.
Under a PIP, Investors may add to their investment in Retail shares of a
Fund, in a consistent manner each month, with a minimum amount of $50. Monies
may be automatically withdrawn from a shareholder's checking or savings account
available through an investor's financial institution and invested in additional
Retail shares at the Public Offering Price next determined after an order is
received by the Trust. An Investor may apply for participation in a PIP by
completing an application obtained through a financial institution, such as
banks, brokers, or dealers selling Retail shares of the Funds, or by calling
1-800-622-FUND (3863). The program may be modified or terminated by an Investor
on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of each Fund is the sum of the
net asset value of the shares being purchased plus any applicable sales charge
per account, which is assessed as follows:
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<TABLE>
<CAPTION>
DEALERS'
AS A % AS A % REALLOWANCE
OF OFFERING OF NET AS A % OF
PRICE PER ASSET VALUE OFFERING
AMOUNT OF TRANSACTION SHARE PER SHARE PRICE
- --------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Less than $100,000... 3.00 3.09 3.00
$100,000 but less
than $250,000...... 2.00 2.04 2.00
$250,000 but less
than $500,000...... 1.50 1.52 1.50
$500,000 but less
than $1,000,000.... 1.00 1.01 1.00
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
Under the 1933 Act, the term "underwriter" includes persons who offer or
sell for an issuer in connection with the distribution of a security or have a
direct or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of Retail shares made by:
(a) trustees and officers of the Trust;
(b) directors, employees and participants in employee benefit/retirement
plans (annuitants) of National City Corporation or any of its affiliates;
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above;
(d) 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;
(e) investors purchasing Fund shares through a payroll deduction plan; and
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail shares of
each Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND (3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in Retail shares in
determining the applicable sales charge. An Investor's aggregate investment in
Retail shares is the total value (based on the higher of current net asset value
or any Public Offering Price originally paid) of:
(a) current purchases
(b) Retail shares that are already beneficially owned by the Investor for
which a sales charge has been paid
(c) Retail shares that are already beneficially owned by the Investor which
were purchased prior to July 22, 1990
(d) Retail shares purchased by dividends or capital gains that are
reinvested
If, for example, an Investor beneficially owns Retail shares of a Fund with
an aggregate current value of $90,000 and subsequently purchases Retail shares
of that Fund having a current value of $10,000, the sales charge applicable to
the subsequent purchase would be reduced to 2.0% of the Public Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. A Letter of Intent option is
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<PAGE> 121
found on the account application which may be obtained from the Investor's
financial institution or directly from the Trust by calling 1-800-622-FUND
(3863). If an Investor so elects, the 13-month period may begin up to 30 days
prior to the Investor's signing the Letter of Intent. The initial investment
under the Letter of Intent must be equal to at least 4.0% of the amount
indicated in the Letter of Intent. During the term of a Letter of Intent, the
Transfer Agent will hold Retail shares representing 4.0% of the amount indicated
in the Letter of Intent in escrow for payment of a higher sales charge if the
entire amount is not purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13-month period, or is redeemed within one year from the
time of fulfillment, 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 trust companies which
are affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
investment advisers and financial planners affiliated with National City
("RIAs") who charge an advisory, consulting or other fee for their services and
buy shares for their own accounts or the accounts of their clients
("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, NAM or RIAs 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.
It is the responsibility of the Banks, NAM and RIAs 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, NAM or RIAs. Confirmations
of share purchases and redemptions will be sent to the Banks, NAM and RIAs.
Beneficial ownership of Institutional shares will be recorded by the Banks, NAM
or RIAs and reflected in the account statements provided by them to their
Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of a Fund which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern time) on any business day are processed at the
net asset value per share next determined after receipt of the order plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the same
financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND(3863). Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
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<PAGE> 122
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 who purchased shares directly with the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. 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 $10,000
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 $10,000, 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 who purchased shares directly with the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares by telephone may
be modified or terminated at any time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Trust's transfer agent's
system. The Plan allows the shareholder to have a fixed minimum sum of $250
distributed at
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<PAGE> 123
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 $500 due to redemptions where the
shareholder does not increase the amount in the account to at least $500 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 5 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
federal funds.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (a "no load Fund") at the net asset value per share on the date of
exchange. As a result, no additional sales charge will be incurred with respect
to such an exchange. Shareholders may also exchange Retail shares of a no load
Fund for Retail shares of another no load Fund at the net asset value per share
without payment of a sales charge. In addition, shareholders of a no load Fund
may exchange Retail shares for Retail shares of a load Fund subject to payment
of the applicable sales charge. However, shareholders exchanging Retail shares
of a no load Fund which were received in a previous exchange transaction
involving Retail shares of a load Fund will not be required to pay an additional
sales charge upon notification of the reinvestment of the equivalent amount into
the Retail shares of a load Fund. Shareholders contemplating an exchange should
carefully review the Prospectus of the Fund into which the exchange is being
considered. An Armada Funds Prospectus may be obtained from NatCity Investments,
Inc., or an Investor's financial institution or by calling 1-800-622-FUND(3863).
Any Retail shares exchanged must have a value at least equal to the minimum
initial investment required by the particular investment fund into which the
exchange is being made. Investors should make their exchange requests in writing
or by telephone to the financial institutions through which they purchased their
original Retail shares. It is the responsibility of financial institutions to
transmit exchange requests to the Transfer Agent. Investors who purchased shares
directly from the Trust should transmit exchange requests directly to the
Transfer Agent. Exchange requests received by the Transfer Agent prior to 4:00
p.m. (Eastern Time) will be processed as of the close of business on the day of
receipt; requests received by the Transfer Agent after 4:00 p.m. (Eastern Time)
will be processed on the next Business Day. The Trust reserves the right to
reject any exchange request. During periods of unusual economic or market
changes, telephone exchanges may be difficult to implement. In such event, an
Investor should mail the exchange request to his financial institution, and an
Investor who directly purchased shares from the Trust should mail the exchange
request to the Transfer Agent. The exchange privilege may be modified or
terminated at any time upon 60 days notice to shareholders.
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SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified Funds over a specified period of time, and
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this Prospectus. Because purchases of
Retail Shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent in connection with the systematic
exchange program. A shareholder may apply for participation in this program
through his financial institution or by calling 1-800-622-FUND (3863).
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act, the Trust pays the following
compensation to the Distributor for services provided and expenses assumed in
providing the Trust advertising, marketing, prospectus printing and other
distribution services: an annual base fee of $1,250,000 plus incentive fees
related to asset growth. Such compensation is payable monthly and accrued daily
among the Trust's investment funds with respect to which the Distributor is
distributing shares. In the case of each such fund, such compensation shall not
exceed .10% per annum of such fund's average net assets.
SHAREHOLDER SERVICES PLAN
The Trust has implemented the Services Plan with respect to Retail shares
in the Pennsylvania Municipal Fund only. Pursuant to the Services Plan, the
Trust will enter into shareholder servicing agreements with certain financial
institutions pursuant to which the institutions render shareholder
administrative services to their customers who are the beneficial owners of
Retail shares in consideration for the payment of up to .10% (on an annualized
basis) of the average daily net asset value of such shares. Persons entitled to
receive compensation for servicing Retail shares may receive different
compensation with respect to those shares than with respect to Institutional
shares in the same Fund. Shareholder administrative services may include
aggregating and processing purchase and redemption orders, processing dividend
payments from the Fund on behalf of customers, providing information
periodically to customers showing their position in Retail shares, and providing
sub-transfer agent services or the information necessary for sub-transfer agent
services, with respect to Retail shares beneficially owned by customers. Since
financial institutions may charge their customers fees depending on the type of
customer account the Investor has established, beneficial owners of Retail
shares should read this Prospectus in light of the terms and fees governing
their accounts with financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared daily
and paid monthly. With respect to each Fund, net income for dividend purposes
consists of dividends, distributions and other income on the Fund's assets, less
the accrued expenses of the Fund. Any net realized capital gains
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<PAGE> 125
will be distributed at least annually. Dividends and distributions will reduce
the Funds' net asset values per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class of any Armada Funds at the net
asset value of such shares on the payment date. Shareholders must make such
election, or any revocation thereof, in writing to their Banks or financial
institutions. The election will become effective with respect to dividends and
distributions paid after its receipt.
Under the Services Plan, the amount of the Pennsylvania Municipal Fund's
net investment income available for distribution to the holders of Retail shares
will be reduced by the amount of shareholder servicing fees payable to financial
institutions under the Services Plan.
TAXES
FEDERAL TAXES
Each Fund intends to qualify as a separate "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for federal income tax to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its net tax-exempt
interest income and 90% of its investment company taxable income, if any, for
such year. Each Fund intends to distribute substantially all of its net
tax-exempt income (such distributions are known as "exempt-interest dividends")
and investment company taxable income, if any, each taxable year.
Exempt-interest dividends may be treated by shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code unless under
the circumstances applicable to the particular shareholder the exclusion would
be disallowed. See the Statement of Additional Information under "Additional
Information Concerning Taxes." In general, the Fund's investment company taxable
income will be the sum of its net investment income and the excess of any net
short-term capital gain for the taxable year over the net long-term capital
loss, if any, for such year. To the extent, if any, dividends paid to
shareholders are derived from taxable income or from net long-term capital
gains, such dividends will not be exempt from federal income tax and may also be
subject to state and local taxes. The Funds do not intend to earn any investment
company taxable income or net long-term capital gains. None of their
distributions are expected to be eligible for the dividends received deduction
for corporations.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by the Funds on December
31 of such year in the event such dividends are actually paid during January of
the following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
If the Funds should hold certain private activity bonds issued after August
7, 1986, shareholders must include, as an item of tax preference, the portion of
dividends paid by the Funds that is attributable to interest on such bonds in
their federal alternative minimum taxable income for purposes of determining
liability (if any) for the alternative minimum tax applicable to individuals and
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum tax purposes. Shareholders receiving
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<PAGE> 126
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of the Fund depending upon the tax
basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include sales
charges incurred upon the purchase of Fund shares in his tax basis for such
shares for the purpose of determining gain or loss on a redemption, transfer or
exchange of such shares. However, if the shareholder effects an exchange of such
shares for shares of another Fund within 90 days of the purchase and is able to
reduce the sales charges applicable to the new shares (by virtue of the Trust's
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged shares but may be included (subject
to this limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
STATE AND LOCAL TAXES
Ohio Taxes
Under current Ohio law, individuals and estates that are subject to the
Ohio personal income tax, or municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions with respect to shares of the
Ohio Tax Exempt Fund ("Distributions") to the extent that the Distributions are
properly attributable to interest on obligations of the State of Ohio or its
political subdivisions ("Ohio Obligations"). Corporations that are subject to
the Ohio corporation franchise tax will not be required to include Distributions
in their tax base for purposes of calculating the Ohio corporation franchise tax
on the net income basis to the extent that such Distributions either represent
exempt-interest dividends for federal income tax purposes or are properly
attributable to interest on Ohio Obligations or U.S. Obligations. However,
shares of the Fund will be included in a corporation's tax base for purposes of
calculating the Ohio corporation franchise tax on the net worth basis.
Distributions that consist of interest on obligations of the United States
or its territories or possessions or of any authority, commission, or
instrumentality of the United States the interest on which is exempt from state
income taxes under the laws of the United States are exempt from the Ohio
personal income tax, and municipal and school district income taxes in Ohio,
and, provided such interest is excluded from gross income for federal income tax
purposes, are excluded from the net income base of the Ohio corporation
franchise tax.
Distributions properly attributable to gain on the sale, exchange or other
disposition of Ohio Obligations will not be subject to the Ohio personal income
tax, or municipal or school district income taxes in Ohio, and will not be
included in the net income base of the Ohio corporation franchise tax.
Distributions attributable to other sources generally will not be exempt from
the Ohio personal income tax, municipal or school district income taxes in Ohio,
or the net income base of the Ohio corporation franchise tax.
It is assumed for purposes of this discussion of Ohio state and local taxes
that the Fund will continue to qualify as a regulated investment company under
the Code and that at all times at least 50% of the value of the total assets of
the Fund consists of Ohio Obligations or similar obligations of other states or
their subdivisions.
Pennsylvania Taxes
Under current Pennsylvania law, shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Pennsylvania
Municipal Fund attributable to interest income from obligations of the State of
Pennsylvania or its political
23
<PAGE> 127
subdivisions, the United States, its territories or certain of its agencies and
instrumentalities ("Exempt Securities"). However, Pennsylvania Personal Income
Tax will apply to distributions from the Fund attributable to gain realized on
the disposition of any investment, including Exempt Securities, or to interest
income from investments other than Exempt Securities. Shareholders also will be
subject to the Pennsylvania Personal Income Tax on any gain they realize on the
disposition of shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of shares in the Fund
that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended to
the extent that the Fund is comprised of Exempt Securities.
MISCELLANEOUS
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City, National City Columbus and National City Kentucky serve as
investment advisers to the Ohio Tax Exempt Fund and National City serves as
investment adviser to the Pennsylvania Municipal Fund. The advisers are wholly
owned subsidiaries of National City Corporation. The advisers provide trust and
banking services to individuals, corporations, and institutions, both nationally
and internationally, including investment management, estate and trust
administration, financial planning, corporate trust and agency, and personal and
corporate banking. The advisers are member banks of the Federal Reserve System
and the Federal Deposit Insurance Corporation.
On June 30, 1997, the Trust Departments of National City, National City
Columbus and National City Kentucky had approximately $10.7 billion, $1.5
billion and $5.6 billion, respectively, in assets under management, and National
City, National City Columbus and National City Kentucky had approximately $21.5
billion, $11.6 billion and $13.8 billion, respectively, in total trust assets.
National City has its principal offices at 1900 East Ninth Street, Cleveland,
Ohio 44114; National City Columbus has its principal offices at 155 East Broad
Street, Columbus, Ohio 43251; and National City Kentucky has its principal
offices at National City Tower, 101 South Fifth Street, Louisville, Kentucky
40202.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Ohio Tax Exempt and Pennsylvania Municipal
24
<PAGE> 128
Funds' investment policies, the adviser(s) have agreed to manage such Funds,
make decisions with respect to and place orders for all purchases and sales of
such Funds' securities, and maintain records relating to such purchases and
sales.
The Fixed Income Team of National City's Asset Management Group is
primarily responsible for the day to day management of the Funds. No individual
is primarily responsible for making investment recommendations. Members of the
team are:
- - Donald L. Ross, CFA, Director of the Fixed Income Team, has been with National
City since 1986. He specializes in the overall duration and yield curve
decisions.
- - Michael E. Santelli, CFA, Vice President, joined National City in 1995.
Previously, he spent a total of 4 years in the mortgage research departments
of Donaldson, Lufkin and Jenrette and Merrill Lynch. He specializes in the
mortgage market.
- - 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 1989. He has
more than 23 years of investment experience with expertise in the area of
municipal bonds (taxable as well as tax-free) and money market instruments.
- - Stanley F. Martinez, Investment Officer, joined National City in 1996.
Previously he managed taxable money market funds and short duration fixed
income portfolios for Mercantile Safe Deposit & Trust. Stanley's focus is on
short duration investments across all fixed income sectors.
- - John C. Pfenenger, Vice President, joined National City in 1996. His
experience includes five years at Mitchell Hutchins in their quantitative
fixed income group. John now specializes in the asset-backed sector.
- - Douglas J. Carey, Investment Officer, joined National City in 1995. Prior to
joining National City, Mr. Carey was a graduate assistant for the Economics
Department of Miami University from August 1994 through July 1995. He is
responsible for the development of econometric models used in economic and
interest rate forecasting, as well as fixed income sector relative valuation.
- - Marilou C. Hitt, Assistant Vice President, has worked in National City's Funds
Management Trading Department since 1984. She has managed short-term money
market instruments for more than 10 years. Her responsibilities also include
fixed income trading of government and corporate securities.
- - Frederick W. "Ted" Ramsey, Vice President of the Fixed Income Research Team,
oversees the Fixed Income Team's credit and research area. His experience
includes 25 years in corporate banking and credit administration, including 10
years as senior credit officer. In addition to his responsibilities as head of
credit research, Mr. Ramsey serves as credit advisor on new investment
opportunities and risk management guidelines.
- - Connie R. Chuhaloff, Investment Officer, joined National City in 1977. She has
held investment-related responsibilities since 1988. Ms. Chuhaloff also has a
background in Trust Operations. Her responsibilities include trading
short-term taxable and tax-free money market instruments, as well as municipal
bonds.
For the services provided and expenses assumed pursuant to the Advisory
Agreements relating to the Ohio Tax Exempt and Pennsylvania Municipal Funds, the
adviser(s) are entitled to receive an advisory fee, computed daily and payable
monthly, at the annual rate of .55% of the average net assets of each of the
Funds. The adviser(s) 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.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Fund. PFPC is an indirect,
25
<PAGE> 129
wholly owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
each Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive with respect to each
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .045% of the next $200,000,000 of its net assets
and .02% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 42 separate classes or
series of shares of beneficial interest ("shares"). Four of these classes or
series, which represent interests in the Ohio Tax Exempt Fund (Class K and Class
K -- Special Series 1) and Pennsylvania Municipal Fund (Class T and Class
T -- Special Series 1), are described in this Prospectus. Class K and Class T
shares constitute the Institutional class or series of shares; and Class
K -- Special Series 1 and Class T -- Special Series 1 shares constitute the
Retail class or series of shares. The other investment funds of the Trust are:
Money Market Fund
(Class A and Class A -- Special Series 1)
Government Fund
(Class B and Class B -- Special Series 1)
Treasury Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Fund
(Class D and Class D -- Special Series 1)
Equity Growth Fund
(Class H and Class H -- Special Series 1)
Fixed Income Fund
(Class I and Class I -- Special Series 1)
National Tax Exempt Fund
(Class L and Class L -- Special Series 1)
Equity Income Fund
(Class M and Class M -- Special Series 1)
Mid Cap Regional Fund
(Class N and Class N -- Special Series 1)
Enhanced Income Fund
(Class O and Class O -- Special Series 1)
Total Return Advantage Fund
(Class P and Class P -- Special Series 1)
Pennsylvania Tax Exempt Fund
(Class Q and Class Q -- Special Series 1)
Intermediate Government Fund
(Class R and Class R -- Special Series 1)
GNMA Fund
(Class S and Class S -- Special Series 1).
International Equity Fund
(Class U and Class U -- Special Series 1)
Equity Index Fund
(Class V and Class V -- Special Series 1)
Core Equity Fund
(Class W and Class W -- Special Series 1)
Small Cap Growth Fund
(Class X and Class X -- Special Series 1)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's
26
<PAGE> 130
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 previously in the text of this document, the Trust is organized
as a trust under the laws of Massachusetts. Shareholders of such a trust may,
under certain circumstances, be held personally liable (as if they were
partners) for the obligations of the trust. The Declaration of Trust of the
Trust provides for indemnification out of the trust property for any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of September 26, 1997, National City and National City Columbus held
beneficially or of record approximately 37.85% and 25.65%, respectively, of the
outstanding Institutional shares of the Ohio Tax Exempt Fund; National City and
National City Columbus held beneficially or of record approximately 0.04% and
0.23%, respectively, of the outstanding Institutional Shares of the Pennsylvania
Municipal Fund. Neither National City nor National City Columbus has any
economic interest in such shares which are held solely for the benefit of its
customers, but may be deemed to be a controlling person of the Funds within the
meaning of the 1940 Act by reason of its record ownership of such shares. The
names of beneficial owners and record owners who are controlling shareholders
under the 1940 Act may be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to
P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust
for these services are described in the Statement of Additional Information.
27
<PAGE> 131
EXPENSES
Except as noted below, the Trust's advisers bear all expenses in connection
with the performance of their services. Each Fund of the Trust bears its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. Each Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Pennsylvania Municipal Fund also
bear the expense of shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
28
<PAGE> 132
ARMADA FUNDS
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES Robert D. Neary
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, Inc.
Leigh Carter
Retired President and Chief Operating
Officer,
B.F. Goodrich Company
Director:
Acromed Corporation
Adams Express Company
Kirtland Capital Corp.
Morrison Products
Petroleum & Resources Corp.
John F. Durkott
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
Richard W. Furst, Dean
Professor of Finance and Dean, Carol Martin
Gatton College of Business and Economics,
University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
Gerald L. Gherlein
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
Meridia Health System
WVIZ Educational Television
J. William Pullen
President and Chief Executive Officer,
Whayne Supply Company
Richard B. Tullis
Chairman Emeritus, Harris Corporation
Director:
Hamilton Beach/Proctor-Silex, Inc.
NACCO Materials Handling Group, Inc.
Waste-Quip, Inc.
<PAGE> 133
ARMADA FUNDS LOGO BULK RATE
Oaks, Pennsylvania 19456 U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
AF-810 (9/97)
<PAGE> 134
ARMADA FUNDS
Statement of Additional Information
September 30, 1997
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 30, 1997 (the "Prospectus"). A copy of the
Prospectus may be
<PAGE> 135
obtained by calling or writing the Trust at 1-800-622-FUND (3863) , Oaks,
Pennsylvania 19456.
<PAGE> 136
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION............................................. 1
INVESTMENT OBJECTIVES AND POLICIES.............................................. 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................18
DESCRIPTION OF SHARES...........................................................20
ADDITIONAL INFORMATION CONCERNING TAXES.........................................22
TRUSTEES AND OFFICERS...........................................................27
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS..................................................31
SHAREHOLDER SERVICES PLAN.......................................................37
PORTFOLIO TRANSACTIONS..........................................................38
AUDITORS........................................................................39
COUNSEL.........................................................................40
YIELD AND PERFORMANCE INFORMATION...............................................40
MISCELLANEOUS...................................................................45
FINANCIAL STATEMENTS............................................................46
APPENDIX A......................................................................A-1
</TABLE>
-i-
<PAGE> 137
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Ohio Tax Exempt and Pennsylvania Municipal Funds (the "Fund"). The information
contained in this Statement of Additional Information expands upon matters
discussed in the Prospectus. No investment in shares of a Fund should be made
without first reading the Prospectus.
The Pennsylvania Municipal Fund commenced operations on August
10, 1994 as a separate investment portfolio (the "Predecessor Fund") of Inventor
Funds, Inc., which was organized as a Maryland corporation. On September 9,
1996, the Predecessor Fund was reorganized as a new portfolio of the Trust.
Prior to the reorganization, the Predecessor Fund offered and sold shares of
stock that were similar to the Trust's Retail Shares of beneficial interest.
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, and Moody's for Municipal Securities and other securities which may be
held by the Funds.
MUNICIPAL SECURITIES
- ---------------------
As described in the Prospectus, the two principal
classifications of Municipal Securities consist of "general obligation" and
"revenue" issues. The Ohio Tax Exempt and Pennsylvania Municipal Funds also may
invest in "moral obligation" issues, which are normally issued by special
purpose authorities. Municipal Bonds include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, and the extension of loans to public institutions and facilities.
Private activity bonds may be purchased if the interest paid is excludable from
federal income tax. Private activity bonds are issued by or on behalf of states
or political subdivisions thereof to finance privately owned or operated
facilities for business and manufacturing, housing, sports, and pollution
control and to finance activities of and
-1-
<PAGE> 138
facilities for charitable institutions. Private activity bonds are also used to
finance public facilities such as airports, mass transit systems, ports, parking
and low income housing. The payment of the principal and interest on private
activity bonds is dependent solely on the ability of the facility's user to meet
its financial obligations and may be secured by a pledge of real and personal
property so financed.
Pennsylvania Municipal Securities that are payable only from
the revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest and principal,
including, among others, laws and regulations which limit the amount fees, rates
or other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. Pennsylvania Municipal
Securities, the payment of interest and principal on which is insured in whole
or in part by a Pennsylvania governmentally created fund, may be adversely
affected by Pennsylvania laws or regulations which restrict the aggregate
proceeds available for payment of principal and interest in the event of a
default on such municipal securities. Similarly, Pennsylvania Municipal
Securities, the payment of interest and principal on which is secured, in whole
or in part, by an interest in real property may be adversely affected by
Pennsylvania laws which limit the availability of remedies or the scope of
remedies available in the event of a default on such municipal securities.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific Pennsylvania Municipal Securities the
Pennsylvania Municipal Fund will invest from time to time or predicting the
nature or extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the securities
in which the Pennsylvania Municipal Fund may invest and, therefore, on the
shares of the Fund.
There are, of course, variations in the quality of Municipal
Bonds both within a particular classification and between classifications, and
the yields on Municipal Bonds depend upon a variety of factors, including the
financial condition of the issuer, the general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of Rating Agencies represent their opinions
as to the quality of Municipal Bonds. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and Municipal
Bonds with the same maturity, interest rate and rating may have different yields
while Municipal Bonds of the same maturity and interest rate with different
ratings
-2-
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may have the same yield. Subsequent to its purchase by a Fund, an issue of
Municipal Bonds may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Funds. The Funds' adviser(s) will
consider such an event in determining whether they should continue to hold the
obligation.
The payment of principal and interest on most Municipal Bonds
purchased by the Funds will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its Municipal Bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on the principal of its Municipal Bonds may be materially adversely
affected by litigation or other conditions.
Certain Municipal Bonds held by the Funds may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal Bond
at the time of its original issuance. In the event that the issuer defaults on
interest or principal payments, the insurer of the bond is required to make
payment to the bondholders upon proper notification. There is, however, no
guarantee that the insurer will meet its obligations. In addition, such
insurance will not protect against market fluctuations caused by changes in
interest rates and other factors. The Funds may, from time to time, invest more
than 25% of their respective assets in Municipal Bonds covered by insurance
policies.
Municipal notes in which the Funds may invest include, but are
not limited to, general obligation notes, tax anticipation notes (notes sold to
finance working capital needs of the issuer in anticipation of receiving taxes
on a future date), revenue anticipation notes (notes sold to provide needed cash
prior to receipt of expected non-tax revenues from a specific source), bond
anticipation notes, certificates of indebtedness, demand notes and construction
loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
- ----------------------------
Investments by the Funds in tax-exempt commercial paper will
be limited to investments in obligations which are rated at least A-2 by S&P,
F-2 by Fitch or Prime-2 by Moody's at the time of investment or which are of
equivalent quality as determined by their adviser(s). Investments in floating
rate instruments will normally involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate) at a major
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commercial bank, and that the investing Fund can demand payment of the
obligation at all times or at stipulated dates on short notice (not to exceed 30
days) at par plus accrued interest. A Fund must use the shorter of the period
required before it is entitled to prepayment under such obligations or the
period remaining until the next interest rate adjustment date for purposes of
determining the maturity. Such obligations are frequently secured by letters of
credit or other credit support arrangements provided by banks. The quality of
the underlying credit or of the bank, as the case may be, must, in the opinion
of the Funds' adviser(s) be equivalent to the long-term bond or commercial paper
ratings stated above. The adviser(s) will monitor the earning power, cash flow
and liquidity ratios of the issuers of such instruments and the ability of an
issuer of a demand instrument to pay principal and interest on demand. Other
types of tax-exempt instruments may also be purchased as long as they are of a
quality equivalent to the bond or commercial paper ratings stated above.
STAND-BY COMMITMENTS
- --------------------
Each Fund may acquire stand-by commitments (also known as put
options) with respect to Municipal Bonds held in its portfolio. The Funds expect
that stand-by commitments will generally be available without the payment of any
direct or indirect consideration. However, if necessary or advisable, a Fund may
pay for a stand-by commitment either separately in cash or by paying a higher
price for portfolio securities which are acquired subject to the commitment
(thus reducing the yield to maturity otherwise available for the same
securities). A Fund will not acquire a stand-by commitment unless immediately
after the acquisition, not more than 5% of its total assets will be invested in
instruments subject to a demand feature, or in stand-by commitments, with the
same institution.
The Funds' right to exercise stand-by commitments will be
unconditional and unqualified. A stand-by commitment will be transferable only
with the underlying Municipal Bonds which may be sold to a third party at any
time. Until a Fund exercises its stand-by commitment, it owns the securities in
its portfolio which are subject to the commitment.
The amount payable to a Fund upon its exercise of a stand-by
commitment will normally be (i) the Fund's acquisition cost of the Municipal
Bonds (excluding any accrued interest which the Fund paid on its acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period. Under normal market conditions, in determining net asset value, the Fund
values the underlying Municipal Bonds on an amortized cost basis. Accordingly,
the amount payable by a dealer upon exercise of a stand-by commitment
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will normally be substantially the same as the portfolio value of
the underlying Municipal Bonds.
Each Fund intends to enter into stand-by commitments only,
with dealers, banks and broker-dealers which, in the adviser(s) opinion, present
minimal credit risks. A Fund's reliance upon the credit of these dealers, banks
and broker-dealers will be secured by the value of the underlying Municipal
Bonds subject to the commitment. Thus, the risk of loss to the Funds in
connection with a stand-by commitment will not be qualitatively different from
the risk of loss faced by a person that is holding securities pending settlement
after having agreed to sell the securities in the ordinary course of business.
WHEN-ISSUED SECURITIES
- ----------------------
Each Fund may purchase Municipal Bonds on a "when-issued"
basis (i.e., for delivery beyond the normal settlement date at a stated price
and yield). When a Fund agrees to purchase when- issued securities, the
custodian sets aside cash or liquid portfolio securities equal to the amount of
the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment, marked to market daily. It is likely that a Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When the Funds engage in when-issued transactions, they rely
on the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser(s), which
invest in high quality, short term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. Each
Fund currently intends to limit such investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in
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securities of investment companies as a group; (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund; and (d) not more than 10% of the outstanding voting stock of any one
investment company will be owned in the aggregate by the Fund and other
investment companies advised by the advisers.
TAXABLE MONEY MARKET INSTRUMENTS
- --------------------------------
Each Fund may invest in various Taxable Money Market
Instruments such as bank obligations, commercial paper, repurchase agreements
and U.S. Government Obligations. The Funds may also invest in guaranteed
investment contracts ("GICs").
Bank obligations include bankers' acceptances generally having
a maturity of six months or less, negotiable certificates of deposit, and
non-negotiable time deposits issued for a definite period of time and earning a
specified return by a U.S. bank which is a member of the Federal Reserve System.
Bank obligations also include U.S. dollar denominated bankers' acceptances,
certificates of deposit and, with respect to the Ohio Tax Exempt Fund, time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. The 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 the Fund's total assets at the time of
purchase.
Investments include commercial paper and other short term
promissory notes issued by corporations, municipalities and other entities
(including variable and floating rate instruments). In addition, the 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. The Funds may also acquire zero coupon obligations, which have greater
price volatility than coupon obligations and which will not result in the
payment of interest until maturity.
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's adviser deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the
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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 the Fund would
be entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities, the Board of Trustees of the
Trust believes that, under the regular procedures normally in effect for custody
of the 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 the Fund under the 1940 Act.
Each Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Funds will invest in the obligations of such
agencies or instrumentalities only when the advisers believe that the credit
risk with respect thereto is minimal.
The Funds may make limited investments in GICs issued by U.S.
insurance companies. Each Fund will purchase a GIC only when the advisers have
determined, under guidelines established by the Board of Trustees, that the GIC
presents minimal credit risks to the Fund and is of comparable quality to
instruments that are rated high quality by one or more Rating Agencies.
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VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
The Funds 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, the investing Fund may demand
payment of principal and accrued interest at a time specified in the instrument
or may resell them to a third party. Such obligations may be backed by bank
letters of credit or guarantees issued by banks, other financial institutions or
the U.S. Government, its agencies or instrumentalities. The quality of any
letter of credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the advisers. In the event an issuer
of a variable or floating rate obligation defaulted on its payment obligation,
the Funds might be unable to dispose of the instrument because of the absence of
a secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities.
2. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs or oil,
gas and mineral leases, except : (a) to the extent appropriate to its investment
objective, invest in securities issued by companies which purchase or sell
commodities or commodity contracts or which invest in such programs; and (b)
with respect to the Ohio Tax Exempt Fund to purchase and sell
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futures contracts and options on futures contracts in accordance
with its investment objective.
3. Invest in any issuer for the purpose of exercising control
or management.
In addition, the Ohio Tax Exempt Fund may not:
1. Purchase securities on margin, make short sales of
securities, or maintain a short position, except to purchase or sell futures
contracts and options on futures contracts in accordance with its investment
objective.
2. Purchase or sell real estate, except to invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
3. Write or purchase put options (except stand-by
commitments), call options, straddles, spreads, or any combination thereof,
except to purchase and sell futures contracts and options on futures contracts
in accordance with its investment objective.
4. Purchase or retain securities of any issuer if the officers
or trustees of the Trust or the officers or directors of its investment advisers
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.
In addition, the Pennsylvania Municipal Fund may not:
1. Make short sales of securities or purchase securities on
margin, except to obtain short-term credits as necessary for the clearance of
security transactions in accordance with its investment objective.
2. Purchase or sell real estate or real estate limited
partnership interests, except to invest in securities or interests of companies
which invest in real estate.
3. Pledge, mortgage or hypothecate assets, except to secure
borrowings permitted by the Fund's investment limitations in aggregate amounts
not to exceed 33-1/3% of the Fund's total assets taken at current value at the
time of the incurrence of such loan.
4. Acquire more than 10% of the voting securities of any one
issuer, provided that this limitation shall apply only as to 75% of the Fund's
net assets.
5. Purchase securities of other investment companies, except
as permitted by the 1940 Act and the rules and regulations thereunder.
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6. Issue senior securities (as defined in the Investment
Company Act of 1940), except in connection with permitted borrowings as
described above or as permitted by rule, regulation or order of the SEC.
The following limitation with respect to the Pennsylvania
Municipal Fund is considered non-fundamental and therefore may be changed
without a shareholder vote.
The Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 15% of its net assets.
The foregoing percentages will apply at the time of purchase
of a security.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making decisions.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN OHIO BONDS
- --------------------------------------------------------------
As described in the Prospectus, the Ohio Tax Exempt Fund will
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions (Ohio Obligations). The Fund is
therefore susceptible to general or particular economic, political or regulatory
factors that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connection
with their issuance of securities and from other publicly available information,
and is believed to be accurate. No independent verification has been made of any
of the following information.
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Generally, the creditworthiness of Ohio Obligations of local
issuers is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply
in connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio
Obligations has been guaranteed by bond insurance purchased by the issuers, the
Fund or other parties. Those Ohio Obligations may not be subject to the factors
referred to in this section of the Prospectus.
Ohio is the seventh most populous state; the 1990 Census count
of 10,847,000 indicated a 0.5% population increase from 1980. The Census
estimate for 1995 is 11,157,000.
While diversifying more into the service and other non-
manufacturing areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially- developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last six years the State rates were below the national rates
(4.9% versus 5.4% in 1996). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or
state-wide economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value of
Ohio Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in
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a deficit position. Most State operations are financed through the General
Revenue Fund (GRF), for which the personal income and sales-use taxes are the
major sources. Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with the ending FY
balance reduced during less favorable and increased during more favorable
economic periods. The State has well-established procedures for, and has timely
taken, necessary actions to ensure resource/expenditure balances during less
favorable economic periods. Those procedures included general and selected
reductions in appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization Fund (BSF, a
cash and budgetary management fund). June 30, 1991 ending fund balances were
$135.3 million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges
to State finances, successfully addressed. To allow time to resolve certain
budget differences an interim appropriations act was enacted effective July 1,
1991; it included GRF debt service and lease rental appropriations for the
entire biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium was passed on
July 11, 1991. $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that
FY, both in light of a continuing uncertain nationwide economic situation, there
was projected, and then timely addressed, an FY 1992 imbalance in GRF resources
and expenditures. In response, the Governor ordered most State agencies to
reduce GRF spending in the last six months of FY 1992 by a total of
approximately $184 million; the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the GRF; and
adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was
then projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to BSF replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations
needed for debt service on or lease rentals relating to any State obligations.
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The 1994-95 biennium presented a more affirmative financial
picture. Based on June 30, 1994 balances, an additional $260 million was
deposited in the BSF. The biennium ended June 30, 1995 with a GRF ending fund
balance of $928 million, of which $535.2 million was transferred into the BSF
(which had an August 28, 1997 balance of over $862 million). The significant GRF
fund balance, after leaving in the GRF an unreserved and undersignated balance
of $70 million, was transferred to the BSF and other funds including school
assistance funds and, in anticipation of possible federal program changes, a
human services stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund
balance, $100 million was transferred for elementary and secondary school
computer network purposes and $30 million to a new State transportation
infrastructure fund. Approximately $400.8 million served as a basis for
temporary 1996 personal income tax reductions aggregating that amount. The
1996-97 biennium-ending GRF fund balance was $834.9 million. Of that, $250
million goes to school building construction and renovation, $94 million to the
school computer network, $44.2 million for school textbooks and instructional
materials and a distance learning program, and $34 million to the BSF (which has
a current balance of $862.7 million), with the $263 million balance to a State
income tax reduction.
The GRF appropriations act for the 1997-98 biennium was passed
on June 25, 1997 and promptly signed (after selective vetoes) by the Governor.
All necessary GRF appropriations for State debt service and lease rental
payments then projected for the biennium were included in that act.
The State's incurrence or assumption of debt without a vote of
the people is, with limited exceptions, prohibited by current State
constitutional provisions. The State may incur debt, limited in amount to
$750,000, to cover casual deficits or failures in revenues or to meet expenses
not otherwise provided for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. (An exception is made
in both cases for any debt incurred to repel invasion, suppress insurrection or
defend the State in war.)
By 14 constitutional amendments, approved from 1921 to date
(the latest adopted in 1995,) Ohio voters authorized the incurrence of State
debt and the pledge of taxes or excises to its payment. At August 28, 1997, $952
million (excluding certain highway bonds payable primarily from highway use
receipts) of this debt was outstanding or awaiting delivery. The only such State
debt at that date still authorized to be incurred were portions of the highway
bonds, and the following: (a) up to $100 million of obligations for coal
research and development may be outstanding at any one time ($30.9 million
outstanding); (b) $240 million of obligations authorized for local
infrastructure improvements, no more than $120 million of which may be issued in
any calendar year
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($826 million outstanding); and (c) up to $200 million in general obligation
bonds for parks, recreation and natural resources purposes which may be
outstanding at any one time ($94.2 million outstanding, with no more than $50
million to be issued in any one year).
The electors in 1995 approved a constitutional amendment
extending the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizing additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million outstanding authorization, and authorizes not more that $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
The Constitution also authorizes the issuance of State
obligations for certain purposes, the owners of which do not have the right to
have excises or taxes levied to pay debt service. Those special obligations
include obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer, $4.8
billion of which were outstanding at August 28, 1997.
A 1990 constitutional amendment authorizes greater State and
political subdivision participation (including financing) in the provision of
housing. The General Assembly may for that purpose authorize the issuance of
State obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and
credit and taxing power of the State to meeting certain guarantees under the
State's tuition credit program which provides for purchase of tuition credits,
for the benefit of State residents, guaranteed to cover a specified amount when
applied to the cost of higher education tuition. (A 1965 constitutional
provision that authorized student loan guarantees payable from available State
moneys has never been implemented, apart from a "guarantee fund" approach funded
essentially from program revenues.)
State and local agencies issue obligations that are payable
from revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited
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in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion
(state-wide aggregate approximately 44% in recent years) of their operating
moneys from State subsidies, but are dependent on local property taxes, and in
119 districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding. The Ohio
Supreme Court has recently concluded that aspects of the system (including basic
operating assistance and the loan program described below) are unconstitutional,
and ordered the State to provide for and fund a system complying with the Ohio
Constitution. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A program has
provided for school district cash need borrowing directly from commercial
lenders, with diversion of State subsidy distributions to repayment if needed.
Recent borrowings under this program totalled $41.1 million for 28 districts in
FY 1994, $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), and $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), and $113.2 million for 12 districts in 1997 (including $90 million for
restructuring prior loans to one).
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations. With other
subdivisions, they also receive local government support and property tax relief
moneys distributed by the State.
For those few municipalities and school districts that on
occasion have faced significant financial problems, there are statutory
procedures for a joint State/local commission to monitor the fiscal affairs and
for development of a financial plan to eliminate deficits and cure any defaults.
(Similar procedures have recently been extended to counties and townships.)
Since inception for municipalities in 1979, these "fiscal emergency" procedures
have been applied to 24 cities and villages; for 19 of them the fiscal situation
was resolved and the procedures terminated. As of August 28, 1997, the 1996
school district "fiscal emergency" provision had been applied to four districts,
and eight districts had been placed on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on
real or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since 1934
limited to 1% of true value in money the amount of the aggregate levy (including
a levy for unvoted general obligations) of property taxes by all overlapping
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<PAGE> 152
subdivisions, without a vote of the electors or a municipal charter provision,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA
- ----------------------------------------------------------------
BONDS
- -----
Potential shareholders should consider the fact that the
Pennsylvania Municipal Fund's portfolio consists primarily of securities issued
by the Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize that the Fund's performance is closely tied to
general economic conditions within the Commonwealth as a whole and to economic
conditions within particular industries and geographic areas located within the
Commonwealth.
Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending deceases have resulted in surpluses the last
four years; as of June 30, 1996, the General Fund had a surplus of $635.2
million.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU, and the parties are proceeding with
-16-
<PAGE> 153
discovery; (ii) in 1987, the Supreme Court of Pennsylvania held the statutory
scheme for county funding of the judicial system to be in conflict with the
constitution of the Commonwealth, but it stayed judgment pending enactment by
the legislature of funding consistent with the opinion, and the legislature has
yet to consider legislation implementing the judgment. In 1992, a new action in
mandamus was filed seeking to compel the Commonwealth to comply with the
original decision. The Court issued a writ in mandamus and appointed a special
master in 1996 to submit a plan for implementation, which it intended to require
by January 1, 1998. In January 1997, the Court established a committee,
consisting of the special master and representatives of the Executive and
Legislative branches, to develop an implementation plan; (iii) litigation was
filed in both state and federal court by an association of rural and small
schools and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts -- the federal case has been stayed pending the resolution of the
state case; a trial in the state case commenced in January 1997 and has
recessed; no briefing schedule or date for oral argument has yet been set; (iv)
Envirotest/Synterra Partners ("Envirotest") filed suit against the Commonwealth
asserting that it sustained damages in excess of $350 million, as a result of
investments it made in reliance on a contract to conduct emissions testing
before the emission testing program was suspended. Envirotest has entered into a
Standstill Agreement with the Commonwealth pursuant to which Envirotest will
receive $145 million, with interest at 6 percent per annum; and (v) in 1995, the
Commonwealth, the Governor of Pennsylvania, the City of Philadelphia and the
Mayor of Philadelphia were joined as additional respondents in an enforcement
action commenced in Commonwealth Court in 1973 by the Pennsylvania Human
Relations Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The Commonwealth and the City were joined to
determine their liability, if any, to pay additional costs necessary to remedy
segregation-related conditions found to exist in Philadelphia public schools. In
January 1997, the Pennsylvania Supreme Court ordered the parties to brief
certain issues, but no decision by the Supreme Court has been issued.
A disaster emergency was declared by the Governor and a
federal major disaster declaration was made by the President of the United
States for certain counties in the Commonwealth for a blizzard and subsequent
flooding in January 1996. The General Assembly authorized $123 million to
provide for the Commonwealth's share of the required match for federal public
assistance and disaster mitigation funds.
Although there can be no assurance that such conditions will
continue, the Commonwealth's general obligation bonds are currently rated AA- by
S&P and A1 by Moody's and Philadelphia's and Pittsburgh's general obligation
bonds are currently rated BBB- and
-17-
<PAGE> 154
BBB+, respectively, by S&P and Baa and Baa1, respectively, by Moody's.
The City of Philadelphia (the "City") experienced a series of
General Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term solution
for its economic difficulties. The audited balance of the City's General Fund as
of June 30, 1996 was a surplus of $118.5 million.
In recent years an authority of the Commonwealth, the
Pennsylvania Intergovernmental Cooperation Authority ("PICA"), has issued
approximately $1.76 billion of special revenue bonds on behalf of the City to
cover budget shortfalls, to eliminate projected deficits and to fund capital
spending. As one of the conditions of issuing bonds on behalf of the City, PICA
exercises oversight of the City's finances. The City is currently operating
under a five year plan approved by PICA in 1996. PICA's power to issue further
bonds to finance capital projects expired on December 31, 1994. PICA's authority
to issue bonds to finance cash flow deficits expired on December 31, 1996, but
its authority to refund existing debt will not expire.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co., formerly SEI Financial Services Company (the
"Distributor"), which has agreed to use appropriate efforts to solicit all
purchase orders. The issuance of shares is recorded on the books of the Trust.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to an investor's financial institution
at its principal office. Such requests must be signed by each shareholder, with
each signature guaranteed by a U.S. commercial bank or trust company or by a
member firm of a national securities exchange. Guarantees must be signed by an
authorized signatory and "Signature Guaranteed" must appear with the signature.
An investor's financial institution may request further documentation from
corporations, executors, administrators, trustees or guardians, and will accept
other suitable verification arrangements from foreign investors, such as
consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when: (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
-18-
<PAGE> 155
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, 1997, sales loads paid by
shareholders of the Ohio Tax Exempt Fund totalled $407.
For the period from June 1, 1996 until September 9, 1996,
shareholders of the Predecessor Fund paid a total of $0 in sales charges. For
the period from September 9, 1996 through May 31, 1997, shareholders of the
Pennsylvania Municipal Fund paid a total of $5 in sales charges.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus permit an investor to use
"dollar cost averaging" in making investments. Under this Program, an agreed
upon fixed dollar amount is invested in Fund shares at predetermined intervals.
This may help investors to reduce their average cost per share because the
Program results in more shares being purchased during periods of lower share
prices and fewer shares during periods of higher share prices. In order to be
effective, dollar cost averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that dollar cost averaging
results in purchases of shares regardless of their price on the day of
investment or market trends and does not ensure a profit, protect against losses
in a declining market, or prevent a loss if an investor ultimately redeems his
shares at a price which is lower than their purchase price. An investor may want
to consider his financial ability to continue purchases through periods of low
price levels. From time to time, in advertisements, sales literature,
communications to shareholders and other materials ("Materials") the Trust may
illustrate the effects of dollar cost averaging through use of or comparison to
an index such as the S&P 500 Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
An illustration of the computation of the offering price per
Retail share of the Funds, based on each Fund's net asset value and number of
outstanding shares on May 31, 1997, follows:
TABLE
-----
OHIO TAX EXEMPT FUND
--------------------
Net Assets of Retail Shares...................................... $3,534,526
----------
Outstanding Retail Shares........................................ 326,554
----------
-19-
<PAGE> 156
Tax Exempt Series SAI
Net Asset Value Per Share
($3,534,526 / 326,554)................................ $10.82
---------------------- ------
Sales Charge, 3.00% of
offering price (3.05% of net asset value per share).... $0.33
Offering to Public..................................... $11.15
------
PENNSYLVANIA MUNICIPAL FUND
---------------------------
Net Assets of Retail Shares............................ $80,928
-------
Outstanding Retail Shares.............................. 7,922
-----
Net Asset Value Per Share
($80,928 / 7,922)..................................... $10.22
----------------- ------
Sales Charge, 3.00% of
offering price (3.13% of net asset value per share).... $0.32
-----
Offering to Public..................................... $10.54
-
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived) to
reduce the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself to be the shareholder
and believed by the Transfer Agent or the financial institution to be genuine.
The Investor or his financial institution must notify the Transfer Agent of his
prior ownership of Retail shares and account number. The Transfer Agent's
records of such instructions are binding.
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more
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<PAGE> 157
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 42 classes or series of shares. Four of these classes
or series, which represent interests in the Ohio Tax Exempt Fund (Class K and
Class K -Special Series 1) and Pennsylvania Municipal Fund (Class T and Class T
- - Special Series 1), are described in this Statement of Additional Information
and the related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of the Fund are entitled to
receive the assets available for distribution belonging to the particular Fund,
and a proportionate distribution, based upon the relative asset values of the
respective Fund, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
class in a particular investment fund have equal voting rights except that only
Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an
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<PAGE> 158
investment fund to another management investment company for consideration which
may include securities issued by the purchaser and, in connection therewith, to
cause all outstanding shares of such fund involved to be redeemed at a price
which is equal to their net asset value and which may be paid in cash or by
distribution of the securities or other consideration received from the sale and
conveyance; (b) sell and convert an investment fund's assets into money and, in
connection therewith, to cause all outstanding shares of such fund involved to
be redeemed at their net asset value; or (c) combine the assets belonging to an
investment fund with the assets belonging to another investment fund of the
Trust, if the Board of Trustees reasonably determines that such combination will
not have a material adverse effect on shareholders of any fund participating in
such combination, and, in connection therewith, to cause all outstanding shares
of any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
IN GENERAL
- ----------
As described above and in the Prospectus, each Fund is
designed to provide investors with tax-exempt interest income. The Funds are not
intended to constitute a balanced investment program and are not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of the Funds would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and IRAs since such plans and
accounts are generally tax-exempt and,
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<PAGE> 159
therefore, would not gain any additional benefit from the Funds' dividends being
tax-exempt.
The policy of the Funds is to pay each year as federal
exempt-interest dividends substantially all the Funds' Municipal Securities
interest income net of certain deductions. In order for the Funds to pay federal
exempt-interest dividends with respect to any taxable year, at the close of each
taxable quarter at least 50% of the aggregate value of their respective
portfolios must consist of tax-exempt obligations. An exempt-interest dividend
is any dividend or part thereof (other than a capital gain dividend) paid by a
Fund and designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than 60 days after the close of the Fund's taxable year.
However, the aggregate amount of dividends so designated by a Fund cannot exceed
the excess of the amount of interest exempt from tax under Section 103 of the
Code received by the Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of total
dividends paid by a Fund with respect to any taxable year which qualifies as
federal exempt- interest dividends will be the same for all shareholders
receiving dividends from the Fund with respect to such year.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the Funds. A "substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, or
who occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. A "related person" includes certain related natural persons,
affiliated corporations, partners and partnerships, and S corporations and their
shareholders.
Interest on indebtedness incurred by a shareholder to purchase
or carry shares of the Funds is not deductible for federal income tax purposes
if the Funds distribute exempt-interest dividends during the shareholder's
taxable year. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six months holding requirement to a period of not less than the
greater of 31 days or
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<PAGE> 160
the period between regular dividend distributions where the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus and above, certain requirements with respect to the
source of its income during a taxable year. At least 90% of the gross income of
each Fund must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks, securities
or foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is treated
as derived with respect to the Fund's business of investing in stock, securities
or currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.
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 (the
"short-short test"): (1) stock and securities (as defined in Section 2(a)(36) of
the 1940 Act); (2) options, futures and forward contracts other than those on
foreign currencies; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock and securities (and options and futures
with respect to stocks and securities). Interest (including original issue
discount and, with respect to taxable debt securities and non-taxable debt
securities acquired after April 30, 1993, accrued market discount) received by a
Fund upon maturity or disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of this requirement. However, any other
income which is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
Effective for taxable years beginning after August 4, 1997, the recently enacted
Taxpayer Relief Act of 1997 repeals the short-short test.
-24-
<PAGE> 161
The Trust will designate any distribution of long-term capital
gains of a Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of such Fund's shares,
if the shareholder has not held such shares for at least six months, any loss on
the sale or exchange of those shares will be treated as long-term capital loss
to the extent of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year a Fund does not qualify for federal
tax treatment as a regulated investment company, all of 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 Securities)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the Fund's current and accumulated earnings and profits, and would be eligible
for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or gross proceeds
realized upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients".
Depending upon the extent of the Funds' activities in states
and localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under federal income tax laws. Shareholders are
advised to consult their tax advisers concerning the application of state and
local taxes.
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<PAGE> 162
STATE AND LOCAL TAXES - OHIO TAX EXEMPT FUND
- --------------------------------------------
The Ohio Tax Exempt Fund is not subject to the Ohio personal
income tax, or school district or municipal income taxes in Ohio. The Ohio Tax
Exempt Fund is not subject to the Ohio corporation franchise tax or the Ohio
dealers in intangibles tax, provided that, if there is a sufficient nexus
between the State of Ohio and such entity that would enable the State to tax
such entity, the Fund timely files the annual report required by Section 5733.09
of the Ohio Revised Code. The Ohio Tax Commissioner has waived the annual filing
requirement for every tax year since 1990, the first year to which such
requirement applied.
Shareholders of the Fund otherwise subject to Ohio personal
income tax, or municipal or school district income taxes in Ohio imposed on
individuals and estates will not be subject to such taxes on distributions with
respect to shares of the Fund ("Distributions") to the extent that such
Distributions are properly attributable to interest on or gain from the sale of
Obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof and agencies and instrumentalities of the State or its political
subdivisions ("Ohio Obligations").
Shareholders otherwise subject to the Ohio corporation
franchise tax will not be required to include Distributions in their tax base
for purposes of calculating the Ohio corporation franchise tax on the net income
basis to the extent that such distributions either (a) are properly attributable
to interest on or gain from the sale of Ohio Obligations, (b) represent "exempt-
interest dividends" for federal income tax purposes, or (c) are described in
both (a) and (b). Shares of the Fund will be included in a Shareholder's tax
base for purposes of computing the Ohio corporation franchise tax on the net
worth basis.
Distributions that consist of interest on obligations of the
United States or its territories or possessions or of any authority, commission,
or instrumentality of the United States that is exempt from state income taxes
under the laws of the United States (including obligations issued by the
governments of Puerto Rico, the Virgin Islands or Guam and their authorities or
municipalities) are exempt from the Ohio personal income tax, and municipal and
school district income taxes in Ohio, and, provided such interest is excluded
from gross income for federal income tax purposes, are excluded from the net
income base of the Ohio corporation franchise tax.
It is assumed for purposes of this discussion of State and
Local Taxes that the Fund will continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and that at all
times at least 50% of the value of the total assets of the Fund consists of Ohio
Obligations or similar obligations of other states or their subdivisions.
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<PAGE> 163
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994;
Director, Zurn Industries,
Inc. (building products
and construction
services), since June
1995.
Leigh Carter* Trustee Retired President and
13901 Shaker Blvd., #6B Chief Operating Officer,
Cleveland, OH 44120 B.F. Goodrich Company,
Age 72 August 1986 to September
1990; Director, Adams
Express Company
(closed-end investment
company), since April
1982; Director, Acromed
Corporation (producer of
spinal implants), since
June 1992; Director,
Petroleum & Resources
Corp., since April 1987;
Director, Morrison
Products (manufacturer of
blower fans and air moving
equipment), since April
1983; Director, Kirtland
Capital Corp. (privately
funded investment group),
since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 53 Center, Inc., since
January 1982; partner,
Kittles Bloomington
Property Company, since
January 1981; partner,
KK&D (Affiliated Real
Estate Companies of
Kittle's Home Furnishings
Center), since January
1989.
</TABLE>
-27-
Tax Exempt Series SAI
<PAGE> 164
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed
Corporation (restaurant
group), since 1990;
Director ; Foam Design,
Inc. (manufacturer of
industrial and commercial
foam products), since
1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health
System (four hospital
health system); Trustee,
WVIZ Educational
Television (public
television).
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
Executive Officer,
American Contractors
Rentals & Sales (rental
subsidiary of Whayne
Supply Co.), since 1988.
Richard B. Tullis Trustee Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, Ohio 44124 communication and
Age 84 information processing
equipment), since October
1985; Director, NACCO
Materials Handling Group,
Inc. (manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990;
Director, Waste-Quip, Inc.
(waste handling
equipment), since 1989.
</TABLE>
-28-
<PAGE> 165
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
Herbert R. Martens, Jr. President Executive Vice President,
C/O Natcity Investments, Inc. National City Corporation
1965 East Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman
Age 45 and Chief Executive
Officer, NatCity
Investments Inc., since
July 1995 (investment
banking); President and
Chief Executive Officer,
Raffensberger, Hughes &
Co. from 1993 until 1995
(broker-dealer);
President, Reserve Capital
Group, from 1990 until
1993.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP, Philadelphia,
1345 Chestnut Street Pennsylvania
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP
</TABLE>
[FN]
- --------------------
* Mr. Carter is considered by the Trust to be an "interested person"
of the Trust as defined in the 1940 Act.
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as Administrator 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, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
-29-
<PAGE> 166
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1997:
<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>
Robert D. Neary, Trustee, $18,750 $0 $0 $18,750
------- -------
Chairman
Thomas R. Benua, Jr., $17,500 $0 $0 $17,500
------- -------
Trustee*
Leigh Carter, Trustee $17,500 $0 $0 $17,500
------- -------
John F. Durkott, Trustee $17,500 $0 $0 $17,500
------- -------
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
------- -------
J. William Pullen, Trustee $17,500 $0 $0 $17,500
------- -------
Richard B. Tullis, Trustee $18,750 $0 $0 $18,750
------- -------
</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.
[FN]
- --------
* Mr. Benua resigned as trustee as of July 17,1997.
-30-
<PAGE> 167
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS
------------------------------------------------------------
ADVISORY AGREEMENT
- ------------------
National City, National City Columbus and National City
Kentucky serve as investment advisers to the Ohio Tax Exempt Fund and National
City serves as investment adviser to the Pennsylvania Municipal Fund, as
described in the Prospectus. Prior to September 26, 1990, only National City and
National City Columbus served as advisers to the Ohio Tax Exempt Fund. The
advisers are affiliates of National City Corporation, a bank holding company
with $52 billion in assets, and headquarters in Cleveland, Ohio and nearly 900
branch offices in four states. Through its subsidiaries, National City
Corporation has been managing investments for individuals, pension and
profit-sharing plans and other institutional investors for over 75 years and
currently manages over $41 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 with
respect to the Ohio Tax Exempt Fund advisory fees of $490,179, $443,670 and
$379,718, and the advisers waived such amounts, for the fiscal years ended May
31, 1997, 1996 and 1995.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, National City, the adviser of the
Pennsylvania Municipal Fund, earned advisory fees of $147,646 and waived fees in
the amount of $2,684 with respect to that Fund. For the period from June 1, 1996
-31-
<PAGE> 168
until September 9, 1996, for the one-month period ended May 31, 1996, for the
fiscal year ended April 30, 1996 and for the period from August 10, 1994
(commencement of operations) through April 30, 1995, Integra Trust Company
("Integra"), the investment adviser to the Predecessor Fund, earned advisory
fees of $73,107, $23,057, $264,836 and $128,093, and Integra waived fees in the
amount of $26,413, $6,792, $44,126 and $39,805, respectively.
Each Advisory Agreement provides that the adviser(s) shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the adviser(s) in the
performance of their duties or from reckless disregard by them of their duties
and obligations thereunder. In addition, the adviser(s) have undertaken in their
Advisory Agreements to maintain their policy and practice of conducting their
Trust Departments independently of their Commercial Departments.
The Advisory Agreement relating to the Ohio Tax Exempt Fund
was approved by the shareholders on September 26, 1990. The Advisory Agreement
relating to the Pennsylvania Municipal Fund was approved by the sole shareholder
prior to the commencement of operations. Unless sooner terminated, the Advisory
Agreement will continue in effect with respect to the Fund to which it relates
until September 30, 1998 and from year to year thereafter, subject to annual
approval by the Trust's Board of Trustees, or by a vote of a majority of the
outstanding shares of such Fund (as defined in the Prospectus) and a majority of
the trustees who are not parties to the Agreement or interested persons (as
defined in the 1940 Act) of any party by votes cast in person at a meeting
called for such purpose. Each Advisory Agreement may be terminated by the Trust
or the adviser(s) 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
adviser(s) will reimburse the Trust for any such excess to the extent described
in any written undertaking provided by the advisers to such state. To the
Trust's knowledge, as of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Trust provides that
annual expenses (as defined by statute) may not exceed 2.5% of the first $30
million, 2% of the next $70 million and 1.5% of the remaining average net assets
of a particular Fund. Such amount, if any, will be estimated, reconciled and
paid on a monthly basis. The fees Banks may charge to Customers for services
-32-
<PAGE> 169
provided in connection with their investments in the Trust are not covered by
the state securities expense limitations described above.
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 adviser(s) 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
Trust shares, the advisers and their affiliated and correspondent banks might be
required to alter materially or discontinue the services offered by them to
shareholders. It is not anticipated, however, that any resulting change in the
Trust's method of operations would affect its net asset value per share or
result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
-33-
<PAGE> 170
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
- ------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred with respect to the Ohio Tax
Exempt Fund the following fees for the fiscal years ended May 31, 1997, 1996 and
1995:$89,124, $81,680 and $70,839 , respectively.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, PFPC earned administration fees of
$26,845 with respect to the Pennsylvania Municipal Fund. For the period from
June 1, 1996 until September 9, 1996, for the one-month period ended May 31,
1996, for the fiscal year ended April 30, 1996 and for the period from August
10, 1994 (commencement of operations) through April 30, 1995, SEI Financial
Management Corporation, a wholly-owned subsidiary of SEI Corporation, served as
administrator to the Predecessor Fund and earned the following fees: $18,799,
$5,929, $68,101 and $23,985, respectively, and waived fees of $0, $0, $9,681 and
$19,188, 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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<PAGE> 171
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 compensate 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. The Plan provides that the
Trust will pay the Distributor an annual base fee of $1,250,000 plus incentive
fees based upon asset growth payable monthly and accrued daily by all of the
Trust's investment funds with respect to which the Distributor is distributing
shares.
The Plan has been approved by the Board of Trustees, 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.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor a total of $5,015 with respect to the Ohio Tax Exempt Fund,
all of which was attributable to general compensation to the Distributor.
For the period from June 1, 1996 through March 7, 1997, the
Trust paid its previous distributor, 440 Financial Distributors, Inc. ("440
Financial" $54,647 with respect to the Ohio Tax Exempt Fund.
-35-
<PAGE> 172
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $1,956 with respect to the Pennsylvania Municipal Fund. For
the period from September 9, 1996 (date of reorganization of the Predecessor
Fund) through March 7, 1997, the Trust paid 440 Financial $5,839 with respect to
the Pennsylvania Municipal Fund.
Of the aggregate amounts paid to the Distributor by the Trust
with respect to the Ohio Tax Exempt Fund, $1,504 was attributable to
distribution services and $3,510 was attributable to marketing/consultation. Of
the aggregate amount paid to the Distributor by the Trust with respect to the
Pennsylvania Municipal Fund, $587 was attributable to distribution services and
$1,369 was attributable to marketing/consultation. Distribution services include
broker/dealer and investor support, voice response development, wholesaling
services, legal review and NASD filings and transfer agency management.
Marketing/Consultation includes planning and development, market and industry
research and analysis and marketing strategy and planning.
Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares including the distributor's expenses for travel, communication
compensation and benefits for sales personnel; and (4) any other expenses
reasonably incurred in connection with the distribution and marketing of Class A
shares subject to approval by a majority of disinterested directors of Inventor.
For the period from June 1, 1996 until September 9, 1996, the distributor of the
Predecessor Fund received $0 from the Fund (after waivers of $26,110).
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank also serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (v) respond to correspondence by security brokers
and others relating to its duties; and (vi) make periodic reports to the Board
of Trustees concerning the Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the
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<PAGE> 173
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.
State Street Bank and Trust Company (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 the Retail
shares in the Pennsylvania Municipal Fund. Pursuant to the Services Plan, the
Trust may enter into agreements with financial institutions pertaining to the
provision of administrative services to their customers who are the beneficial
owners of Retail shares in consideration for the payment of up to .10% (on an
annualized basis) of the net asset value of such shares. Such services may
include: (i) aggregating and processing purchase and redemption requests from
customers; (ii) providing customers with a service that invests the assets of
their accounts in Retail shares; (iii) processing dividend payments from the
Funds; (iv) providing information periodically to customers showing their
position in Retail shares; (v) arranging for bank wires; (vi) responding to
customer inquiries relating to the services performed with respect to Retail
shares beneficially owned by customers; (vii) forwarding shareholder
communications; and (viii) other similar services requested by the Trust.
Agreements between the Trust and financial institutions will be terminable at
any time by the Trust without penalty.
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<PAGE> 174
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to the Advisory Agreement relating to the Ohio Tax
Exempt Fund, National City, National City Columbus and National City Kentucky
are responsible for, make decisions with respect to and place orders for all
purchases and sales of portfolio securities for the Fund. Pursuant to the
Advisory Agreement between the Trust and National City relating to the
Pennsylvania Municipal Fund, National City is responsible for, makes decisions
with respect to and places orders for all purchases and sales of portfolio
securities for the Fund. 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, [1997], 1996 and 1995, the
Ohio Tax Exempt Fund did not pay any brokerage commissions.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, the Pennsylvania Municipal Fund
paid brokerage commissions of $0. For the period from June 1, 1996 until
September 9, 1996, for the one-month period ended May 31, 1996, for the fiscal
year ended April 30, 1996 and for the period from August 10, 1994 (commencement
of operations) through April 30, 1995, the Pennsylvania Municipal Fund paid no
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 the Funds. 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.
-38-
<PAGE> 175
Portfolio securities will not be purchased from or sold to the
Trust's advisers, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Trust will not give preference to
its advisers' correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as advisers to the Trust, National City,
National City Columbus and National City Kentucky have agreed to maintain their
policy and practice of conducting their Trust departments independently of their
Commercial Departments. In making investment recommendations for the Trust,
Trust Department personnel will not inquire or take into consideration whether
the issuer of securities proposed for purchase or sale for the Trust's account
are customers of the Commercial 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 Fund's 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 the 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, 1997 for the Ohio Tax Exempt Fund and for
the Pennsylvania Municipal Fund, which are incorporated by reference in this
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report referred to under "Financial
Statements," and are included in reliance upon such
-39-
<PAGE> 176
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements for periods or years prior to May 31,
1997 with respect to the Predecessor Fund, which are incorporated by reference
in this Statement of Additional Information, were audited by Coopers & Lybrand,
L.L.P., independent accountants for the Predecessor Fund, whose report dated
July 26, 1996 expressed an unqualified opinion on such financial statements, and
are included in reliance upon such report given upon the authority of such firm
in accounting and auditing.
COUNSEL
-------
Drinker Biddle & Reath LLP (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. Squire, Sanders & Dempsey, L.L.P. with offices at
4900 Key Center, 127 Public Square, Cleveland, Ohio 44114-1304, act as special
Ohio tax counsel for the Trust and have reviewed the section of this Statement
of Additional Information entitled "Additional Information Concerning Taxes -
State and Local Taxes - Ohio Tax Exempt Fund" and the Prospectus entitled "Taxes
- - State and Local Taxes - Ohio Taxes."
YIELD AND PERFORMANCE INFORMATION
---------------------------------
Each Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. A Fund's
net investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b 6
Yield = 2 [(----) - 1]
cd+1
Where: a = dividends and interest earned during the
period.
-40-
<PAGE> 177
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 portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each 30-day
period, or, with respect to obligations purchased during the 30-day period, the
purchase price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30-day period that the obligation is in the Fund.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
Interest earned on tax-exempt obligations that are issued
without original issue discount and have a current market discount is calculated
by using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that exceed the then-
remaining portion of the original issue discount (market discount), the yield to
maturity is the imputed rate based on the original issue discount calculation.
On the other hand, in the case of tax-exempt obligations that are issued with
original issue discount but which have discounts based on current market value
that are less than the then-remaining portion of the original issue discount
(market premium), the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" in
the Prospectus.
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<PAGE> 178
The "tax-equivalent yield" is computed by dividing the portion
of a Fund's yield (calculated as above) that is exempt from federal income tax
by one minus a stated federal income tax rate and adding that figure to that
portion, if any, of the Fund's yield that is not exempt from federal income tax.
For the 30-day period ended May 31, 1997, the respective
yields of the Retail and Institutional shares of the Ohio Tax Exempt and
Pennsylvania Municipal Funds were: 4.50% and 4.64%; 4.26% and 4.50%,
respectively. The tax equivalent yields (assuming a 39.6% federal tax rate and
7.5% Ohio tax rate) for the Ohio Tax Exempt Fund's Retail and Institutional
shares for the same period were 8.05% and 8.30%, respectively. The tax
equivalent yields (assuming a 39.6% federal tax rate and a 2.8% Pennsylvania tax
rate) for the Pennsylvania Municipal Fund's Retail and Institutional shares for
the same period were 7.26% and 7.66%, respectively.
Each Fund computes its average annual total returns by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
Each Fund computes its aggregate total returns by determining
its aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
-42-
<PAGE> 179
ERV
(-----) -1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total returns for the Ohio Tax Exempt Fund
for the one year period ending May 31, 1997 were 3.19% (after taking into
account the sales load) and 6.38% (without taking into account any sales load)
for the Retail shares and 6.37% for the Institutional shares. The average annual
total returns since the Fund's commencement of operations through May 31, 1997
were 5.44% (after taking into account the sales load) and 5.88% (without taking
into account any sales load) for the Retail shares and 5.88% for the
Institutional shares. The Ohio Tax Exempt Fund commenced investment operations
on January 5, 1990.
The average annual total returns for the fiscal year ending
May 31, 1997 for the Pennsylvania Municipal Fund were 2.96%, (after taking into
account the sales load) and 6.13% (without taking into account any sales load)
for the Retail shares and 6.21% for the Institutional shares. The average annual
total returns since the Predecessor Fund's commencement of operations through
May 31, 1997 were 4.04% (after taking into account the sales load) and 5.17%
(without taking into account any sales load) for the Retail shares and 5.20% for
the Institutional shares. The Predecessor Fund commenced investment operations
on August 10, 1994.
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the
-43-
<PAGE> 180
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value. A Fund does not, for these purposes, deduct
from the initial value invested any amount representing sales charges. A Fund
will, however, disclose the maximum sales charge and will also disclose that the
performance data do not reflect sales charges and that inclusion of sales
charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments, economic conditions,
the relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical performance
of various asset classes, including but not limited to, stocks, bonds and
Treasury securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the advisers as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to a Fund. The Funds may also include in Materials charts, graphs
or drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Funds and/or other mutual funds, or
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury securities and
shares of a Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund
and/or other mutual funds (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternatives to certificates of deposit and other financial
-44-
<PAGE> 181
instruments. Such Materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
that particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the respective liabilities in respect of that
Fund.
The Trust bears all costs in connection with its organization,
including the fees of registering and qualifying its shares for distribution
under federal and state securities regulations. All organizational expenses are
amortized on the straight-line method over a period of five years from the date
of the commencement of operations.
-45-
<PAGE> 182
The following shareholders owned beneficially 5% or more of
the outstanding Retail shares of the Ohio Tax Exempt Fund as of September 23,
1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
---------- --------------
<S> <C> <C>
Wheat First FBO 91,172.8550 28.59%
David J. Beverly &
Pamela C. Beverly
JT TEN
1128 Laguna Dr.
Huron, OH 44839-2605
Wheat First FBO 17,767.1380 5.57%
William I. Strippy &
Mary Strippy
JT TEN
14450 Regency Dr.
Strongsville, OH 44136-4900
</TABLE>
The following shareholders owned beneficially 5% or more of
the outstanding Retail Shares of the Pennsylvania Municipal Fund as of September
23, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
---------- --------------
<S> <C> <C>
Helen M. Weyer 5,921.1750 74.28%
James N. Weyer Jr. JT TEN
2600 Mohawk Dr.
White Oak, PA 15131-3121
Robert H. Rhone 1,096.6370 13.76%
c/o Michael Rhone
P.O. Box 175
Rew, PA 16744-0175
Rita La Fianza & 492.9900 6.18%
Howard H. La Fianza
JT TEN
507 Lisa Dr.
West Mifflin, PA 15122-3150
</TABLE>
The following shareholders owned beneficially 5% or more of
the outstanding Institutional shares of the Pennsylvania Municipal Fund as of
August 31, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Pennsylvania Municipal Institutional Institutional
Fund Shares Shares
- ---------------------- ---------- --------------
<S> <C> <C>
Louise Black Clark 302,989 6.33%
------------------ ------- -----
Box 218
-------
Ojai, CA 93023
---------------
</TABLE>
To the Trust's knowledge, no shareholder beneficially owned 5%
or more of the outstanding Retail shares of the Pennsylvania Municipal Fund as
of August 31, 1997.
The following shareholders owned beneficially 5% or more of
the outstanding Institutional shares of the Pennsylvania Municipal Fund as of
, 1997:
<TABLE>
<CAPTION>
Number of Percentage of
Pennsylvania Municipal Institutional Outstanding
Fund Shares Institutional Shares
- ---------------------- ------------- --------------------
<S> <C> <C>
National City Bank 3,533,580.03 98.17%
Sheldon & Co. Pathway - 49
Attn.: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
National City Bank 9,220,701.47 97.93
Sheldon & Co. Pathway - 49
Attn.: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1997 are hereby incorporated herein by
reference. Copies of the annual report may be obtained by calling the Trust at
1-800-622-FUND (3863) or by writing to the Trust, Oaks, Pennsylvania 19456.
-46-
<PAGE> 183
APPENDIX A
----------
DESCRIPTION OF RATINGS
----------------------
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions
1
<PAGE> 184
will likely impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating and is
currently highly vulnerable to nonpayment.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
A-2
<PAGE> 185
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the
bonds. The rating may be revised prior to delivery if changes
A-3
<PAGE> 186
occur in the legal documents or the underlying credit quality of
the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal 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.
A-4
<PAGE> 187
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over
time by adverse economic changes. However, business and financial
alternatives can be identified, which could assist the obligor in
satisfying its debt service requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the instrument.
"CCC" - Bonds have certain identifiable characteristics
that, if not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
"CC" - Bonds are minimally protected. Default in
payments of interest seems probable over time.
"C" - Bonds are in imminent default in payment of
interest or principal.
"DDD," "DD" and "D" - Bonds are in default on interest
and/or principal payments. Such securities are extremely
speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor.
A-5
<PAGE> 188
"DDD" represents the highest potential for recovery on these
securities, and "D" represents the lowest potential for recovery.
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.
A-6
<PAGE> 189
TAX-EXEMPT COMMERCIAL PAPER RATINGS
- -----------------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions have a
strong ability for repayment of senior 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, may be more
subject to
A-7
<PAGE> 190
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions 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" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
A-8
<PAGE> 191
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F- 1+" and "F-1" ratings.
"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.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of
A-9
<PAGE> 192
likelihood that principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the
degree of safety regarding timely payment of principal and interest
is strong, the relative degree of safety is not as high as for
issues rated "TBW-1."
"TBW-3" - This designation represents the lowest
investment grade category and indicates that while the debt is more
susceptible to adverse developments (both internal and external)
than obligations with higher ratings, capacity to service principal
and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is
regarded as non-investment grade and therefore speculative.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-10
<PAGE> 193
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-11
<PAGE> 194
CROSS REFERENCE SHEET
---------------------
Total Return Advantage Fund
Fixed Income Fund
Enhanced Income Fund
GNMA Fund
Intermediate Government Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
1. Cover Page....................................... Cover Page
2. Synopsis......................................... Expense Table
3. Condensed Financial
Information...................................... Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant....................................... Risk Factors, Investment
Objectives and Policies;
Investment Limitations;
Description of the Trust and
Its Shares
5. Management of the Trust.......................... Management of the Trust;
Custodian and Transfer Agent
6. Capital Stock and Other
Securities....................................... How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes;
Description of the Trust and
Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered.................................... Pricing of Shares; How to
Purchase and Redeem Shares;
Distribution Agreement
8. Redemption Repurchase............................ How to Purchase and Redeem
Shares
9. Pending Legal Proceedings........................ Inapplicable
</TABLE>
<PAGE> 195
CROSS REFERENCE SHEET
---------------------
Total Return Advantage Fund
Fixed Income Fund
Enhanced Income Fund
GNMA Fund
Intermediate Government Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
1. Cover Page......................................................... Cover Page
2. Table of Contents.................................................. Table of Contents
3. General Information and History.................................... Statement of Additional
Information
4. Investment Objectives and Policies................................. Risk Factors, Investment
Objectives and Policies
5. Management of Registrant........................................... Trustees and Officers
6. Control Persons and Principal...................................... Description of Shares
Holders of Securities
7. Investment Advisory and Other...................................... Advisory, Administra-
Services Management tion, Distribution,
Custody, and Transfer
Agency Agreements
8. Brokerage Allocation and Other..................................... Risk Factors, Investment
Practices Objectives and Policies
9. Capital Stock and Other Securities................................. Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing................................... Additional Purchase
of Securities Being Offered ....................................... and Redemption
Information
11. Tax Status......................................................... Additional Information
Concerning Taxes
12. Underwriters....................................................... Not Applicable
13. Calculation of Performance Data.................................... Yield and Performance
Information
14. Financial Statements............................................... Financial Statements
</TABLE>
<PAGE> 196
ARMADA
FUNDS
INCOME
SERIES
ARMADA FUNDS LOGO
Financial Power Close at Hand
PROSPECTUS
September 30, 1997
ARMADA TOTAL RETURN ADVANTAGE FUND
ARMADA FIXED INCOME FUND
ARMADA ENHANCED INCOME FUND
ARMADA GNMA FUND
ARMADA INTERMEDIATE GOVERNMENT FUND
<PAGE> 197
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expense Table............................................................................. 2
Financial Highlights...................................................................... 4
Introduction.............................................................................. 10
Investment Objectives and Policies........................................................ 10
Investment Limitations.................................................................... 24
Yield and Performance Information......................................................... 25
Pricing of Shares......................................................................... 26
How to Purchase and Redeem Shares......................................................... 26
Distribution Agreement.................................................................... 32
Shareholder Services Plan................................................................. 32
Dividends and Distributions............................................................... 32
Taxes..................................................................................... 33
Management of the Trust................................................................... 34
Description of the Trust and Its Shares................................................... 36
Custodian and Transfer Agent.............................................................. 38
Expenses.................................................................................. 38
Miscellaneous............................................................................. 38
</TABLE>
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL
CITY BANK OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY
BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and certain of its affiliates serve as investment advisers to
Armada Funds for which they receive an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 198
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments, Inc.
please call your Financial Consultant for information.
For current performance, fund information, account redemption
information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following five investment funds
(the "Funds") of Armada Funds (the "Trust"), each having its own investment
objective and policies:
TOTAL RETURN ADVANTAGE FUND'S investment objective is to provide a total
rate of return, income and price appreciation greater than that of popular
market indices with similar maturity and quality characteristics. Under normal
market conditions, the Fund maintains an average dollar-weighted portfolio
maturity of two years above or below the average maturity of the Lehman Brothers
Government/Corporate Bond Index.
FIXED INCOME FUND'S investment objective is to provide as high a level of
current income as is consistent with prudent investment risk. The Fund invests
in high and medium grade bonds and other fixed income securities. Under normal
market conditions, the Fund maintains an average dollar-weighted portfolio
maturity of ten years or less.
ENHANCED INCOME FUND'S investment objective is to seek a total rate of
return greater than that of the Merrill Lynch 1-3 year Treasury Index. The Fund
will normally invest at least 80% of the value of its total assets in investment
grade debt securities of all types. However, up to 20% of the value of its total
assets may be invested in preferred stocks and other investments. Under normal
market conditions, the Fund intends to maintain an average dollar-weighted
portfolio maturity for its debt securities of from 1 1/2 to 4 years.
GNMA FUND'S investment objective is to seek the highest level of current
income consistent with preservation of capital and a high degree of liquidity by
investing primarily in mortgage pass-through securities guaranteed by the
Government National Mortgage Association.
INTERMEDIATE GOVERNMENT FUND'S investment objective is to seek preservation
of capital and a high degree of liquidity while providing current income. The
Fund invests primarily in obligations issued or guaranteed as to principal and
interest by the U.S. government and its agencies and instrumentalities.
The net asset value per share of each Fund will fluctuate as the value of
its investment fund changes in response to changing market prices and other
factors.
National City Bank ("National City"), National City Bank of Columbus
("National City Columbus") and National City Bank of Kentucky ("National City
Kentucky") serve as investment advisers to the Fixed Income Fund; National Asset
Management Corporation ("NAM") serves as investment adviser to the Enhanced
Income Fund and Total Return Advantage Fund; and National City serves as
investment adviser to the GNMA Fund and Intermediate Government Fund. These
investment advisers are referred to herein individually as an "adviser" and
collectively as the "advisers."
SEI Investments Distribution Co., formerly "SEI Financial Services Co."
(the "Distributor"), serves as the Trust's sponsor and distributor. Each Fund
pays a fee to the Distributor for distributing its shares. See "Distribution
Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL CITY BANK OF
COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, NATIONAL ASSET MANAGEMENT CORPORATION,
THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES, AND ARE NOT FEDERALLY INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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, 1997
<PAGE> 199
EXPENSE TABLE
<TABLE>
<CAPTION>
TOTAL RETURN TOTAL RETURN FIXED FIXED ENHANCED ENHANCED
ADVANTAGE ADVANTAGE INCOME INCOME INCOME INCOME GNMA
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
SHARES(1) SHARES SHARES(1) SHARES SHARES(1) SHARES SHARES(1)
------------- ------------- ------- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases..... 3.75% None 3.75% None 2.75% None 3.75%
Sales Charge Imposed on
Reinvested Dividends..... None None None None None None None
Deferred Sales Charge...... None None None None None None None
Redemption Fee............. None None None None None None None
Exchange Fee............... None None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee
waivers)(2).............. 0% 0% .40% .40% 0% 0% .55%
12b-1 Fees(3) .02% .02% .06% .06% .02% .02% .06%
Other Expenses............. .41% .16% .46% .21% .33% .23% .48%
----- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES
(after fee
waivers)(2)............ .43% .18% .92% .67% .35% .25% 1.09%
===== ==== ==== ==== ==== ==== ====
<CAPTION>
INTERMEDIATE INTERMEDIATE
GNMA GOVERNMENT GOVERNMENT
INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES SHARES(1) SHARES
------------- ------------ -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases..... None 3.75% None
Sales Charge Imposed on
Reinvested Dividends..... None None None
Deferred Sales Charge...... None None None
Redemption Fee............. None None None
Exchange Fee............... None None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average
Management Fees (after fee
waivers)(2).............. .55% .55% .55%
12b-1 Fees(3) .06% .06% .06%
Other Expenses............. .23% .45% .20%
---- ---- ----
TOTAL FUND OPERATING
EXPENSES
(after fee
waivers)(2)............ .84% 1.06% .81%
==== ==== ====
</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 Retail shares of the Total Return Advantage
Fund, Fixed Income Fund, GNMA Fund and Intermediate Government Fund and/or
up to .10% (on an annualized basis) of the net asset value of Retail shares
of the Enhanced Income Fund. For further information concerning the Services
Plan, see "Shareholder Services Plan."
(2) The expense information in the table relating to each Fund has been restated
to reflect current fees. For the current fiscal year, the advisors will
voluntarily waive fees in the amount of .15% of the average daily net assets
of the Fixed Income Fund and NAM will waive its entire advisory fee of .55%
and .45% of the average daily net assets of the Total Return Advantage and
Enhanced Income Funds, respectively. Without such fee waivers, Total Fund
Operating Expenses would be .98% and .73% for the Retail and Institutional
shares of the Total Return Advantage Fund, respectively, .80% and .70% for
the Retail and Institutional shares of the Enhanced Income Fund,
respectively, and 1.07% and .82% for the Retail and Institutional shares of
the Fixed Income Fund, respectively. Additionally, if the maximum
distribution fee permitted under the 12b-1 Plan were imposed, Total Fund
Operating Expenses would be 1.06% and .81%, 1.11% and .86%, .88% and .78%,
1.13% and .88% and 1.10% and .85% for the Retail and Institutional shares of
the Total Return Advantage Fund, Fixed Income Fund, Enhanced Income Fund,
GNMA Fund and Intermediate Government Fund, respectively.
(3) The Funds have in effect 12b-1 Plans pursuant to which each Fund may bear
fees in an amount of up to .10% of average daily net assets. As a result of
the payment of sales charges and 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD").
The NASD has adopted rules which generally limit the aggregate sales charges
and payments under the Trust's Service and Distribution Plan ("Distribution
Plan") and Services Plan to a certain percentage of total new gross share
sales, plus interest. The Trust would stop accruing 12b-1 and related fees
if, to the extent, and for as long as, such limit would otherwise be
exceeded.
2
<PAGE> 200
- ---------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Return Advantage Retail Shares................... $ 42 $ 51 $ 61 $ 90
Total Return Advantage Institutional Shares............ $ 2 $ 6 $ 10 $ 23
Fixed Income Retail Shares............................. $ 47 $ 66 $ 87 $146
Fixed Income Institutional Shares...................... $ 7 $ 21 $ 37 $ 83
Enhanced Income Retail Shares.......................... $ 31 $ 38 $ 47 $ 71
Enhanced Income Institutional Shares................... $ 3 $ 8 $ 14 $ 32
GNMA Fund Retail Shares................................ $ 48 $ 71 $ 95 $165
GNMA Fund Institutional Shares......................... $ 9 $ 27 $ 47 $104
Intermediate Government Fund Retail Shares............. $ 48 $ 70 $ 94 $162
Intermediate Government Fund Institutional Shares...... $ 8 $ 26 $ 45 $100
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution Agreement"
in this Prospectus and the financial statements and related notes incorporated
by reference into the Statement of Additional Information for the Funds. Any
fees that are charged by affiliates of the advisers or other institutions
directly to their customer accounts for services related to an investment in
shares of any of the Funds are in addition to and are not reflected in the fees
and expenses described above.
3
<PAGE> 201
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
TOTAL RETURN ADVANTAGE FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Total Return Advantage Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31
----------------------------------------------------
FOR THE PERIOD
1997 1996 ENDED MAY 31, 1995
----------------------- ------------------------ ---------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(3) RETAIL(3)
------------- ------ -------------- ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 9.88 $ 9.87 $ 10.55 $10.54 $ 10.00 $10.16
--------- ------ --------- ------ -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............. 0.67 0.64 0.70(7) 0.62(7) 0.65(7) 0.49(7)
Net Gain (Loss) on Securities
(Realized and Unrealized)....... 0.15 0.16 (0.24) (0.22) 0.43 0.40
--------- ------ --------- ------ -------- -------
Total from Investment
Operations............... 0.82 0.80 0.46 0.40 1.08 0.89
--------- ------ --------- ------ -------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (0.67) (0.64) (0.70) (0.62) (0.53) (0.49)
Dividends in Excess of Net
Investment Income............... (0.00) (0.00) (0.12) (0.14) (0.00) (0.02)
Dividends from Net Realized
Capital Gains................... (0.00) (0.00) (0.31) (0.31) (0.00) (0.00)
Dividends in Excess of Net
Realized Capital Gains.......... (0.14) (0.14) (0.00) (0.00) (0.00) (0.00)
--------- ------ --------- ------ -------- -------
Total distributions........ (0.81) (0.78) (1.13) (1.07) (0.53) (0.51)
--------- ------ --------- ------ -------- -------
Net Asset Value, End of Period...... $ 9.89 $ 9.89 $ 9.88 $ 9.87 $ 10.55 $10.54
========= ====== ========= ====== ======== =======
TOTAL RETURN........................ 8.51% 8.35%(5) 4.22% 3.74%(5) 12.52%(4,6) 12.65%(4,5,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's).......................... $ 259,228 $2,186 $280,401 $2,040 $ 261,403 $ 106
Ratio of Expenses to Average Net
Assets.......................... .16%(1) .41%(2) .13%(1) .36%(2) .18%(1,4) .31%(2,4)
Ratio of Net Investment Income to
Average Net Assets.............. 6.70%(1) 6.46%(2) 6.67%(1) 6.12%(2) 7.23%(1,4) 6.92%(2,4)
Portfolio Turnover Rate........... 169% 169% 268% 268% 166% 166%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Institutional class for the year ended May
31, 1997 would have been .71% and 6.15%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the 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 adviser,
administrator and custodian for the Institutional class for the period ended
May 31, 1995 would have been .77% and 6.64%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Retail class for the year ended May 31, 1997
would have been .96% and 5.91%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the 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 adviser, administrator and
custodian for the Retail class for the period ended May 31, 1995 would have
been .87% and 6.36%, respectively.
(3) Institutional and Retail classes commenced operations on July 7, 1994 and
September 6, 1994, respectively.
(4) Annualized.
(5) Total Return excludes sales charge.
(6) 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.
(7) Calculated based upon average shares outstanding.
4
<PAGE> 202
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
FIXED INCOME FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Fixed Income Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31
------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................... $ 10.30 $10.35 $ 10.54 $10.60 $ 10.24 $10.30
--------- ------ -------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................. 0.60 0.57 0.61 0.59 0.63 0.61
Net Gain/(Loss) on Securities
(Realized and Unrealized)............. 0.07 0.07 (0.22) (0.23) 0.30 0.30
--------- ------ -------- ------ ------- ------
Total from Investment Operations...... 0.67 0.64 0.39 0.36 0.93 0.91
--------- ------ -------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income................................ (0.60) (0.57) (0.61) (0.59) (0.63) (0.61)
Dividends in Excess of Net Investment
Income................................ (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Dividends from Net Realized Capital
Gains................................. (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains......................... (0.00) (0.00) (0.02) (0.02) (0.00) (0.00)
--------- ------ -------- ------ ------- ------
Total Distributions................... (0.60) (0.57) (0.63) (0.61) (0.63) (0.61)
--------- ------ -------- ------ ------- ------
Net Asset Value, End of Period......... $ 10.37 $10.42 $ 10.30 $10.35 $ 10.54 $10.60
========= ====== ======== ====== ======= ======
TOTAL RETURN........................... 6.63% 6.36%(3) 3.79% 3.44%(3) 9.55% 9.26%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)... $ 121,271 $3,720 $ 111,240 $6,216 $ 88,047 $5,527
Ratio of Expenses to Average Net
Assets................................ .70%(4) .96%(5) .80%(4) 1.04%(5) .85%(4) 1.09%(5)
Ratio of Net Investment Income to
Average Net Assets.................... 5.76%(4) 5.52%(5) 5.78%(4) 5.50%(5) 6.24%(4) 5.95%(5)
Portfolio Turnover Rate............... 217% 217% 45% 45% 42% 42%
<CAPTION>
1994 1993 1992
----------------------- ----------------------- -----------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period................... $ 10.93 $10.98 $ 10.60 $10.63 $ 10.15 $10.15
------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................. 0.61 0.58 0.70 0.65 0.81 0.79
Net Gain/(Loss) on Securities
(Realized and Unrealized)............. (0.59) (0.58) 0.46 0.48 0.45 0.45
------- ------ ------- ------ ------- ------
Total from Investment Operations...... 0.02 0.00 1.16 1.13 1.26 1.24
------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income................................ (0.61) (0.58) (0.70) (0.65) (0.81) (0.76)
Dividends in Excess of Net Investment
Income................................ (0.05) (0.05) (0.02) (0.02) (0.00) (0.00)
Dividends from Net Realized Capital
Gains................................. (0.03) (0.03) (0.11) (0.11) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains......................... (0.02) (0.02) (0.00) (0.00) (0.00) (0.00)
------- ------ ------- ------ ------- ------
Total Distributions................... (0.71) (0.68) (0.83) (0.78) (0.81) (0.76)
------- ------ ------- ------ ------- ------
Net Asset Value, End of Period......... $ 10.24 $10.30 $ 10.93 $10.98 $ 10.60 $10.63
======= ====== ======= ====== ======= ======
TOTAL RETURN........................... 0.00% (0.23%)(3) 11.32% 11.03%(3) 12.96% 12.64 %(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)... $95,907 $5,480 $95,246 $5,208 $40,414 $1,033
Ratio of Expenses to Average Net
Assets................................ .83% 1.08% .32%(4) .57%(5) .30%(4) .55 %(5)
Ratio of Net Investment Income to
Average Net Assets.................... 5.59% 5.34% 6.46%(4) 6.21%(5) 7.84%(4) 7.57 %(5)
Portfolio Turnover Rate............... 34% 34% 33% 33% 13% 13 %
<CAPTION>
FOR THE PERIOD
DECEMBER 20,
1989
1991 (COMMENCEMENT OF
----------------------- OPERATIONS) TO
INSTITUTIONAL RETAIL MAY 31, 1990
------------- ------ ----------------
Net Asset Value,
Beginning of Period................... $ 9.83 $10.11 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................. 0.76 0.10 0.33
Net Gain/(Loss) on Securities
(Realized and Unrealized)............. 0.39 0.01 (0.24)
------- ------- -------
Total from Investment Operations...... 1.15 0.11 0.09
------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income................................ (0.76) (0.07) (0.26)
Dividends in Excess of Net Investment
Income................................ (0.07) (0.00) (0.00)
Dividends from Net Realized Capital
Gains................................. (0.00) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains......................... (0.00) (0.00) (0.00)
------- ------- -------
Total Distributions................... (0.83) (0.07) (0.26)
------- ------- -------
Net Asset Value, End of Period......... $ 10.15 $10.15 $ 9.83
======= ======= =======
TOTAL RETURN........................... 12.20% 8.45 (2,3) 2.21%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)... $34,664 $ 284 $ 30,699
Ratio of Expenses to Average Net
Assets................................ .33%(4) .56 (2,5) .37%(2)
Ratio of Net Investment Income to
Average Net Assets.................... 8.34%(4) 7.89 (2,5) 8.34%(2)
Portfolio Turnover Rate............... 0% 0% 20%
</TABLE>
- ---------------
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .79% and 5.66%, respectively. 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
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 net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been 1.05% and 5.44%, respectively. The operating expense ratio
and 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 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.
5
<PAGE> 203
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
ENHANCED INCOME FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Enhanced Income Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31
--------------------------------------------------
FOR THE PERIOD
1997 1996 ENDED MAY 31, 1995
----------------------- ----------------------- -------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(3) RETAIL(3)
------------- ------ ------------- ------ -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 10.01 $10.02 $ 10.16 $10.18 $ 10.00 $ 10.10
-------- ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................. 0.58 0.57 0.58 0.56 0.51(7) 0.43(7)
Net Gain/(Loss) on Securities
(Realized and Unrealized)........... 0.01 0.01 (0.05) (0.05) 0.06 0.06
-------- ------ -------- ------ -------- ------
Total from Investment
Operations................... 0.59 0.58 0.53 0.51 0.57 0.49
-------- ------ -------- ------ -------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.............................. (0.58) (0.57) (0.58) (0.56) (0.41) (0.41)
Dividends in Excess of Net Investment
Income.............................. (0.00) (0.00) (0.10) (0.11) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains....................... (0.03) (0.03) (0.00) (0.00) (0.00) (0.00)
-------- ------ -------- ------ -------- ------
Total distributions............ (0.61) (0.60) (0.68) (0.67) (0.41) (0.41)
-------- ------ -------- ------ -------- ------
Net Asset Value, End of Period.......... $ 9.99 $10.00 $ 10.01 $10.02 $ 10.16 $ 10.18
======== ====== ======== ====== ======== ======
TOTAL RETURN............................ 6.02% 5.91%(5) 5.36% 5.13%(5) 6.54%(4,6) 6.84 (4,5,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's).............................. $61,031 $2,051 $66,918 $1,718 $ 60,467 $ 2,547
Ratio of Expenses to Average Net
Assets.............................. .21%(1) .31%(2) .23%(1) .33%(2) .21%(1,4) .32%(2,4)
Ratio of Net Investment Income to
Average Net Assets.................. 5.74%(1) 5.63%(2) 5.72%(1) 5.55%(2) 5.70%(1,4) 5.89%(2,4)
Portfolio Turnover Rate............... 225% 225% 98% 98% 36% 36%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Institutional class for the year ended May
31, 1997 would have been .66% and 5.29%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the 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 adviser,
administrator and custodian for the Institutional class for the period ended
May 31, 1995 would have been .71% and 5.20%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Retail class for the year ended May 31, 1997
would have been .75% and 5.18%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the 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 adviser, administrator and
custodian for the Retail class for the period ended May 31, 1995 would have
been .79% and 5.42%, respectively.
(3) Institutional and Retail classes commenced operations on July 7, 1994 and
September 9, 1994, respectively.
(4) Annualized.
(5) Total Return excludes sales charge.
(6) 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.
(7) Calculated based upon average shares outstanding.
7
<PAGE> 204
FINANCIAL HIGHLIGHTS
The GNMA Fund and Intermediate Government Fund commenced operations on
August 10, 1994 as separate investment portfolios (the "Predecessor GNMA Fund"
and the "Predecessor Intermediate Government Fund," respectively, and
collectively, the "Predecessor Funds") of Inventor Funds, Inc., which was
organized as a Maryland corporation. On September 9, 1996, the Funds were
reorganized as new portfolios of the Trust. Prior to the reorganization, the
Predecessor Funds offered and sold Retail shares that were similar to the Funds'
Retail shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Funds' Retail shares (the
series that is similar to the Retail shares of the GNMA and Intermediate
Government Funds) for the fiscal period from May 1, 1996 to May 31, 1996, the
fiscal year ended April 30, 1996 and the fiscal period ended April 30, 1995. As
part of the reorganization, the fiscal year of the Predecessor Funds was changed
to coincide with the Trust's May 31 fiscal year. A one-month financial report
representing the Predecessor Funds' operations from May 1, 1996 through May 31,
1996 is being presented. The information was audited by Coopers & Lybrand
L.L.P., independent accountants for the Predecessor Funds, whose reports thereon
are contained in Inventor Funds' Annual Reports to Shareholders for the fiscal
year ended April 30, 1996 and the period ended May 31, 1996. Such financial
highlights should be read in conjunction with the financial statements and notes
thereto contained in Inventor Funds' Annual Reports to Shareholders and
incorporated by reference into the Statement of Additional Information relating
to the GNMA Fund and Intermediate Government Fund. Additional information about
the performance of the Predecessor Funds is contained in Inventor Funds' Annual
Reports to Shareholders, which may be obtained without charge by contacting the
Trust at its telephone number or address provided on page 1.
The information presented below relating to the fiscal year ended May 31,
1997 has been derived from financial statements audited by Ernst & Young, LLP,
independent auditors for the GNMA Fund and Intermediate Government Fund, 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.
7
<PAGE> 205
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
GNMA FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOR THE FOR THE
MAY 31, 1997(4) PERIOD ENDED YEAR ENDED PERIOD ENDED
------------------------ MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(5) 1996(4) 1996(4) 1995(4)
------------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 10.03 $ 10.02 $ 10.12 $ 10.16 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income........ 0.65 0.45 0.05 0.66 0.48
Net Gain/(Loss).............. 0.22 0.23 (0.09) 0.14 0.16
------- ------- ------- ------- -------
Total from Investment
Operations.......... 0.87 0.68 (0.04) 0.80 0.64
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income..................... (0.65) (0.45) (0.05) (0.66) (0.48)
Dividends from Realized
Capital Gains.............. (0.01) (0.01) 0.00 (0.18) 0.00
Dividends in Excess of Net
Realized Capital Gains..... (0.09) (0.09) (0.00) (0.00) (0.00)
------- ------- ------- ------- -------
Total Distributions... (0.75) (0.55) (0.05) (0.84) (0.48)
------- ------- ------- ------- -------
Net Asset Value, End of
Period....................... $ 10.15 $ 10.15 $ 10.03 $ 10.12 $ 10.16
======= ======= ======= ======= =======
TOTAL RETURN................... 9.03% 8.83%(6) (0.35)%(3,6) 7.97%(6) 6.61%(3,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)..................... $64,501 $ 128 $ 60,532 $ 62,161 $ 42,212
Ratio of Expenses to Average
Net Assets................. .86%(1) 1.12%(2) .85%(1,2) .85%(1) .85%(1,2)
Ratio of Net Investment
Income to Average Net
Assets..................... 6.45%(1) 6.17%(2) 6.33%(1,2) 6.30%(1) 6.68%(1,2)
Portfolio Turnover Rate...... 57% 57% 1% 149% 226%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers for the Institutional class and the Predecessor Fund for the year
ended May 31, 1997, for the period ended May 31, 1996, for the year ended
April 30, 1996, and for the period ended April 30, 1995 would have been
1.01% and 6.30%, 1.28% and 5.90%, 1.29% and 5.86%, and 1.40% and 6.13%,
respectively.
(2) Annualized
(3) Not annualized.
(4) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(5) Retail class commenced operations on September 11, 1996.
(6) Total Return excludes sales charge.
8
<PAGE> 206
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOR THE FOR THE
MAY 31, 1997(4) PERIOD ENDED YEAR ENDED PERIOD ENDED
------------------------ MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(5) 1996(4) 1996(4) 1995(4)
------------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $ 9.97 $ 9.97 $ 10.04 $ 10.02 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.............. 0.59 0.41 0.05 0.64 0.44
Net Gain/(Loss) on Securities
(Realized and Unrealized)........ 0.13 0.13 (0.07) 0.07 0.02
------- ------- ------- ------- -------
Total from Investment
Operations................ 0.72 0.54 (0.02) 0.71 0.46
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................... (0.59) (0.41) (0.05) (0.64) (0.44)
Dividends from Net Realized Capital
Gains............................ (0.00) (0.00) (0.00) (0.05) (0.00)
Dividends in Excess of Net Realized
Capital Gains.................... (0.08) (0.08) (0.00) (0.00) (0.00)
Total Distributions......... (0.67) (0.49) (0.05) (0.69) (0.44)
------- ------- ------- ------- -------
Net Asset Value, End of Period....... $ 10.02 $ 10.02 $ 9.97 $ 10.04 $ 10.02
------- ------- ------- ------- -------
TOTAL RETURN......................... 7.41% 7.22%(6) (0.19)%(3,6) 7.09%(6) 4.75%(3,6)
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)........................... $91,161 $ 23 $ 88,829 $ 89,901 $ 53,316
Ratio of Expenses to Average Net
Assets........................... 0.83%(1) 1.07%(2) 0.85%(1,2) 0.85%(1) 0.85%(1,2)
Ratio of Net Investment Income to
Average Net Assets............... 5.83%(1) 5.64%(2) 5.88%(1,2) 6.20%(1) 6.17%(1,2)
Portfolio Turnover Rate............ 96% 96% 2% 94% 172%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers and other service providers for the Institutional
class and the Predecessor Fund for the year ended May 31, 1997, for the
period ended May 31, 1996, for the year ended April 30, 1996 and for the
period ended April 30, 1995 would have been .96% and 5.71%, 1.25% and 5.48%,
1.25% and 5.80%, and 1.33% and 5.69%, respectively.
(2) Annualized
(3) Not annualized.
(4) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(5) Retail class commenced operations on September 11, 1996.
(6) Total Return excludes sales charge.
9
<PAGE> 207
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 "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 under "Shareholder Services Plan," the Trust has
implemented the Services Plan with respect to Retail shares in the Funds. Under
the Services Plan, only the beneficial owners of Retail shares bear the expenses
of shareholder administrative services which are provided by financial
institutions for their benefit (not to exceed .25% annually with respect to the
Total Return Advantage, Fixed Income, GNMA and Intermediate Government Funds,
and .10% annually with respect to the Enhanced Income Fund). See "Shareholder
Services Plan," "Dividends and Distributions" and "Description of the Trust and
Its Shares" for a description of the impact that the Services Plan may have on
holders of Retail shares.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of a Fund may not be changed without the vote of
the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Except as noted below under "Investment Limitations," a Fund's
investment policies, however, may be changed without a vote of shareholders.
There can be no assurance that a Fund will achieve its objective. See
"Investment Objectives and Policies" in the Statement of Additional Information
for further information on the investments in which the Funds may invest.
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 under "Ratings
Criteria"). The Fund will normally invest at least 80% of the value of its total
assets in debt securities of all types, although up to 20% of the value of its
total assets may be invested in preferred stocks and other investments. Under
normal market conditions, the Fund maintains an average dollar-weighted
portfolio maturity of two years above or below the average maturity of the
Lehman Brothers Government/Corporate Bond Index.
Although the Total Return Advantage Fund normally invests substantially all
of its assets in investment grade debt securities, it may invest up to 15% of
its net assets in non-rated securities and securities rated below investment
grade (commonly referred to as "junk bonds"). For a discussion of risk factors
relating to such securities, see "Risks Related to Lower Rated Securities."
FIXED INCOME FUND
The investment objective of the Fixed Income Fund is to provide as high a
level of current income as is consistent with prudent investment risk. The Fund
seeks to achieve its objective by investing substantially all of its assets in a
fund of high and medium grade bonds and other fixed income securities. The Fund
normally invests at least 80% of the value of its total assets in debt
securities of all types, although up to 20% of the value of its total assets may
be invested in preferred stocks and other investments. In making investment
decisions, the Fund's advisers will consider such factors as current yield,
preservation of capital, maturity, yield to maturity, and the potential for
realizing capital appreciation. Under normal market conditions, the
10
<PAGE> 208
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 grade debt securities of all types. However, up to 20% of the value
of its total assets may be invested in preferred stocks and other investments.
In making investment decisions, the Fund's adviser will focus on a number of
factors, including yield to maturity, maturity, quality and the outlook for
specific issuers and market sectors. Under normal market conditions, the Fund
intends to maintain an average dollar-weighted portfolio maturity for its debt
securities of from 1 1/2 to 4 years. The two components of total rate of return
are current income and change in the value of portfolio securities. The Merrill
Lynch 1-3 Year Treasury Index is composed of Treasury Securities that mature in
one to three years. The average dollar-weighted maturity of the Index is
generally from 2 1/2 to 3 years. The Index is unmanaged, and its total rate of
return does not reflect the expenses that a mutual fund normally incurs. The
Fund's objective refers to a return after deduction of Fund expenses.
GNMA FUND
The investment objective of the GNMA Fund is to provide the highest level
of current income consistent with preservation of capital and a high degree of
liquidity. The Fund invests primarily (at least 65% of its total assets under
normal conditions) in mortgage pass-through securities guaranteed by the
Government National Mortgage Association ("GNMA"). Any remaining assets may
consist of:
(1) obligations of the U.S. Treasury;
(2) obligations issued or guaranteed as to principal and interest by
agencies and instrumentalities of the U.S. government;
(3) mortgage-backed securities issued by other government agencies and
privately issued mortgage-backed securities rated at least A by a nationally
recognized statistical rating organization ("Rating Agency");
(4) repurchase agreements involving any of such obligations;
(5) shares of money market investment companies investing exclusively in
such obligations; and
(6) futures on U.S. Treasury obligations.
Under normal market conditions, the estimated average life of the GNMA Fund's
holdings of mortgage pass-through and mortgage-backed securities will range
between 4 and 10 years. In addition, the Fund may engage in dollar rolls, short
sales against the box, interest rate swaps and when-issued transactions. The
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. Furthermore, the Fund
reserves the right to engage in securities lending, although it does not have
the present intent to do so during the current fiscal year. The Fund may also
borrow money in amounts up to 33 1/3% of its net assets. In order to meet
liquidity needs, the Fund may hold cash reserves, and may, for temporary
defensive purposes, invest up to 100% of its assets in Short Term Obligations
(as described below).
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 and purchases securities on a when-issued basis. The
Fund reserves the right to engage in securities lending, although it does not
presently intend to do so. In addition, the Fund may borrow money in amounts up
to 33 1/3% of its net assets. In order to meet liquidity needs, the Fund may
hold cash
11
<PAGE> 209
reserves, and may, for temporary defensive purposes, invest up to 100% of its
assets in Short Term Obligations (as described below).
The Intermediate Government 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.
COMMON INVESTMENT POLICIES OF THE FUNDS
Debt Securities
The Total Return Advantage, Fixed Income and Enhanced Income Funds may
invest in debt securities which may include: equipment lease and trust
certificates; corporate issues; collateralized mortgage obligations; state,
municipal and private activity bonds; obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities; securities of supranational
organizations such as the World Bank; participation certificates in pools of
mortgages, including mortgages issued or guaranteed by the U.S. government, its
agencies or instrumentalities; asset-backed securities such as mortgage backed
securities, Certificates of Automobile Receivables ("CARS") and Certificates of
Amortizing Revolving Debts ("CARDS"); private placements; and income
participation loans. Each Fund normally limits investments in asset-backed
securities to under 50% of its net assets. The Total Return Advantage Fund,
Fixed Income Fund and Enhanced Income Fund normally limit investments in income
participation loans to under 10%, 5% and 20% of their respective net assets.
Some of the securities in which the Funds invest may have warrants or options
attached. Recognizing the increasing globalization of the securities markets,
each Fund may also invest in foreign securities, currencies, securities of
domestic issuers denominated in foreign currencies and related investments
described below.
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 Total Return Advantage Fund and Enhanced Income Fund normally
maintains a minimum, dollar-weighted average quality rating for its portfolio of
securities within the two highest rating categories assigned by one or more
Rating Agencies. Debt securities rated in the lowest investment grade debt
category (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) may have
speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to a
12
<PAGE> 210
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.
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
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securities purchased by the Fund. Because of this, the Fund's performance may
depend more on its own credit analysis than is the case for mutual funds
investing in higher rated securities.
The Total Return Advantage Fund's adviser continuously monitors the issuers
of lower rated securities held by the Fund for their ability to make required
principal and interest payments, as well as in an effort to control the
liquidity of the Fund so that it can meet redemption requests.
Asset-Backed Securities
The Total Return Advantage, Fixed Income and Enhanced Income Funds may
purchase securities that are secured or backed by mortgages or other assets
(i.e., automobile loans and credit card receivables) and are issued by entities
such as GNMA, FNMA, Federal Home Loan Mortgage Corporation ("FHLMC"), commercial
banks, financial companies, finance subsidiaries of industrial companies,
savings and loan associations, mortgage banks and investment banks.
Mortgage-Backed Securities. Asset-Backed Securities acquired by the Total
Return Advantage, Fixed Income and Enhanced Income Funds consist of both
mortgage and non-mortgage-backed securities. Mortgage-backed securities
represent an ownership interest in a pool of mortgages, the interest on which is
in most cases issued and guaranteed by an agency or instrumentality of the U.S.
government, although not necessarily by the U.S. government itself.
Mortgage-backed securities include collateralized mortgage obligations and
mortgage pass-through certificates. The GNMA and Intermediate Government Funds
may purchase securities that are secured or backed by mortgages and are issued
by entities such as GNMA, FNMA and FHLMC, and the GNMA Fund may also purchase
securities issued by commercial banks, savings and loan associations, mortgage
banks and investment banks.
Mortgage pass-through certificates, which represent interests in pools of
mortgage loans, provide the holder with a pro rata interest in the underlying
mortgages. One type of such certificate in which the Funds may invest is a GNMA
Certificate which is backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government. Another type is a FNMA
Certificate, the principal and interest of which are guaranteed only by FNMA
itself, not by the full faith and credit of the U.S. government. Another type is
a FHLMC Participation Certificate which is guaranteed by FHLMC as to timely
payment of principal and interest. However, like a FNMA security it is not
guaranteed by the full faith and credit of the U.S. government. Privately issued
mortgage backed securities will carry a rating at the time of purchase of at
least A by S&P or by Moody's or, if unrated, will be in the adviser's opinion
equivalent in credit quality to such rating. Mortgage-backed securities issued
by private issuers, whether or not such obligations are subject to guarantees by
the private issuer, may entail greater risk than obligations directly or
indirectly guaranteed by the U.S. government.
The yield and average life 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 the
expected yield to maturity and average life, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity and average life. 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, the expected
yield to maturity and average life. Risks relating to the duration of a security
may be enhanced if the security's yield to maturity is extended or reduced if
such security's yield to maturity is shortened. There can be no assurance that
the Trust's estimation of the duration of asset-backed and mortgaged-backed
securities it holds will be accurate or that the duration of such instruments
will always remain within the maximum target duration. In calculating the
average weighted maturity of the Funds, the maturity of asset-backed and
mortgage-backed securities will be based on estimates of average life.
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Prepayments on asset-backed and mortgage-backed securities generally
increase with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic and social
factors. In general, the collateral supporting non-mortgage, asset-backed
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments. Like other fixed income securities, when
interest rates rise, the value of an asset-backed or mortgage-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed or mortgage-backed security with prepayment features may not
increase as much as that of other fixed income securities, and, as noted above,
changes in market rates of interest may accelerate or retard prepayments and
thus affect maturities.
These characteristics may result in a higher level of price volatility for
these assets under certain market conditions. In addition, while the trading
market for short-term mortgages and Asset-Backed and Mortgage-Backed Securities
is ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Non-Mortgage-Backed Securities. The Funds may also invest in
non-mortgage-backed securities including interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage backed securities are not issued or guaranteed
by the U.S. government or its agencies or instrumentalities.
Non-mortgage-backed securities involve certain risks that are not presented
by mortgage backed securities. Primarily, these securities do not have the
benefit of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws. Most issuers
of motor vehicle receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
motor vehicle receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
Foreign Securities, American Depository Receipts ("ADRs") and Foreign
Currencies
The Total Return Advantage, Fixed Income and Enhanced Income Funds may
invest in foreign securities including ADRs, securities of domestic issuers
denominated in foreign currencies, securities of foreign issuers denominated in
either foreign currencies or U.S. dollars, and foreign currencies. ADRs are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by foreign issuers. ADRs may be listed on a
national securities exchange or may be traded in the over-the-counter market.
ADR prices are denominated in U.S. dollars; the underlying security may be
denominated in a foreign currency.
Investments in foreign securities involve certain inherent risks, such as
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns, changes in exchange rates
of foreign currencies and the possibility of adverse changes in investment or
exchange control regulations. There may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets, or
diplomatic developments that
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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.
Exchange Rate-Related Securities
The Total Return Advantage and Enhanced Income Funds may each invest in
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is denominated in U.S.
dollars and is not subject to foreign currency risk and, in most cases, is paid
at rates higher than most other similarly rated securities in recognition of the
foreign currency risk component of Exchange Rate-Related Securities.
Investments in Exchange Rate-Related Securities entail certain risks. There
is the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid secondary market will exist for a particular Exchange
Rate-Related Security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may, from time to time, combine to
make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
Forward Currency Exchange Contracts
The Total Return Advantage and Enhanced Income Funds may enter into forward
currency exchange contracts in an effort to reduce the level of volatility
caused by changes in foreign currency exchange rates or where such transactions
are economically appropriate for the reduction of risks inherent in the ongoing
management of the Funds. The Funds may not enter into such contracts for
speculative purposes. A forward currency exchange contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of contract. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time, they tend to limit any potential gain that might be realized should the
value of such currency increase. Consequently, a Fund may choose to refrain from
entering into such contracts. In connection with forward currency exchange
contracts, the Funds will create a segregated account of liquid assets, such as
cash, U.S. government securities or other liquid high grade debt obligations, or
will otherwise cover their position in accordance with applicable requirements
of the SEC.
Interest Rate Swaps
In order to protect its value from interest rate fluctuations, each of the
Total Return Advantage, Enhanced Income and GNMA Funds may enter into interest
rate swaps. The Funds expect to enter into these hedging transactions primarily
to preserve a return or spread of a particular investment or portion of their
holdings and to protect against an increase in the price of securities the Funds
anticipate purchasing at a later date. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (i.e., an exchange of floating rate payments for fixed rate payments).
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of liquid assets, such as cash, U.S. government securities
or other liquid high grade debt securities, having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated account
by the Fund's custodian. A Fund will not enter into any interest rate swap
unless the unsecured commercial paper, senior debt, or claims paying ability of
the other party is rated, with respect to the 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
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Fund may have under such an arrangement will be covered by setting aside liquid
high grade securities in a segregated account.
Futures Contracts and Related Options
The Total Return Advantage, Enhanced Income and Intermediate Government
Funds may invest in interest rate and bond index futures contracts and options
on futures contracts and the GNMA and Intermediate Government Funds may invest
in futures contracts on U.S. Treasury Obligations in order to offset an expected
decrease in the value of their respective portfolios that might otherwise result
from a market decline. A Fund may do so either to hedge the value of its
portfolio securities as a whole, or to protect against declines occurring prior
to sales of securities in the value of the securities to be sold. In addition,
the 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 portfolio holdings.
The Total Return Advantage and Enhanced Income Funds may purchase and sell
call and put options on futures contracts traded on an exchange or board of
trade. When a Fund purchases an option on a futures contract, it has the right
to assume a position as a purchaser or seller of a futures contract at a
specified exercise price at any time during the option period. When a Fund sells
an option on a futures contract, it becomes obligated to purchase or sell a
futures contract if the option is exercised. In anticipation of a market
advance, a Fund may purchase call options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund intends to purchase. Similarly, if the
value of a Fund's securities is expected to decline, the Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
The Total Return Advantage, Enhanced Income, GNMA and Intermediate
Government Funds intend to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC") exempting the Funds from registration as a
"commodity pool operator." A Fund's commodities transactions must constitute
bona fide hedging or other permissible transactions pursuant to such
regulations. In addition, a Fund may not engage in such transactions if the sum
of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5% of the liquidation value of its assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into. In
connection with a Fund's position in a futures contract or option thereon, the
Fund will create a segregated account of liquid assets, such as cash, U.S.
government securities or other liquid high grade debt obligations, or will
otherwise cover its position in accordance with applicable requirements of the
SEC.
Risk Factors Associated with Futures and Related Options
To the extent the Total Return Advantage, Enhanced Income, GNMA and
Intermediate Government Funds are engaging in a futures transaction as a hedging
device, due to the risk of an imperfect correlation between securities in their
funds that are the subject of a hedging transaction and the futures contract
used as a hedging device, it is possible that the hedge will not be fully
effective in that, for example, losses on the portfolio securities may be in
excess of gains on the futures contract or losses on the futures contract may be
in excess of gains on the portfolio securities that were the subject of the
hedge. In futures contracts based on indices, the risk of imperfect correlation
increases as the composition of the Funds varies from the composition of the
index. In an effort to compensate for the imperfect correlation of movements in
the price of the securities being hedged and movements in the price of futures
contracts, the Funds may buy or sell
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futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect a Fund's net investment results if market
movements are not as anticipated when the hedge is established.
Successful use of futures by the Funds also are subject to the advisers'
ability to predict correctly movements in the direction of securities prices,
interest rates and other economic factors. For example, if the Funds have hedged
against the possibility of a decline in the market adversely affecting the value
of securities held in their funds and prices increase instead, the Funds will
lose part or all of the benefit of the increased value of securities which they
have hedged because they will have offsetting losses in their futures positions.
In addition, in such situations, if a Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Funds may have to sell securities at a time when it may
be disadvantageous to do so.
Although the Total Return Advantage, Enhanced Income, GNMA and Intermediate
Government Funds intend to enter into futures contracts and the Total Return
Advantage and Enhanced Income Funds into options transactions only if there is
an active market for such investments, no assurance can be given that a liquid
market will exist for any particular contract or transaction at any particular
time. See "Illiquid Securities." Many futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the 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:
(a) 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;
(b) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures contract when desired;
(c) losses greater than the amount of the principal invested as initial
margin due to unanticipated market movements which are potentially unlimited;
and
(d) the adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors.
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. The Funds do not intend
to purchase when-issued securities for speculative purposes but only for the
purpose of acquiring portfolio securities. In when-issued and delayed delivery
transactions, a Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
attractive. One form of when-issued or delayed delivery security that the GNMA
and Intermediate Government Funds may purchase is a "to be announced" ("TBA")
mortgage-backed security. A TBA transaction arises when a mortgage-backed
security, such as a GNMA pass-through security, is purchased or sold with the
specific pools that will constitute that GNMA pass-through security to be
announced on a future settlement date. 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.
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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.
Short Term Obligations
Each Fund will ordinarily hold some short term obligations (with maturities
of 18 months or less) such as domestic and foreign commercial paper, bankers'
acceptances, certificates of deposit and demand and time deposits of domestic
and foreign branches of U.S. banks and foreign banks, reverse repurchase
agreements, U.S. Treasury bills, money market funds, and guaranteed investment
contracts ("GICs"). Reverse repurchase agreements involve the risk that the
market value of the securities held by a Fund may decline below the price of the
securities it is obligated to repurchase.
All Funds may acquire repurchase agreements, which carry the risk that
default or bankruptcy of the seller may expose a Fund to possible loss because
of adverse market action or delays connected with the disposition of the
underlying obligations. Further, it is uncertain whether the Fund would be
entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities.
The GNMA Fund may invest in reverse repurchase agreements in the form of
Dollar Rolls. Dollar Rolls are transactions in which securities are sold by the
Fund for delivery in the current month and the Fund simultaneously contracts to
repurchase substantially similar securities on a specified future date. Any
difference between the sale price and the purchase price is netted against the
interest income foregone on the securities sold to arrive at an implied
borrowing rate. Alternatively, the sale and purchase transactions can be
executed at the same price, with the Fund being paid a fee as consideration for
entering into the commitment to purchase. Dollar Rolls may be renewed prior to
cash settlement and initially may involve only a firm commitment agreement by
the Fund to buy a security. If the broker-dealer to which 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.
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 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
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securities may be subject to greater interest rate volatility than interest
paying Permitted Investments.
U.S. Treasury Obligations
Each 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).
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 agreements, 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
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 its portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them at a
mutually agreed-upon date and price. The 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
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 GNMA. GNMA was established as an instrumentality of the U.S.
government to supervise and finance certain types of activities. 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 ("FNMA"), are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations;
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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 their respective advisers believe
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 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.
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.
Risk Factors Associated with Derivative Instruments
The Funds may purchase certain "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of different
securities, interest or currency exchange rates, or indices. The types of
derivative instruments that the Funds may purchase include (but are not limited
to) futures contracts, options, forward currency contracts and structured debt
obligations (including collateralized mortgage obligations, various floating
rate instruments and other types of securities).
Like all investments, derivative instruments involve several basic types of
risks which must be managed in order to meet investment objectives. The specific
risks presented by derivatives include, to varying degrees, market risk in the
form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
is based; liquidity risk that a Fund will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying securities, rates or
indices on which it is based; extension risk that the expected duration of an
instrument may increase or decrease; 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 risk to the Funds due to the use of derivatives will be
limited to the principal invested in such instruments. When the GNMA Fund
engages in short sales "against the box," risk of loss will be limited to the
value of the securities "in the box." 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
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pass-through securities. Periodic occurrence of this degree of structural risk
would not be expected to materially impact overall Fund returns relative to its
investment objective.
The Fund will not invest in high structural risk derivatives whose duration
(and hence return) can vary widely depending on moves in interest rates or other
contractual variables. Generally, these are instruments which are deemed to have
a high sensitivity to changes in interest rates, which could materially alter
the effective duration or coupon and return of the instruments.
The Fund may invest in mortgage-backed derivative securities, including
collateralized mortgage obligations ("CMOs"), provided that they are not
identified by the advisers as "high risk securities" by certain quantitative
tests that are generally accepted standards in the investment industry.
Other derivative instruments that are suitable for investment include:
asset-backed securities such as those backed by automobile loans or credit card
receivables. All such securities, however, must conform to the structural risk
standards stated above (i.e. not present high structural risk).
The advisers do not presently intend to invest in the following types of
derivatives on behalf of the Fund:
- - exchange rate-related securities
- - forward currency exchange contracts
- - interest rate swaps
- - futures contracts and related options
- - structured instruments, such as range notes, dual index notes, leveraged or
deleveraged bonds, inverse floaters, index amortizing notes and other
structured instruments having similar cash flow characteristics
Total Return Advantage Fund and Enhanced Income Fund. These Funds may
invest in derivative instruments having either moderate structural risk or high
structural risk characteristics (as described above in the section pertaining to
the Fixed Income Fund). There are no policy restrictions on specific types of
derivative instruments in which the Funds are permitted to invest. However,
structural risk is controlled by adherence to specific overall Fund parameters.
The Funds are managed in accordance with a policy goal that constrains the
potential variability of overall Fund duration and total return in relation to
specified investment performance benchmarks. Fund exposure to derivative
instruments having high structural risk characteristics is targeted at a maximum
of 5.0% of each Fund's net assets with no individual position greater than 1.0%
of each Fund. Variability in total Fund duration caused by these securities is
targeted not to exceed 0.1 years in any one calendar year.
GNMA Fund. The adviser has adopted the following internal policy
concerning management of the structural risk inherent in derivative instruments
on behalf of the GNMA Fund:
The adviser does not presently intend to invest in the following types of
derivatives on behalf of the GNMA Fund:
- - exchange rate-related securities
- - forward currency exchange contracts
- - structured instruments, such as range notes, dual index notes, leveraged or
deleveraged bonds, inverse floaters, index amortizing notes and other
structured instruments having similar cash flow characteristics
Intermediate Government Fund. The adviser does not presently intend to
invest in the following types of derivatives 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.
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
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<PAGE> 221
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 100% under normal market conditions. For
further information, see "Risk Factors, Investment Objectives and Policies" in
the Statement of Additional Information.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the Fund's
outstanding shares (as defined under "Miscellaneous"). (Other investment
limitations that also cannot be changed without a vote of shareholders are
contained in the Statement of Additional Information under "Risk Factors,
Investment Objectives and Policies.")
No Fund may:
1. Make loans, except that each Fund may purchase or hold debt instruments,
lend portfolio securities and enter into repurchase agreements in accordance
with its investment objective and policies.
2. (a) This paragraph (a) applies to the Total Return Advantage, Fixed
Income and Enhanced Income Funds. Borrow money or issue senior securities,
except that each Fund may borrow from banks and enter into reverse repurchase
agreements for temporary purposes in amounts not in excess of 10% of the value
of its total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Fund's total assets at the time of such borrowing. A Fund will not
purchase securities while borrowings (including reverse repurchase agreements)
in excess of 5% of its total assets are outstanding.
(b) This paragraph (b) applies to the GNMA and Intermediate Government
Funds. Neither Fund may borrow money or issue senior securities, except that
each Fund may borrow from anyone for temporary purposes in amounts not in excess
of 5% of the value of its total assets at the time of such borrowing; or a 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 a Fund's total assets, asset coverage of at least 300% is
required. The Funds will not purchase securities while outstanding borrowings
equal or exceed 5% of their respective total assets. "Asset coverage" means that
a 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
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<PAGE> 222
than 10% of any class of securities of the issuer or more than 10% of the
outstanding voting securities of the issuer], except that up to 25% of the value
of the Fund's total assets may be invested without regard to such limitations.
With respect to the GNMA and Intermediate Government Funds, this investment
limitation No. 4 does not apply to repurchase agreements involving securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
Additional investment limitations which are matters of fundamental policy
are as follows:
5. The Fixed Income Fund may invest no more than 10% of the value of its
net assets in illiquid securities, including repurchase agreements with
remaining maturities in excess of seven days, non-negotiable time deposits,
certificates of participation without corresponding remarketing agreements, and
other securities which are not readily marketable.
6. Neither the Total Return Advantage Fund nor Enhanced Income Fund may
invest more than 15% of the value of its net assets in illiquid securities. See
"Illiquid Securities" under "Risk Factors, Investment Objectives and
Policies -- Common Investment Policies of the Funds."
For purposes of investment limitations No. 3 with respect to the GNMA and
Intermediate Government Funds) and 4 (with respect to all Funds), a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's securities will not constitute a violation of such limitation for
purposes of the 1940 Act. If the Funds exceed their limitations on the holding
of illiquid securities, they will sell illiquid securities as necessary to
maintain the required liquidity when the adviser or advisers believe that it is
in the best interests of the Funds to do so.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders each Fund's yield and total return data for its Institutional
shares and Retail shares. The "yield" quoted in advertisements refers to the
income generated by an investment in a class of shares of a Fund over a 30-day
period identified in the advertisement. This income is then "annualized." The
amount of income so generated by the investment during the 30-day period is
assumed to be earned and reinvested at a constant rate and compounded
semi-annually; the annualized income is then shown as a percentage of the
investment.
The Funds calculate their total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price 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."
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Investors may compare the performance of each class of shares of a Fund to
the performance of other mutual funds with comparable investment objectives, to
various mutual fund or market indices, respectively, and to data or rankings
prepared by independent services such as Lipper Analytical Services, Inc. or
other financial or industry publications that monitor the performance of mutual
funds. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar,
Incorporated and other publications of a local, regional or financial industry
nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in the net asset value of a class should be
considered in ascertaining the total return to shareholders for a given period.
Yield and total return data should also be considered in light of the risks
associated with a Fund's portfolio composition, quality, maturity, operating
expenses and market conditions. Any fees charged by financial institutions (as
described in "How to Purchase and Redeem Shares") are not included in the
computation of performance data but will reduce a shareholder's net return on an
investment in a Fund.
Further information about the performance of the Funds is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain these
materials from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For processing purchase and redemption orders, the net asset value per
share of each Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined each day that the Exchange is open
for business.
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
With respect to each Fund, investments in securities are valued at their
closing sales price if the principal market is an exchange. Other securities,
and temporary cash investments acquired more than 60 days from maturity, are
valued at the mean between quoted bid and asked prices. Such valuations are
provided by one or more independent pricing services when such valuations are
believed to reflect fair market value. When valuing securities, pricing services
consider institutional size trading in similar groups of securities and any
developments related to specific issues, among other things. Short-term
investments with maturities of 60 days or less are generally 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 will fluctuate as the value of its investment portfolio 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 Oaks, Pennsylvania 19456.
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, in-
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<PAGE> 224
cluding trips and monetary awards to NatCity
Investments, Inc. and other affiliates of National City.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily through
financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. (For
information on such fees, the Investor should review his agreement with the
institution or contact it directly.) In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby a
financial institution would perform various administrative support services for
its customers who are the beneficial owners of Retail shares and would receive
fees from the Funds for such services. See "Shareholder Services Plan." For
direct purchases of shares, Investors should call 1-800-622-FUND(3863) or to
speak with a NatCity Investments professional, call 1-888-4NATCTY (462-8289).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact NatCity Investments, Inc., the Distributor
or their financial institutions for information as to applications and annual
fees. Investors should also consult their tax advisers to determine whether the
benefits of an IRA are available or appropriate.
The minimum investment for the initial purchase of Retail shares in each
Fund is $500. All subsequent investments for Retail shares and IRAs are subject
to a minimum investment of $250. Investments made in Retail shares through the
Planned Investment Program ("PIP") a monthly savings program described below are
not subject to the minimum initial and subsequent investment requirements or any
minimum account balance requirements described in "Other Redemption
Information." Purchases for an IRA through the PIP will be considered as
contributions for the year in which the purchases are made.
Under a PIP, 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 PIP by
completing an application obtained through a financial institution, such as
banks, brokers, or dealers selling Retail shares of the Funds, or by calling
1-800-622-FUND (3863). The program may be modified or terminated by an Investor
on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The Public Offering Price for Retail shares of the Total Return Advantage
Fund, Fixed Income Fund, GNMA Fund and Intermediate Government Fund is the sum
of the net asset value of the shares being purchased plus any applicable sales
charge per account, per Fund, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE AS
PRICE PER ASSET VALUE 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>
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<PAGE> 225
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 AS
PRICE PER ASSET VALUE 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) 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
(e) investors purchasing Fund shares through a payroll deduction plan
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail shares of
each Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND (3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in Retail shares in
determining the applicable sales charge. An Investor's aggregate investment in
Retail shares is the total value (based on the higher of current net asset value
or any Public Offering Price originally paid) of:
(a) current purchases
(b) Retail shares that are already beneficially owned by the Investor for
which a sales charge has been paid
(c) Retail shares that are already beneficially owned by the Investor which
were purchased prior to July 22, 1990
(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
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<PAGE> 226
which, if made at one time, would qualify for a reduced sales charge. A Letter
of Intent option is included on the account application which may be obtained
from the Investor's financial institution or directly from the Trust by calling
1-800-622-FUND (3863). If an Investor so elects, the 13-month period may begin
up to 30 days prior to the Investor's signing the Letter of Intent. The initial
investment under the Letter of Intent must be equal to at least 4.0% of the
amount indicated in the Letter of Intent. During the term of a Letter of Intent,
the Transfer Agent will hold Retail shares representing 4.0% of the amount
indicated in the Letter of Intent in escrow for payment of a higher sales charge
if the entire amount is not purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13-month period or is redeemed within one year from the
time of fulfillment, 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 trust companies which
are affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
registered investment advisers and financial planners affiliated with National
City ("RIAs") who charge an advisory, consulting or other fee for their services
and buy shares for their own accounts or the accounts of their clients
("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, NAM or RIAs 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.
It is the responsibility of the Banks, NAM and RIAs 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, NAM or RIAs. Confirmations
of share purchases and redemptions will be sent to the Banks, NAM and RIAs.
Beneficial ownership of Institutional shares will be recorded by the Banks, NAM
or RIAs 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 processed at the
net asset value per share next determined after receipt of the order plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the same
financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND (3863). Redemption
proceeds are paid by check or credited to the Investor's account with his
financial institution.
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<PAGE> 227
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 who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to the Armada Funds, P.O. Box
84231, Boston, Massachusetts 02266-8421. 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 $10,000
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 $10,000, 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 who purchased shares directly from the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares by telephone may
be modified or terminated at any time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Trust's transfer agent's
system. The Plan allows the shareholder to have a fixed minimum sum of $250
distributed at regular intervals. The shareholder's account must have a minimum
value of $5,000 to be eligible for
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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 $500 due to redemptions where the
shareholder does not increase the amount in the account to at least $500 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 15 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
federal funds.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (each a "no load Fund") at the net asset value per share on the
date of exchange. As a result, no additional sales charge will be incurred with
respect to such an exchange. Shareholders may also exchange Retail shares of a
no load Fund for Retail shares of another no load Fund at the net asset value
per share without payment of a sales charge. In addition, shareholders of a no
load Fund may exchange Retail shares for Retail shares of a load Fund subject to
payment of the applicable sales charge. However, shareholders exchanging Retail
shares of a no load Fund which were received in a previous exchange transaction
involving Retail shares of a load Fund will not be required to pay an additional
sales charge upon notification of the reinvestment of the equivalent amount into
the Retail shares of a load Fund. Shareholders contemplating an exchange should
carefully review the Prospectus of the fund into which the exchange is being
considered. An Armada Funds Prospectus may be obtained from NatCity Investments,
Inc., an Investor's financial institution or by calling 1-800-622-FUND(3863).
Any Retail shares exchanged must have a value at least equal to the minimum
initial investment required by the particular investment fund into which the
exchange is being made. Investors should make their exchange requests in writing
or by telephone to the financial institutions through which they purchased their
original Retail shares. It is the responsibility of financial institutions to
transmit exchange requests to the Transfer Agent. Investors who purchased shares
directly from the Trust should transmit exchange requests directly to the
Transfer Agent. Exchange requests received by the Transfer Agent prior to 4:00
p.m. (Eastern Time) will be processed as of the close of business on the day of
receipt; requests received by the Transfer Agent after 4:00 p.m. (Eastern Time)
will be processed on the next business day. The Trust reserves the right to
reject any exchange request. During periods of unusual economic or market
changes, telephone exchanges may be difficult to implement. In such event, an
Investor should mail the exchange request to his financial institution, and an
Investor who directly purchased shares from the Trust should mail the exchange
request to the Transfer Agent. The exchange privilege may be modified or
terminated at any time upon 60 days notice to shareholders.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada Funds money market fund. Under a
systematic exchange
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program, a shareholder enters an agreement to purchase shares of one or more
specified Funds over a specified period of time, and initially purchases shares
of one Armada money market fund in an amount equal to the total amount of the
investment. On a monthly basis, a specified dollar amount of shares of the
Armada money market fund is exchanged for shares of the Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this Prospectus. Because purchases of
Retail Shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent in connection with the systematic
exchange program. A shareholder may apply for participation in this program
through his financial institution or by calling 1-800-622-FUND(3863).
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act, the Trust pays the following
compensation to the Distributor for services provided and expenses assumed in
providing the Trust advertising, marketing, prospectus printing and other
distribution services: (i) an annual base fee of $1,250,000, plus (ii) incentive
fees related to asset growth. Such compensation is payable monthly and accrued
daily among the Trust's investment funds with respect to which the Distributor
is distributing shares. In the case of each such fund, such compensation shall
not exceed .10% per annum of the fund's average net assets.
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) with respect to the Total
Return Advantage, Fixed Income, GNMA and Intermediate Government Funds and up to
.10% (on an annualized basis) with respect to the Enhanced Income Fund of such
shares' average daily net asset value. Persons entitled to receive compensation
for servicing Retail shares may receive different compensation with respect to
those shares than with respect to Institutional shares in the same Fund.
Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Trust on
behalf of customers, providing information periodically to customers showing
their position in Retail shares, and providing sub-transfer agent services or
the information necessary for subaccounting, with respect to Retail shares
beneficially owned by customers. Since financial institutions may charge their
customers fees depending on the type of customer account the Investor has
established, beneficial owners of Retail shares should read this Prospectus in
light of the terms and fees governing their accounts with financial
institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared daily
and paid monthly. With respect to each Fund, net income for dividend purposes
consists of dividends, distributions and other income on the Fund's assets, less
the accrued expenses of the Fund. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce a Fund's
net asset value per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class of any Armada Funds at
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the net asset value of such shares on the payment date. Shareholders must make
such election, or any revocation thereof, in writing to their Banks or financial
institutions. 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 will be reduced by
the amount of shareholder servicing fees payable to financial institutions under
the Services Plan.
TAXES
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for federal income taxes to the
extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by a Fund will be taxable as ordinary income to its
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or to a qualified retirement plan are
deferred under the Code.) Since all of each Fund's net investment income is
expected to be derived from earned interest, it is anticipated that no part of
any distribution will be eligible for the dividends received deduction for
corporations.
Substantially all of each Fund's net realized long-term capital gains, if
any, will be distributed at least annually to Fund shareholders. A Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a long-
term loss to the extent of the earlier capital gain distribution. Generally, a
shareholder may include sales charges incurred upon the purchase of Fund shares
in his tax basis for such shares for the purpose of determining gain or loss on
a redemption, transfer or exchange of such shares. However, if the shareholder
effects an exchange of such shares for shares of another Fund within 90 days of
the purchase and is able to reduce the sales charges
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applicable to the new shares (by virtue of the
Trust's exchange privilege), the amount equal to such reduction may not be
included in the tax basis of the shareholder's exchanged shares but may be
included (subject to this limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISERS
NAM serves as the investment adviser to the Total Return Advantage and
Enhanced Income Funds. National City, National City Columbus and National City
Kentucky ("National City Banks") serve as investment advisers to the Fixed
Income Fund. National City serves as investment adviser to the GNMA and
Intermediate Government Funds. The National City Banks and NAM are wholly owned
subsidiaries of National City Corporation. The National City Banks provide trust
and banking services to individuals, corporations, and institutions, both
nationally and internationally, including investment management, estate and
trust administration, financial planning, corporate trust and agency, and
personal and corporate banking. The National City Banks are member banks of the
Federal Reserve System and the Federal Deposit Insurance Corporation. NAM is a
registered investment adviser providing investment advisory and related
services.
On June 30, 1997, the Trust Departments of National City, National City
Columbus and National City Kentucky had approximately $10.7 billion, $1.5
billion and $5.6 billion, respectively, in assets under management, and National
City, National City Columbus and National City Kentucky had approximately $21.5
billion, $11.6 billion and $13.8 billion, respectively, in total trust assets.
NAM had approximately $7.7 billion in assets under management. The principal
offices for each of the investment advisers are as follows:
National City
1900 East Ninth Street
Cleveland, Ohio 44114;
National City Columbus
155 East Broad Street
Columbus, Ohio 43251;
National City Kentucky
National City Tower
101 South Fifth Street
Louisville, Kentucky 40202; and
NAM
101 South Fifth Street
Louisville, Kentucky 40202.
NAM manages the Total Return Advantage and Enhanced Income Funds, makes
decisions with respect to and places orders for all purchases and sales of the
Funds' securities and maintains the Funds' records relating to such purchases
and sales.
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The Investment Management Group of NAM makes the investment decisions for these
Funds. No individual person is primarily responsible for making recommendations
to the Investment Management Group.
The National City Banks manage the Fixed Income Fund and National City
manages the GNMA and Intermediate Government Funds. They make decisions with
respect to and place orders for all purchases and sales of the Funds'
securities, and maintain the Funds' records relating to such purchases and
sales. The Fixed Income Team of National City's Asset Management Group makes the
investment decisions for these Funds. No individual person is primarily
responsible for making recommendations to the Asset Management Group. Members of
the team are:
- - Donald L. Ross, CFA, Director of the Fixed Income Team, has been with National
City since 1986. He specializes in the overall duration and yield curve
decisions.
- - Michael E. Santelli, CFA, Vice President, joined National City in 1995.
Previously, he spent a total of 4 years in the mortgage research departments
of Donaldson Lufkin and Jenrette and Merrill Lynch. He specializes in the
mortgage market.
- - 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 1989. He has
more than 23 years of investment experience with expertise in the area of
municipal bonds (taxable as well as tax-free) and money market instruments.
- - Stanley F. Martinez, Investment Officer, joined National City in 1996.
Previously, he managed taxable money market funds and short duration fixed
income portfolios for Mercantile-Safe Deposit & Trust. His focus is on short
duration investments across all fixed income sectors.
- - John C. Pfenenger, Vice President, joined National City in 1996. His
experience includes five years at Mitchell Hutchins in their quantitative
fixed income group. John now specializes in the asset-backed sector.
- - Douglas J. Carey, Investment Officer, joined National City in 1995. Prior to
joining National City, Mr. Carey was a graduate assistant for the Economic
Department of Miami University from August 1994 through July 1995. He is
responsible for the development of econometric models used in economic and
interest rate forecasting, as well as fixed income sector relative valuation.
- - Marilou C. Hitt, Assistant Vice President, has worked in National City's Funds
Management Trading Department since 1984. She has managed short-term money
market instruments for more than 10 years. Her responsibilities also include
fixed income trading of government and corporate securities as well as
short-term taxable and tax-free money market instruments.
- - Frederick W. "Ted" Ramsey, Vice President of the Fixed Income Research Team,
oversees the Fixed Income Team's credit and research area. His experience
includes 25 years in corporate banking and credit administration, including 10
years as senior credit officer. In addition to his responsibilities as head of
credit research, Mr. Ramsey serves as credit advisor on new investment
opportunities and risk management guidelines.
- - Connie R. Chuhaloff, Investment Officer, joined National City in 1977. She has
held investment-related responsibilities since 1988. Ms. Chuhaloff also has a
background in Trust Operations. Her responsibilities include trading
short-term taxable and tax-free money market instruments, as well as municipal
bonds.
The investment adviser(s) are entitled to receive advisory fees, computed
daily and payable monthly, at the annual rates of .55% of the average daily net
assets of each of the Total Return Advantage, Fixed Income, GNMA and
Intermediate Government Funds, and .45% of the average daily net assets of the
Enhanced Income Fund. The adviser(s) may from time to time waive all or a
portion of their advisory fees to increase the net
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income of the Funds available for distribution as dividends.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
each Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive with respect to each
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .045% of the next $200,000,000 of its net assets
and .02% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 42 separate classes or
series of shares of beneficial interest ("shares"). Ten of these classes or
series, which represent interests in the Fixed Income Fund (Class I and Class
I -- Special Series 1), Enhanced Income Fund (Class O and Class O Special Series
1), Total Return Advantage Fund (Class P and Class P -- Special Series 1),
Intermediate Government Fund (Class R and Class R -- Special Series 1) and GNMA
Fund (Class S and Class S -- Special Series 1) are described in this Prospectus.
Class I, Class O, Class P, Class R and Class S shares constitute the
Institutional class or series of shares; and Class I -- Special Series 1, Class
O -- Special Series 1, Class P -- Special Series 1, Class R -- Special Series 1
and Class S Special Series 1 shares constitute the Retail class or series of
shares. The other Funds of the Trust are:
Money Market Fund
(Class A and Class A -- Special Series 1)
Government Fund
(Class B and Class B -- Special Series 1)
Treasury Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Fund
(Class D and Class D -- Special Series 1)
Equity Growth 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)
Pennsylvania Municipal Fund
(Class T and Class T -- Special Series 1)
International Equity Fund
(Class U and Class U -- Special Series 1)
Equity Index Fund
(Class V and Class V -- Special Series 1)
Core Equity Fund
(Class W and Class W -- Special Series 1)
Small Cap Growth Fund
(Class X and Class X -- Special Series 1)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
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Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Services Plan, only
the holders of Retail shares in an investment fund are, or would be entitled to
vote on matters submitted to a vote of shareholders (if any) concerning the
Services Plan. Voting rights are not cumulative, and accordingly, the holders of
more than 50% of the aggregate shares of the Trust may elect all of the trustees
irrespective of the vote of the other shareholders.
As stated previously in the text of this document, the Trust is organized
as a trust under the laws of Massachusetts. Shareholders of such a trust may,
under certain circumstances, be held personally liable (as if they were
partners) for the obligations of the trust. The Declaration of Trust of the
Trust provides for indemnification out of the trust property for any shareholder
held personally liable solely by reason of his being or having been a
shareholder and not because of his acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of September 26, 1997, National City, National City Columbus and
National City Kentucky held beneficially or of record approximately 11.88%,
0.30% and 73.56%, respectively, of the outstanding Institutional shares of the
Total Return Advantage Fund; National City, National City Columbus and National
City Kentucky held beneficially or of record approximately 23.09%, 26.78% and
7.78%, respectively, of the outstanding Institutional shares of the Fixed Income
Fund; National City, National City Columbus, and National City Kentucky held
beneficially or of record approximately 5.36%, 7.84% and 59.95%, respectively,
of the outstanding Institutional shares of the Enhanced Income Fund; National
City and National City Columbus held beneficially or of record approximately
0.28%, and 0.30%, respectively, of the outstanding Institutional shares of the
Intermediate Government Fund; National City, National City Columbus, and
National City Kentucky held beneficially or of record approximately 4.59%,
0.09%, and 0.30%, respectively, of the outstanding Institutional shares of the
GNMA. Neither National City, National City Columbus, nor National City Kentucky
has any economic interest in such shares which are held solely for the benefit
of its customers, but may be deemed to be a controlling person of the Funds
within the meaning of the 1940 Act by reason of its record ownership of such
shares. The names of beneficial owners and record owners who are controlling
shareholders under the 1940 Act may be found in the Statement of Additional
Information.
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<PAGE> 235
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to P.
O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust for
these services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Trust's advisers bear all expenses in connection
with the performance of their services. Each Fund of the Trust bears its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
Distribution Plan; advisory fees; administration fees and expenses; charges of
the custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholders' reports and shareholder meetings; and
any extraordinary expenses. Each Fund also pays for brokerage fees and
commissions in connection with the purchase of its portfolio securities. Under
the Services Plan, the Retail shares in the Funds also bear the expense of
shareholder servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
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<PAGE> 236
ARMADA FUNDS
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES Robert D. Neary
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, Inc.
Leigh Carter
Retired President and Chief Operating
Officer,
B.F. Goodrich Company
Director:
Acromed Corporation
Adams Express Company
Kirtland Capital Corp.
Morrison Products
Petroleum & Resources Corp.
John F. Durkott
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
Richard W. Furst, Dean
Professor of Finance and Dean, Carol Martin
Gatton College of Business and Economics,
University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
Gerald L. Gherlein
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
Meridia Health System
WVIZ Educational Television
J. William Pullen
President and Chief Executive Officer,
Whayne Supply Company
Richard B. Tullis
Chairman Emeritus, Harris Corporation
Director:
Hamilton Beach/Proctor-Silex, Inc.
NACCO Materials Handling Group, Inc.
Waste-Quip, Inc.
<PAGE> 237
ARMADA FUNDS LOGO BULK RATE
Oaks, Pennsylvania 19456 U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National Asset
Management Corporation
101 South Fifth Street
Louisville, Kentucky 40202
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
AF-809 (9/97)
<PAGE> 238
ARMADA FUNDS
Statement of Additional Information
September 30, 1997
Total Return Advantage Fund
Fixed Income Fund
Enhanced Income Fund
GNMA Fund
Intermediate Government Fund
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 30, 1997 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at 1-800-622-FUND
(3863) , Oaks, Pennsylvania 19456.
<PAGE> 239
TABLE OF CONTENTS
Page
STATEMENT OF ADDITIONAL INFORMATION...................... 1
INVESTMENT OBJECTIVES AND POLICIES........................ 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........... 11
DESCRIPTION OF SHARES.................................... 14
ADDITIONAL INFORMATION CONCERNING TAXES.................. 16
TRUSTEES AND OFFICERS.................................... 19
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS.................. 23
SHAREHOLDER SERVICES PLAN................................ 30
PORTFOLIO TRANSACTIONS................................... 31
AUDITORS................................................. 33
COUNSEL.................................................. 33
YIELD AND PERFORMANCE INFORMATION........................ 34
MISCELLANEOUS............................................ 39
FINANCIAL STATEMENTS..................................... 41
APPENDIX A............................................... A-1
APPENDIX B............................................... B-1
Income Series SAI
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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
Total Return Advantage, Fixed Income, Enhanced Income , GNMA and Intermediate
Government 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 GNMA Fund and Intermediate Government Fund commenced
operations on August 10, 1994 as separate investment portfolios (the
"Predecessor GNMA Fund" and "Predecessor Intermediate Government Fund,"
collectively the "Predecessor Funds") of Inventor Funds, Inc. which was
organized as a Maryland corporation. On September 9, 1996, the Predecessor Funds
were reorganized as new portfolios of Armada. Prior to the reorganization, the
Predecessor Funds offered and sold shares of stock that were similar to Armada's
Retail shares of beneficial interest.
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
- -----------------------
As described in the Prospectus, each Fund may purchase
asset-backed securities, which are securities backed by mortgages, installment
contracts, credit card receivables or other assets. Asset-backed securities
represent interests in "pools" of assets in which payments of both interest and
principal on the securities are made monthly, thus in effect "passing through"
monthly payments made by the individual borrowers on the assets that underlie
the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of asset-backed securities varies with the
maturities of the underlying instruments, and the average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage
<PAGE> 241
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.
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
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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
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 Total Return
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<PAGE> 243
Advantage and Enhanced Income 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 Total Return Advantage and Enhanced Income Funds'
adviser anticipates that a particular foreign currency may decline substantially
relative to the U.S. dollar or other leading currencies, in order to reduce
risk, a Fund may enter into a forward contract to sell, for a fixed amount, the
amount of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency. Similarly, when the obligations
held by a Fund create a short position in a foreign currency, the Fund may enter
into a forward contract to buy, for a fixed amount, an amount of foreign
currency approximating the short position. With respect to any forward foreign
currency contract, it will not generally be possible to match precisely the
amount covered by that contract and the value of the securities involved due to
the changes in the values of such securities resulting from market movements
between the date the forward contract is entered into and the date it matures.
In addition, while forward contracts may offer protection from losses resulting
from declines or appreciation in the value of a particular foreign currency,
they also limit potential gains which might result from changes in the value of
such currency. A Fund will also incur costs in connection with forward foreign
currency exchange contracts and conversions of foreign currencies and U.S.
dollars.
A separate account consisting of liquid assets, such as cash,
U.S. government securities or other liquid high grade debt obligations equal to
the amount of the Enhanced Income and Total Return Advantage Funds' assets that
could be required to consummate forward contracts will be established with the
Funds' Custodian except to the extent the contracts are otherwise "covered." For
the purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Funds. A forward
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<PAGE> 244
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 Total Return Advantage, Enhanced Income and GNMA Funds may
enter into interest rate swaps for hedging purposes and not for speculation. A
Fund will typically use interest rate swaps to preserve a return on a particular
investment or portion of its portfolio or to shorten the effective duration of
its 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 Total Return Advantage, Enhanced Income 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 respective
advisers 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.
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FUTURES CONTRACTS AND RELATED OPTIONS
- -------------------------------------
For a detailed description of futures contracts and related
options, see Appendix B to this Statement of Additional Information.
INCOME PARTICIPATION LOANS
- --------------------------
The Total Return Advantage, Fixed Income and Enhanced Income
Funds may make or acquire participations in privately negotiated loans to
borrowers. Frequently, such loans have variable interest rates and may be backed
by a bank letter of credit; in other cases they may be unsecured. Such
transactions may provide an opportunity to achieve higher yields than those that
may be available from other securities offered and sold to the general public.
Privately arranged loans, however, will generally not be rated
by a credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made by
a Fund may have a demand provision permitting the Fund to require repayment
within seven days. Participations in such loans, however, may not have such a
demand provision and may not be otherwise marketable. Recovery of an investment
in any such loan that is illiquid and payable on demand will depend on the
ability of the borrower to meet an obligation for full repayment of principal
and payment of accrued interest within the demand period, normally seven days or
less (unless the Fund determines that a particular loan issue, unlike most such
loans, has a readily available market). As it deems appropriate, the Board of
Trustees of the Trust will establish procedures to monitor the credit standing
of each such borrower, including its ability to honor contractual payment
obligations.
WHEN-ISSUED SECURITIES
- ----------------------
Each Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase when- issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment, marked to market daily. It is likely that a Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the
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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
- ----------------------
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, the Total Return Advantage, Fixed Income and Enhanced
Income 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
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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 Total
Return Advantage, Fixed Income and Enhanced Income 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 Total Return Advantage, Fixed Income and Enhanced Income
Funds may also make limited investments in Guaranteed Investment Contracts
("GIC") issued by U.S. insurance companies. When investing in GICs, a Fund makes
cash contributions to a deposit fund or an insurance company's general account.
The insurance company then credits to that Fund monthly a guaranteed minimum
interest which is based on an index. The insurance company may assess periodic
charges against a GIC for expense and service costs allocable to it, and the
charges will be deducted from the value of the deposit fund. A Fund will
purchase a GIC only when its advisers have determined, under guidelines
established by the Board of Trustees, that the GIC presents minimal credit risks
to the Fund and is of comparable quality to instruments that are rated high
quality by one or more rating agencies.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As described in the Prospectus, each Fund may purchase
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of these obligations are supported by the full faith and
credit of the U.S. Treasury, such as obligations issued by the Government
National Mortgage Association. Others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the U.S. Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. government
to purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given that
the U.S. government would provide financial support to U.S. government-sponsored
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<PAGE> 248
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 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.
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<PAGE> 249
2. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Fund 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 Total Return Advantage, Fixed Income and Enhanced Income Funds may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs, except
that a Fund may: (a) to the extent appropriate to its investment objective,
invest in securities issued by companies which purchase or sell commodities or
commodity contracts or which invest in such programs; and (b) purchase and sell
futures contracts and options on futures contracts in accordance with its
investment objective. In addition, each Fund may enter into 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. Purchase securities of other investment companies, except
as permitted by the Investment Company Act of 1940 and the
rules and regulations thereunder.
The Total Return Advantage and Enhanced Income Funds
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, the Fixed Income, GNMA and Intermediate
Government Funds may not write or purchase put options, call options, straddles,
spreads, or any combination thereof, except that the Funds may purchase and sell
futures contracts and options on futures contracts in accordance with their
investment objectives.
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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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in each Fund are sold on a continuous basis by SEI
Investments Distribution Co., formerly SEI Financial Services Company (the
"Distributor"), which has agreed to use appropriate efforts to solicit all
purchase orders. The issuance of shares is recorded on the books of the Trust.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to an investor's financial institution
at its principal office. Such requests must be signed by each shareholder, with
each signature guaranteed by a U.S. commercial bank or trust company or by a
member firm of a national securities exchange. Guarantees must be signed by an
authorized signatory and "Signature Guaranteed" must appear with the signature.
An investor's financial institution may request further documentation from
corporations, executors, administrators, trustees or guardians, and will accept
other suitable verification arrangements from foreign investors, such as
consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for more than seven days for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
There is no sales load charged on shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended May 31, 1997, sales loads paid by
shareholders of the Total Return Advantage, Fixed Income, Enhanced Income, GNMA
and Intermediate Government Funds totalled $50, $6, $68, $6 and $6,
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
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intervals. This may help investors to reduce their average cost per share
because the Program results in more shares being purchased during periods of
lower share prices and fewer shares during periods of higher share prices. In
order to be effective, dollar cost averaging should usually be followed on a
sustained, consistent basis. Investors should be aware, however, that dollar
cost averaging results in purchases of shares regardless of their price on the
day of investment or market trends and does not ensure a profit, protect against
losses in a declining market, or prevent a loss if an investor ultimately
redeems his shares at a price which is lower than their purchase price. An
investor may want to consider his financial ability to continue purchases
through periods of low price levels. From time to time, in advertisements, sales
literature, communications to shareholders and other materials ("Materials"),
the Trust may illustrate the effects of dollar cost averaging through use of or
comparison to an index such as the S&P 500 Index or Lehman Intermediate
Government Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Total Return Advantage, Fixed Income, Enhanced Income , GNMA
and Intermediate Government Funds, based on the value of the Funds' net assets
and number of outstanding shares on May 31, 1997 are as follows:
<TABLE>
<CAPTION>
TABLE
Total Return Advantage Fund
---------------------------
<S> <C>
Net Assets of Retail Shares.......................... $2,186,227
----------
Outstanding Retail Shares............................ 221,051
----------
Net Asset Value Per Share
($2,186,227 / 221,051).............................. $ 9.89
---------------------- ----------
Sales Charge, 3.75% of
offering price (3.94% of
net asset value per share)........................... 0.39
- -------------------------- ----------
Offering to Public................................... $ 10.28
- ------------------ ----------
</TABLE>
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<TABLE>
<CAPTION>
FIXED INCOME FUND
-----------------
<S> <C>
Net Assets of Retail Shares......................... $3,719,976
----------
Outstanding Retail Shares........................... 357,016
----------
Net Asset Value Per Share
($3,719,976 / 357,016).............................. $ 10.42
----------
Sales Charge, 3.75% of
offering price (3.93% of
net asset value per share).......................... 0.41
Offering to Public.................................. $ 10.83
ENHANCED INCOME FUND
--------------------
Net Assets of Retail Shares......................... $2,050,874
----------
Outstanding Retail Shares........................... 205,025
----------
Net Asset Value Per Share
($2,050,874 / 205,025)............................. $ 10.00
----------
Sales Charge, 2.75% of
offering price (2.80% of
net asset value per share).......................... 0.28
Offering to Public.................................. $ 10.28
----------
GNMA Fund
---------
Net Assets of Retail Shares......................... $ 128,326
----------
Outstanding Retail Shares........................... 12,644
----------
Net Asset Value Per Share
($128,326 / 12,644)................................ $ 10.15
----------
Sales Charge, 3.75% of
offering price (3.94% of
net asset value per share).......................... 0.40
----------
Offering to Public.................................. $ 10.55
----------
INTERMEDIATE GOVERNMENT
FUND
-----------------------
Net Assets of Retail Shares......................... $ 23,394
----------
Outstanding Retail Shares........................... 2,335
----------
</TABLE>
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Net Asset Value Per Share
($23,394 / 2,335).................................... $ 10.02
----------------- ---------
Sales Charge, 3.75% of
offering price (3.89% of
net asset value per share)............................ 0.39
---------
Offering to Public.................................... $ 10.41
-----------
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived) to
reduce the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 42 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), Intermediate Government Fund
(Class R and Class R - Special Series 1) and GNMA Fund (Class S and Class S -
Special Series 1) and are described in this Statement of Additional Information
and the related Prospectus.
-14-
<PAGE> 254
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
class in a particular investment fund have equal voting rights except that only
Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees
-15-
<PAGE> 255
reasonably determines that such combination will not have a material adverse
effect on shareholders of any fund participating in such combination, and, in
connection therewith, to cause all outstanding shares of any fund to be redeemed
at their net asset value or converted into shares of another class of the Trust
shares at net asset value. In the event that shares are redeemed in cash at
their net asset value, a shareholder may receive in payment for such shares an
amount that is more or less than his original investment due to changes in the
market prices of the fund's securities. The exercise of such authority by the
Board of Trustees will be subject to the provisions of the 1940 Act, and the
Board of Trustees will not take any action described in this paragraph unless
the proposed action has been disclosed in writing to the fund's shareholders at
least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust. Some of the
-16-
<PAGE> 256
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 (the
"short-short test"): (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. Effective for taxable years beginning after August 4, 1997, the
recently enacted Taxpayer Relief Act of 1997 repeals the short- short test.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Fund which are not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated
-17-
<PAGE> 257
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 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."
-18-
<PAGE> 258
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994;
Director, Zurn
Industries, Inc.
(building products and
construction services),
since June 1995.
Leigh Carter* Trustee Retired President and
13901 Shaker Blvd., #6B Chief Operating Officer,
Cleveland, OH 44120 B.F. Goodrich Company,
Age 72 August 1986 to September
1990; Director, Adams
Express Company
(closed-end investment
company), since April
1982; Director, Acromed
Corporation (producer
of spinal implants);
since June 1992;
Director, Petroleum &
Resources Corp., since
April 1987; Director,
Morrison Products
(manufacturer of blower
fans and air moving
equipment), since April
1983; Director,
Kirtland Capital Corp.
(privately funded
investment group),
since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 53 Center, Inc., since
January 1982; partner,
Kittles Bloomington
Property Company, since
January 1981; partner,
KK&D (Affiliated Real
Estate Companies of
Kittle's Home
Furnishings Center),
since January 1989.
</TABLE>
-19-
<PAGE> 259
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed
Corporation (restaurant
group), since 1990;
Director; Foam Design,
Inc., (manufacturer of
industrial and
commercial foam
products), since 1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health
System (four hospital
health system);
Trustee,
WVIZ Educational
Television (public
television).
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
--
Executive Officer,
American Contractors
Rentals & Sales (rental
subsidiary of Whayne
Supply Co.), since
1988.
Richard B. Tullis Trustee Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, Ohio 44124 communication and
Age 84 information processing
equipment), since
October 1985; Director,
NACCO Materials
Handling Group, Inc.
(manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex,
Inc. (manufacturer of
household appliances),
since 1990; Director,
Waste-Quip, Inc. (waste
handling equipment),
since 1989.
</TABLE>
-20-
<PAGE> 260
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Herbert R. Martens, Jr. President Executive Vice President,
c/o NatCity Investments, Inc. National City Corporation
1965 East Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman
Age 45 and Chief Executive
Officer, NatCity
Investments, Inc.,
since July 1995
(investment banking);
President and Chief
Executive Officer,
Raffensberger, Hughes &
Co. from 1993 until
1995 (broker-dealer);
President, Reserve
Capital Group, from
1990 until 1993.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP
1345 Chestnut Street Philadelphia, Pennsylvania
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP
</TABLE>
[FN]
- --------------------
* Mr. Carter is considered by the Trust to be an "interested person"
of the Trust as defined in the 1940 Act.
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as administrator 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, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
-21-
<PAGE> 261
The following table summarizes the compensation for each of
the trustees of the Trust for the fiscal year ended May 31, 1997:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Annual Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
Robert D. Neary, Trustee, $18,750 $0 $0 $18,750
------- -------
Chairman
Thomas R. Benua, Jr., $17,500 $0 $0 $17,500
------- -------
Trustee*
Leigh Carter, Trustee $17,500 $0 $0 $17,500
------- -------
John F. Durkott, Trustee $17,500 $0 $0 $17,500
------- -------
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
------- -------
J. William Pullen, Trustee $17,500 $0 $0 $17,500
------- -------
Richard B. Tullis, Trustee $18,750 $0 $0 $18,750
------- -------
</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.
[FN]
- --------
* Mr. Benua resigned as trustee as of July 17, 1997.
-22-
<PAGE> 262
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
--------------------------------------------------
ADVISORY AGREEMENT
- ------------------
As described in the Prospectus, National Asset Management
Corporation ("NAM") serves as investment adviser to the Total Return Advantage
and Enhanced Income Funds; National City, National City Columbus and National
City Kentucky serve as investment advisers to the Fixed Income Fund; National
City serves as investment adviser to the GNMA and Intermediate Government Funds.
The advisers are affiliates of National City Corporation, a bank holding company
with $52 billion in assets, and headquarters in Cleveland, Ohio and nearly 900
branch offices in four states. Through its subsidiaries, National City
Corporation has been managing investments for individuals, pension and
profit-sharing plans and other institutional investors for over 75 years and
currently manages over $41 billion in assets. From time to time, the advisers
may voluntarily waive fees or reimburse the Trust for expenses.
Pursuant to the Advisory Agreements relating to the Total
Return Advantage, Fixed Income and Enhanced Income Funds, the Trust incurred
advisory fees in the following respective amounts for the fiscal years ended May
31, 1997, 1996 and 1995: (i) $0 (after waivers of $1,530,963), $0 (after waivers
of $1,545,558) and $0 (after waivers of $1,176,389) for the Total Return
Advantage Fund; (ii) $550,261 (after waivers of $118,288), $588,875 and $493,595
(after waivers of $0) for the Fixed Income
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<PAGE> 263
Fund; and (iii) $0 (after waivers of $296,129), $0 (after waivers of $298,505)
and $0 (after waivers of $236,026) for the Enhanced Income Fund.
Pursuant to the Advisory Agreement relating to the
GNMA and Intermediate Government Funds, the Trust incurred advisory fees in the
following amounts for the fiscal year ended May 31, 1997: (i) $323,854 (after
fee waivers of $50,450) for the GNMA Fund and (ii) $485,145 (after fee waivers
of $54,417) for the Intermediate Government Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, National City, the adviser of the
GNMA and Intermediate Government Funds, earned advisory fees of $256,168 and
$366,399 and waived fees in the amounts of $0 and $0 for the GNMA and
Intermediate Government Funds, respectively. Integra Trust Company ("Integra"),
the investment adviser to the Predecessor GNMA and Intermediate Government
Funds, earned the following advisory fees with respect to such funds for the
stated periods: (i) $118,136 and $173,163 for the period from June 1, 1996 until
September 9, 1996; (ii) $36,971 and $53,654 for the one-month period ended May
31, 1996; (iii) $385,463 and $602,602 for the fiscal year ended April 30, 1996 ;
and (iv) $178,282 and $132,372 for the period from August 10, 1994 (commencement
of operations) through April 30, 1995, respectively. Integra waived advisory
fees during the same periods in the amounts of: (i) $50,450 and $54,417; (ii)
$9,583 and $11,464; (iii) $107,340 and $130,371; and (iv) $72,352 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 with respect to the Total Return
Advantage and Enhanced Income Funds was approved by their sole shareholder prior
to the Funds' commencement of investment operations. The Advisory Agreement
relating to the Fixed Income Fund was approved by the shareholders of the Fund
on September 26, 1990. The Advisory Agreement with respect to the GNMA and
Intermediate Government Funds was approved by their sole shareholder prior to
their commencement of operations. Unless
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<PAGE> 264
sooner terminated, each Advisory Agreement will continue in effect with respect
to each Fund to which it relates until September 30, 1998 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 adviser(s) 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.
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 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
-25-
<PAGE> 265
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.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
- -------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following respective fees
to PFPC for the fiscal years ended May 31, 1997, 1996 and 1995: (i) $258,768,
$260,951 and $150,557 (after waivers of $55,353) for the Total Return Advantage
Fund; (ii) $121,554, $107,068 and $89,856 for the Fixed Income Fund; and (iii)
$65,807, $866,336 and $37,396 (after waivers of $14,882) for the Enhanced Income
Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, PFPC earned administration fees of
$46,576 and $66,618 for the GNMA and Intermediate Government Funds,
respectively. 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 with respect to such
funds for the stated periods: (i) $30,378 and $44,528 for the period from June
1, 1996 until September 9, 1996; (ii) $9,507 and $13,797 for the one-month
period ended May 31, 1996; (iii) $99,119 and $154,955 for the fiscal year ended
April 30, 1996 ; and (iv) $52,643 and $65,623 for the period from
-26-
<PAGE> 266
August 10, 1994 (commencement of operations) through April 30, 1995.
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by Rule
12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's Board
of Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement relating to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the Trust
and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial interest
in the Plan or related agreement. The Plan and related agreement may be
terminated as to a particular Fund by a vote of the Trust's disinterested
trustees or by vote of the shareholders of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested trustees has been
committed to the discretion of such disinterested trustees as required by the
Rule.
The Trust's Plan provides that each fund will compensate 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
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<PAGE> 267
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. The Plan provides that the Trust will pay the Distributor
an annual base fee of $1,250,000 plus incentive fees based upon asset growth
payable monthly and accrued daily by all of the Trust's investment funds with
respect to which the Distributor is distributing shares.
The Plan has been approved by the Board of Trustees, 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.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $13,764, $6,603 and $3,317 with respect to the Total Return
Advantage, Fixed Income and Enhanced Income Funds. Of the aggregate amounts paid
to the Distributor by the Trust with respect to the Total Return Advantage Fund,
$4,129 was attributable to distribution services and $9,635 was attributable to
marketing/consultation. Of the aggregate amount paid to the Distributor by the
Trust with respect to the Fixed Income Fund, $1,981 was attributable to
distribution services and $4,622 was attributable to marketing/consultation. Of
the aggregate amounts paid to the Distributor by the Trust with respect to the
Enhanced Income Fund, $995 was attributable to distribution services and $2,322
was attributable to marketing/ consultation. Distribution services include
broker/dealer and investor support, voice response development, wholesaling
services, legal review and NASD filings and transfer agency management.
Marketing/Consultation includes planning and development, market and industry
research and analysis and marketing strategy and planning.
For the period from June 1, 1996 through March 7, 1997, the
Trust paid its previous distributor, 440 Financial Distributors, Inc. ("440
Financial") $15,367, $50,925 and $3,612 with respect to the Total Return
Advantage, Fixed Income and Enhanced Income Funds.
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<PAGE> 268
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $3,416 and $4,827 with respect to the GNMA and the
Intermediate Government Fund. Of the aggregate amounts paid to the Distributor
by the Trust with respect to the GNMA Fund, $1,025 was attributable to
distribution services and $2,391 was attributable to marketing/consultation. Of
the aggregate amount paid to the Distributor by the Trust with respect to the
Intermediate Government Fund, $1,448 was attributable to distribution services
and $3,379 was attributable to marketing/consultation. Distribution services
include broker/dealer and investor support, voice response development,
wholesaling services, legal review and NASD filings and transfer agency
management. Marketing/Consultation includes planning and development, market and
industry research and analysis and marketing strategy and planning.
Class A Shares of the Predecessor GNMA and Intermediate
Government 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
Funds' distributor of the Funds' 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 Inventor. For the period from June 1, 1996 until
September 9, 1996, the distributor of the Predecessor GNMA and Intermediate
Government Funds received $0 (after waivers of $42,191) and $0 (after waivers of
$61,844), respectively.
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;
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(iv) collect and receive all income and other payments and distributions on
account of each Fund's fund securities; (v) respond to correspondence by
security brokers and others relating to its duties; and (vi) make periodic
reports to the Board of Trustees concerning the Funds' operations. National City
Bank is authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Funds, provided that it shall remain responsible
for the performance of all of its duties under the Custodian Services Agreement
and shall hold the Funds harmless from the acts and 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.
State Street Bank and Trust Company (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 Total Return Advantage, Fixed Income, GNMA and
Intermediate Government Funds, and .10% (on an annualized basis) in the case of
the Enhanced Income Fund of the net asset value of such shares. Such services
may include: (i) aggregating and processing purchase and redemption requests
from customers; (ii) providing customers with a service that invests the assets
of their accounts in Retail shares; (iii) processing dividend payments from the
Funds; (iv) providing
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<PAGE> 270
information periodically to customers showing their position in Retail shares;
(v) arranging for bank wires; (vi) responding to customer inquiries relating to
the services performed with respect to Retail shares beneficially owned by
customers; (vii) forwarding shareholder communications; and (viii) other similar
services requested by the Trust. Agreements between the Trust and financial
institutions will be terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to its Advisory Agreement with the Trust, NAM is
responsible for making decisions with respect to and placing orders for all
purchases and sales of fund securities for the Total Return Advantage and
Enhanced Income Funds. Under 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, National City is responsible for making decisions with respect
to and placing orders for all purchases and sales of fund securities for the
Fixed Income, GNMA and Intermediate Government Funds. The advisers purchase
portfolio securities for the Funds 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, 1997, 1996 and 1995, the
Total Return Advantage Fund paid brokerage commissions in the amounts of $0, $0
and $14,093. For the fiscal years ended May 31, 1997, 1996 and 1995, the Fixed
Income and Enhanced Income Funds did not pay any brokerage commissions.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, the GNMA and Intermediate
Government Funds paid no brokerage commissions. For the period from June 1, 1996
until September 9, 1996, the one-month fiscal period ended May 31, 1996, and the
fiscal years ended April 30, 1996 and 1995, the Predecessor GNMA and
Intermediate Government Funds did not pay any brokerage commissions.
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<PAGE> 271
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.
Portfolio 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.
As adviser to the Total Return Advantage and Enhanced Income
Funds, NAM has agreed to maintain its policy and practice of conducting its
investment management activities independently of the Commercial Departments of
all banking affiliates. While serving as advisers to the Trust, National City,
National City Columbus and National City Kentucky have similarly agreed to
maintain their policy and practice of conducting their Trust departments
independently of their Commercial Departments. In making investment
recommendations for the Trust, personnel will not inquire or take into
consideration whether the issuers of securities proposed for purchase or sale
for the Trust's account are customers of the Commercial Department. In dealing
with commercial customers, the Commercial Department will not inquire or take
into consideration whether securities of those customers are held by the Trust.
The Trust is required to identify any securities of its
"regular brokers or dealers" during its most recent fiscal year. At May 31,
1997, (i) the Total Return Advantage Fund held Prudential Insurance corporate
bonds with a value of $2,598,244 and maturing on July 15, 2015; (ii) the Fixed
Income Fund held Prudential Home Mortgage Securities Series 1996-7, Class A7
security with a value of $2,399,609 and maturing on January 2, 2007; (iii) the
Intermediate Government Fund held Prudential Home
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<PAGE> 272
Mortgage Securities Series 1996-7, Class A7 security with a value
of $1,439,766 and maturing on January 2, 2007.
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 the Funds. 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, 1997, for the Total Return Advantage, Fixed
Income, Enhanced Income , GNMA and Intermediate Government 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 under "Financial Statements," and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements for periods or years prior to May 31,
1997 with respect to the Predecessor Funds, which are incorporated by reference
in this Statement of Additional Information, were audited by Coopers & Lybrand,
L.L.P., independent accountants for the Predecessor Funds whose report dated
July 26, 1996 expressed an unqualified opinion on such financial statements, and
are included in reliance upon such report given upon the authority of such firm
in accounting and auditing.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to
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<PAGE> 273
the Trust and will pass upon the legality of the shares offered
hereby.
YIELD AND PERFORMANCE INFORMATION
---------------------------------
Each Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. 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 6
Yield = 2 [(------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last
day of the period.
Each Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each 30-day
period, or, with respect to obligations purchased during the 30-day period, the
purchase price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30-day period that the obligation is in the Fund.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity
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<PAGE> 274
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, 1997, the yields of the
Retail and Institutional shares of the Total Return Advantage Fund, Fixed Income
Fund, Enhanced Income Fund, GNMA Fund and Intermediate Government Fund were
6.20% and 6.70%, 5.39% and 5.86%, 5.94% and 6.19%, 5.71% and 6.19%, and 5.19%
and 5.64%, respectively.
Each Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result.
This calculation can be expressed as follows:
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<PAGE> 275
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
Each Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the 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 Total Return
Advantage Fund's fiscal year ended May 31, 1997 were 4.33% (after taking the
sales load into account) and 8.35% (without taking into account any sales load)
for its Retail shares and 8.51% for its Institutional shares. The average annual
total returns since the Total Return Advantage Fund's commencement of operations
through May 31, 1997 were 6.24% (after taking into account the sales load) and
7.75% (without taking into account any sales load) for its Retail shares and
8.22% for its Institutional shares. The Retail share class of the Total Return
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<PAGE> 276
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 returns for the Fixed Income Fund's
fiscal year ended May 31, 1997 were 2.40% (after taking the sales load into
account) and 6.36% (without taking into account any sales load) for its Retail
shares and 6.63% for its Institutional shares. The average annual total returns
since the Fixed Income Fund's commencement of operations through May 31, 1997
were 6.82% (after taking into account the sales load) and 7.37% (without taking
into account any sales load) for its Retail shares and 7.61% 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 fiscal year ended May 31, 1997 were 3.03% (after taking the sales load
into account) and 5.91% (without taking into account any sales load) for its
Retail shares and 6.02% for its Institutional shares. The average annual total
returns since the Enhanced Income Fund's commencement of operations through May
31, 1997 were 4.77% (after taking into account the sales load) and 5.87%
(without taking into account any sales load) for its Retail shares and 5.95% 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 GNMA Fund's one year
period ending May 31, 1997 were 4.76% (after taking the sales load into account)
and 8.83% (without taking into account any sales load) for its Retail shares and
9.03% for its Institutional shares. The average annual total returns since the
GNMA Fund's commencement of operations through May 31, 1997 were 6.75% (after
taking into account the sales load) and 8.21% (without taking into account any
sales load) for its Retail shares and 8.27% for its Institutional shares. The
GNMA Fund commenced operations on August 10, 1994.
The average annual total returns for the Intermediate
Government Fund's one year period ending May 31, 1997 were 3.19% (after taking
the sales load into account) and 7.22% (without taking into account any sales
load) for its Retail shares and 7.41% for its Institutional shares. The average
annual total returns since the Intermediate Government Fund's commencement of
operations through May 31, 1997 were 5.27% (after taking into account the sales
load) and 6.72% (without taking into account any sales load) for its Retail
shares and 6.78% for its Institutional shares. The Intermediate Government Fund
commenced operations on August 10, 1994.
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<PAGE> 277
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. A Fund
does not, for these purposes, deduct from the initial value invested any amount
representing sales charges. A Fund will, however, disclose the maximum sales
charge and will also disclose that the performance data do not reflect sales
charges and that inclusion of sale charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, 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,
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<PAGE> 278
including but not limited to, stocks, bonds, Treasury securities and shares of a
Fund and/or other mutual funds. Materials may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund and/or other
mutual funds (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
-------------
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organizational
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As used in the Prospectus, "assets belonging to a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the liabilities in respect of that Fund.
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Total Return Advantage Fund as of
August 31, 1997:
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the Total Return Advantage Fund as of September 23,
1997:
<TABLE>
<CAPTION>
Percentage
Number of of Outstanding
Retail Shares Retail Shares
------------- --------------
<S> <C> <C>
Wheat First FBO A/C 4410-0904
INTRAC 216,795.2670 96.95%
Attn: Gary Ream
8440 Woodfield Crossing Blvd.
Indianapolis, IN 46240-2476
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Total Return Advantage Fund as of
September 23, 1997:
<TABLE>
<CAPTION>
Percentage
Number of of Outstanding
Institutional Institutional
Shares Shares
------------- --------------
<S> <C> <C>
Sheldon & Co.
Attn: Trust Mutual Funds 14,988,653.1250 55.28%
P.O. Box 94984
Cleveland, OH 44101-4984
Sheldon & Co. 7,007,290.0120 25.84%
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
Sheldon & Co TTEE 4,074,103.3860 15.03%
C/O National City Bank
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 279
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Total Return Institutional Institutional
Advantage Fund Shares Shares
- -------------- ------------ --------------
<S> <C> <C>
Appalachian Regional Healthcare 2,594,323.57 9.51%
------------ -----
Attn: Mr. Richard Blackburn
1220 Harrodsburg
Lexington, KY 40533
Appalachian Regional Healthcare 1,854,782.14 6.80%
------------------------------ ------------ -----
Attn: Mr. Richard Blackburn
---------------------------
1220 Harrodsburg
----------------
Lexington, KY 40533
University of Louisville 1,828,046.00 6.70%
--------- -----
Attn: Larry Goldstein
Belknap Campus Service
Complex
Louisville, KY 40292
Appalachian Regional Healthcare 1,826,056.50 6.70%
------------ -----
Attn: Mr. Richard Blackburn
1220 Harrodsburg
Lexington, KY 40533
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail shares of the Fixed Income Fund as of September 23, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
------------ --------------
<S> <C> <C>
Wheat First FBO
INTRAC 102,183.5840 29.32%
Attn: Gary Ream
8440 Woodfield Crossing Blvd.
Indianapolis, IN 46240-2476
Wheat First FBO
BF Beverage Co. Inc. 51,604.5570 14.81%
3150 Shelby St.
Indianapolis, IN 46227-3165
</TABLE>
To the Trust's knowledge, no shareholder beneficially owned 5%
or more of the outstanding Institutional shares of the Fixed Income Fund as of
September 23, 1997.
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the GNMA Fund as of August 31, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
GNMA Fund Shares Shares
- -------------- ------------ --------------
<S> <C> <C>
National CityBank 6,082,253.55 91.87%
Sheldon & Co. Parkway - 49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Enhanced Income Fund as of August
31, 1997.
-40-
<PAGE> 280
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Enhanced Income Fund Shares Shares
- -------------------- ------------- -------------
<S> <C> <C>
Whayne Supply Co. 1,041,933 16.03%
- ----------------- ----------- --------
Attn: Ora Nell Burke
- ---------------------
P.O. Box 35900
Louisville, KY 40232
Baptist Hospital, Inc. 608,860 9.36%
- ---------------------- --------- -------
Attn: Allen Montgomery
- ----------------------
4007 Kresge Way
- ---------------
Louisville, KY 40207-0000
Denison University 604,740 9.30%
- ------------------- ---------- -------
Attn: Michael Horst
- --------------------
Manager Financial Services
- --------------------------
Granville, OH 43203
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Retail Shares of the Enhanced Income Fund as of September 23, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
------------- -------------
<S> <C> <C>
Wheat First, FBO
INTRAC 170,858.4480 76.84%
Attn: Gary Ream
8440 Woodfield Crossing Blvd.
Indianapolis, IN 46240-2476
Wheat First FBO 33,195.1700 14.93%
BF Beverage Co., Inc
3150 Shelby St.
Indianapolis, IN 46227-3165
Wheat First FBO NC 1882-1036 12,589.5700 3.66%
Harvey M. Bruner Jr. IRA
WPS AS Custodian
U/A DTD 10/24/96
700 Brick Mill Run Apt 106
Westlake, OH 44145-1655
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the Enhanced Income Fund as of September
23, 1997.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Shares Shares
------------- -------------
<S> <C> <C>
Sheldon & Co. 3,227,532.1450 47.36%
Future Quest-
c/o National City Bank
Attn: Trust Mutual FDS/01-99999977
P.O. Box 94777
Cleveland, OH 44101-4777
Sheldon & Co. 2,298,976.6480 33.73%
Future Quest-
c/o National City Bank
Attn: Trust Mutual Fund
FDS/01-99999977
P.O. Box 94777
Cleveland, OH 44101-4777
Key Trust Co. 663,794.2200 9.74%
FBO St. Luke's Self Ins.
Short Term #32468406
800 Superior Avenue
Post Office Box 94717
Cleveland, OH 44101-4717
</TABLE>
To the Trust's knowledge, no shareholder beneficially owned 5%
or more of the outstanding Retail shares of the Total Return Advantage Fund as
of August 31, 1997.
The following shareholders beneficially owned 5% or more of the
outstanding Institutional shares of the GNMA Fund as of September 23, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Shares Shares
------------- -------------
<S> <C> <C>
National City Bank 6,082,253.5520 91.87%
Sheldon & Co. Pathway-49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Retail shares of the GNMA Fund as of September 23, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
------------- -------------
<S> <C> <C>
SEI Trust Company 3,925.4940 31.55%
IRA A/C Virginia A. Josek
1701 Iowa Dr.
West Mifflin, PA 15122-3931
SEI Trust Co. 2,971.6650 23.88%
Cust. for the IRA Account
FBO R/O Helen M. Weyer
2600 Mohawk Dr.
White Oak, PA 15131-3121
SEI Trust Co. 2,235.4010 17.97%
Cust. for the IRA Account
FBO R/O William C. Rodgers
177 C. Pennwood Ave.
Pittsburgh, PA 15218-1458
June C. Muraco & 1,740.0540 13.99%
Joseph E. Muraco JT Ten
116 Patterson Ave.
Carrugie, PA 15106-2827
Edith De Shantz & 1,043.5230 8.39%
Herman H. De Shantz JT Ten
590 Dorchester Ave.
Pittsburgh, PA 15226-2020
</TABLE>
The following shareholders beneficially owned 5% or more of the
outstanding Retail Shares of the Intermediate Government Fund as of September
25, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
------------- -------------
<S> <C> <C>
SEI Trust Company 2,352.5880 99.33%
Cust for the IRA Account
FBO William J. Fortwangler
553 Conniston Ave.
Pittsburgh, PA 15210-3231
</TABLE>
To the Trust's knowledge, no shareholder owned 5% or more of
the outstanding Institutional shares of the Intermediate Government Fund as of
September 23, 1997.
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the Funds for the fiscal year ended May 31, 1997 are hereby
incorporated herein by reference. Copies of the annual report may be obtained by
calling the Trust at 1-800-622- FUND (3863) or by writing to the Trust, Oaks,
Pennsylvania 19456.
-41-
<PAGE> 281
APPENDIX A
----------
DESCRIPTION OF RATINGS
----------------------
Corporate Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay
A-1
<PAGE> 282
interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating and is
currently highly vulnerable to nonpayment.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate
long-term debt:
A-2
<PAGE> 283
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates 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.
A-3
<PAGE> 284
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate bonds:
"AAA" - Bonds considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
A-4
<PAGE> 285
strong ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity
throughout the life of the instrument.
"CCC" - Bonds have certain identifiable characteristics
that, if not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
"CC" - Bonds are minimally protected. Default in
payments of interest seems probable over time.
"C" - Bonds are in imminent default in payment of
interest or principal.
A-5
<PAGE> 286
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
A-6
<PAGE> 287
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
A-7
<PAGE> 288
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions have a
strong ability for repayment of senior short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree.
A-8
<PAGE> 289
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions.
Ample alternative liquidity is maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions 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" - Issuers do not fall within any of the
Prime rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D- 1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and
other protection factors qualify issue as investment grade. Risk
factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
"D-4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure against
A-9
<PAGE> 290
disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"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.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
A-10
<PAGE> 291
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is
regarded as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory
capacity for timely repayment.
"A3" - Obligations are supported by an adequate
capacity for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
A-11
<PAGE> 292
APPENDIX B
As stated in their Prospectus, the Total Return Advantage,
Enhanced Income, GNMA and Intermediate Government Funds may enter into certain
futures transactions and options for hedging purposes. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Funds, through using
futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
<PAGE> 293
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.
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.
B-2
<PAGE> 294
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. 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
B-3
<PAGE> 295
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 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.
B-4
<PAGE> 296
III. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid
or received by a Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian or a subcustodian an amount of cash or
cash equivalents, known as initial margin, based on the value of the contract.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, the
advisers may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures
by the Funds as hedging devices. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Fund would be
B-5
<PAGE> 297
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 Funds may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by the
advisers.
Where futures are purchased to hedge against a possible
increase in the price of securities before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of
B-6
<PAGE> 298
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.
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
B-7
<PAGE> 299
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 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.
B-8
<PAGE> 300
CROSS REFERENCE SHEET
---------------------
Mid Cap Regional Fund
Equity Growth Fund
Equity Income Fund
Small Cap Growth Fund
International Equity Fund
Core Equity Fund
<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
6. Capital Stock and Other
Securities....................................... How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes;
Description of the Trust and
Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered.................................... Pricing of Shares; How to
Purchase and Redeem Shares;
Distribution Agreement
8. Redemption Repurchase............................ How to Purchase and Redeem
Shares
9. Pending Legal Proceedings........................ Inapplicable
</TABLE>
<PAGE> 301
CROSS REFERENCE SHEET
---------------------
Mid Cap Regional Fund
Equity Growth Fund
Equity Income Fund
Small Cap Growth Fund
International Equity Fund
Core Equity Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
1. Cover Page......................................................... Cover Page
2. Table of Contents.................................................. Table of Contents
3. General Information and History.................................... Statement of Additional
Information
4. Investment Objectives and Policies................................. Risk Factors, Investment
Objectives and Policies
5. Management of Registrant........................................... Trustees and Officers
6. Control Persons and Principal...................................... Description of Shares
Holders of Securities
7. Investment Advisory and Other...................................... Advisory, Administra-
Services Management tion, Distribution,
Custody and Transfer
Agency Agreements
8. Brokerage Allocation and Other..................................... Risk Factors, Investment
Practices Objectives and Policies
9. Capital Stock and Other Securities................................. Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing................................... Additional Purchase
of Securities Being Offered ....................................... and Redemption
Information
11. Tax Status......................................................... Additional Information
Concerning Taxes
12. Underwriters....................................................... Not Applicable
13. Calculation of Performance Data.................................... Yield and Performance
Information
14. Financial Statements............................................... Financial Statements
</TABLE>
<PAGE> 302
ARMADA
FUNDS
EQUITY
SERIES
ARMADA FUNDS LOGO
Financial Power Close at Hand
PROSPECTUS
September 30, 1997
ARMADA MID CAP REGIONAL FUND
ARMADA EQUITY GROWTH FUND
ARMADA EQUITY INCOME FUND
ARMADA SMALL CAP GROWTH FUND
ARMADA INTERNATIONAL EQUITY FUND
ARMADA CORE EQUITY FUND
<PAGE> 303
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expense Table............................................................................. 3
Financial Highlights...................................................................... 4
Introduction.............................................................................. 7
Investment Objectives and Policies........................................................ 7
Investment Limitations.................................................................... 16
Yield and Performance Information......................................................... 17
Pricing of Shares......................................................................... 18
How to Purchase and Redeem Shares......................................................... 19
Distribution Agreement.................................................................... 24
Shareholder Services Plan................................................................. 24
Dividends and Distributions............................................................... 25
Taxes..................................................................................... 25
Management of the Trust................................................................... 26
Description of the Trust and its Shares................................................... 28
Custodian and Transfer Agent.............................................................. 30
Expenses.................................................................................. 30
Miscellaneous............................................................................. 30
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL CITY BANK
OF COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, NATIONAL ASSET MANAGEMENT
CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank, National Asset Management Corporation and certain of their
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.
<PAGE> 304
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments, Inc.,
please call your Financial Consultant for information. For
current performance, fund information, account redemption
information, and to purchase shares, please call 1-800-622-FUND
(3863).
</TABLE>
This Prospectus describes shares in the following six investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
MID CAP REGIONAL FUND'S investment objective is to seek capital appreciation
by investing in a diversified portfolio of publicly traded equity securities of
issuers which are domiciled primarily in Ohio, Indiana, Kentucky and
Pennsylvania and contiguous states and other states in which National City
Corporation affiliates are located.
EQUITY GROWTH 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.
SMALL CAP GROWTH FUND'S investment objective is to seek long term capital
appreciation. The Fund will normally invest at least 80% of its total assets in
securities of companies with stock market capitalizations of under $1.5 billion
at the time of purchase.
INTERNATIONAL EQUITY FUND'S investment objective is to seek capital growth
consistent with reasonable investment risk. The Fund will normally invest at
least 80% of its total assets in equity securities of foreign issuers.
CORE EQUITY FUND'S investment objective is to seek a total rate of return,
before Fund expenses, greater than that of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"). The Fund invests in a diversified portfolio
of domestic common stocks of issuers with large capitalizations.
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") serves as investment adviser to the Mid
Cap Regional Fund, Small Cap Growth Fund and International Equity Fund; National
City, National City Bank of Columbus ("National City Columbus") and National
City Bank of Kentucky ("National City Kentucky") serve as investment advisers to
the Equity Growth Fund and Equity Income Fund; National Asset Management
Corporation ("NAM") serves as investment adviser to the Core Equity Fund (each
an "adviser" and collectively, the "advisers"). Wellington Management Company,
LLP serves as the investment sub-adviser to the Small Cap Growth Fund (the
"sub-adviser").
SEI Investments Distribution Co., formerly SEI Financial Services Company
(the "Distributor") serves as the Trust's sponsor and distributor. Each Fund
pays a fee to the Distributor for distributing its shares. See "Distribution
Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL CITY BANK OF
COLUMBUS, NATIONAL CITY BANK OF KENTUCKY, NATIONAL ASSET MANAGEMENT CORPORATION,
THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES, AND ARE NOT FEDERALLY INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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, 1997
<PAGE> 305
EXPENSE TABLE
<TABLE>
<CAPTION>
SMALL
MID CAP MID CAP EQUITY EQUITY CAP
REGIONAL REGIONAL GROWTH EQUITY GROWTH INCOME EQUITY INCOME GROWTH
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
SHARES(1) SHARES SHARES(1) SHARES SHARES(1) SHARES SHARES(1,2)
------- ------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases............................ 3.75% None 3.75% None 3.75% None 3.75%
Sales Charge Imposed on Reinvested
Dividends............................ None None None None None None None
Deferred Sales Charge.................. None None None None None None None
Redemption Fee......................... None None None None None None None
Exchange Fee........................... None 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% .75%
12b-1 Fees(3).......................... .06% .06% .06% .06% .06% .06% .06%
Other Expenses......................... .42% .17% .44% .19% .49% .24% .42%
---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after
fee waivers)....................... 1.23%(4) .98%(4) 1.25%(4) 1.00%(4) 1.30%(4) 1.05%(4) 1.23%(5)
==== ==== ==== ==== ==== ==== ====
<CAPTION>
SMALL CAP INTERNATIONAL
GROWTH INTERNATIONAL EQUITY CORE EQUITY CORE EQUITY
INSTITUTIONAL EQUITY RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1) SHARES(1,2) SHARES(2) SHARES(1,2) SHARES(2)
------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases............................ None 3.75% None 3.75% None
Sales Charge Imposed on Reinvested
Dividends............................ None None None None None
Deferred Sales Charge.................. None None None None None
Redemption Fee......................... None None None None None
Exchange Fee........................... None None None None None
ANNUAL FUND OPERATING EXPENSES (as a
percentage of average net assets)
Management Fees........................ .75% .75% .75% .75% .75%
12b-1 Fees(3).......................... .06% .06% .06% .06% .06%
Other Expenses......................... .17% .59% .34% .42% .17%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after
fee waivers)....................... 0.98%(5) 1.40%(5) 1.15%(5) 1.23%(5) 0.98%(5)
==== ==== ==== ==== ====
</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 Retail shares. For further information
concerning the Services Plan, see "Shareholder Services Plan."
(2) The Fund commenced investment operations on August 1, 1997, and therefore,
the expenses shown in the table for the Fund (other than Management Fees)
are annualized estimates only.
(3) The Funds have in effect a 12b-1 Plan pursuant to which each Fund may bear
fees in an amount of up to .10% of average daily net assets. As a result of
the payment of sales charges and 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD").
The NASD has adopted rules which generally limit the aggregate sales charges
and payments under the Trust's Service and Distribution Plan ("Distribution
Plan") and Services Plan to a certain percentage of total new gross share
sales, plus interest. The Trust would stop accruing 12b-1 and related fees
if, to the extent, and for as long as, such limit would otherwise be
exceeded.
(4) The expense information in the table relating to the 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 1.27% and
1.02%, 1.29% and 1.04% and 1.34% and 1.09% for the Retail and Institutional
shares of the Mid Cap Regional Fund, Equity Growth Fund and Equity Income
Fund, respectively.
(5) Without fee waivers during the current fiscal year by the Trust's
administrator, Other Expenses and Total Fund Operating Expenses would be:
(i) 0.52% and 1.33% for the Retail shares and 0.27% and 1.08% for the
Institutional shares of the Small Cap Growth Fund, respectively; (ii) 0.69%
and 1.50% for the Retail shares and 0.44% and 1.25% for the Institutional
shares of the International Equity Fund, respectively; and (iii) 0.52% and
1.33% for the Retail shares and 0.27% and 1.08% for the Institutional shares
of the Core Equity Fund, respectively. Additionally, if the maximum
distribution fee permitted under the 12b-1 Plan were imposed, Total Fund
Operating Expenses would be 1.37% and 1.12%, 1.54% and 1.29%, and 1.37% and
1.12% for the Retail and Institutional Shares of the Small Cap Growth,
International Equity and Core Equity Funds, respectively.
2
<PAGE> 306
- ---------------
EXAMPLE
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Mid Cap Regional Retail Shares........................... $ 50 $75 $ 103 $181
Mid Cap Regional Institutional Shares.................... $ 10 $31 $ 54 $120
Equity Growth Retail Shares.............................. $ 50 $76 $ 104 $183
Equity Growth Institutional Shares....................... $ 10 $32 $ 55 $122
Equity Income Retail Shares.............................. $ 50 $77 $ 106 $188
Equity Income Institutional Shares....................... $ 11 $33 $ 58 $128
Small Cap Growth Retail Shares........................... $ 50 $75 N/A N/A
Small Cap Growth Institutional Shares.................... $ 10 $31 N/A N/A
International Equity Retail Shares....................... $ 51 $80 N/A N/A
International Equity Institutional Shares................ $ 12 $37 N/A N/A
Core Equity Retail Shares................................ $ 50 $75 N/A N/A
Core Equity Institutional Shares......................... $ 10 $31 N/A N/A
</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 advisers or other institutions
directly to their customer accounts for services related to investments in
shares of the Funds are in addition to and not reflected in the fees and
expenses described above.
3
<PAGE> 307
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
MID CAP REGIONAL FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Mid Cap Regional Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(1) RETAIL(1)
------------- ---------- ------------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 13.10 $12.94 $ 11.38 $11.26 $ 10.00 $10.16
-------- ------ ------- ------ ------- -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... .09 .08 .08 .06 .10 .07
Net Gains on Securities
(Realized and Unrealized)..... 2.90 2.83 2.41 2.37 1.36 1.11
-------- ------ ------- ------ ------- -----
Total from Investment
Operations............. 2.99 2.91 2.49 2.43 1.46 1.18
-------- ------ ------- ------ ------- -----
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (.09) (.05) (.08) (.06) (.04) (.04)
Dividends in Excess of Net
Investment Income............. (.00) (.00) (.02) (.02) (.00) (.00)
Dividends from Net Realized
Capital Gains................. (.85) (.85) (.67) (.67) (.04) (.04)
-------- ------ ------- ------ ------- -----
Total Distributions...... (.94) (.90) (.77) (.75) (.08) (.08)
-------- ------ ------- ------ ------- -----
Net Asset Value, End of Period.... $ 15.15 $14.95 $ 13.10 $12.94 $ 11.38 $11.26
======== ====== ======= ====== ======= =====
TOTAL RETURN...................... 23.61% 23.26%(3) 22.64% 22.28%(3) 17.42%(2) 14.80%(2,3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)........................ $ 199,311 $4,929 $99,294 $4,702 $50,993 $3,567
Ratio of Expenses to Average Net
Assets (after fee waivers).... .97% 1.22% 1.05%(4) 1.30%(5) 1.01%(2,4) 1.34%(2,5)
Ratio of Net Investment Income
to Average Net Assets......... .83% .57% .83%(4) .58%(5) 1.31%(2,4) 1.09%(2,5)
Portfolio Turnover Rate......... 64% 64% 106% 106% 69% 69%
Average Commission Rate......... $ .05 $ .05 $ 0.06 $ 0.6 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 charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Institutional class for the year ended May
31, 1996 would have been 1.06% and .82%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the 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 adviser,
administrator, and custodian for the Retail class for the period May 31,
1995 would have been 1.38% and 1.05%, respectively.
4
<PAGE> 308
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
EQUITY GROWTH FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Equity Growth Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED YEAR
YEAR ENDED MAY YEAR ENDED MAY YEAR ENDED ENDED
MAY 31, 31, MAY 31, 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 18.02 $18.05 $ 14.77 $14.79 $ 13.66 $13.68
--------- ------ --------- ------ --------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .09 .05 .14 .10 .21 .18
Net Gains on Securities..................... 4.66 4.66 3.46 3.47 1.21 1.21
--------- ------ --------- ------ --------- ------
Total Income from Investment Operations..... 4.75 4.71 3.60 3.57 1.42 1.39
--------- ------ --------- ------ --------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.09) (.05) (.14) (.10) (.20) (.17)
Dividends in Excess of Net Investment
Income.................................... (.02) (.01) (.02) (.02) (.00) (.00)
Dividends from Net Realized Capital Gains... (4.03) (4.03) (.19) (.19) (.00) (.00)
Dividends in excess of Net Realized Capital
Gains..................................... (.00) (.00) (.00) (.00) (.11) (.11)
--------- ------ --------- ------ --------- ------
Total Distributions......................... (4.14) (4.09) (.35) (.31) (.31) (.28)
--------- ------ --------- ------ --------- ------
Net Asset Value, End of Period............... $ 18.63 $18.67 $ 18.02 $18.05 $ 14.77 $14.79
========= ====== ========= ====== ========= ======
TOTAL RETURN................................. 29.57% 29.24%(3) 24.61% 24.34%(3) 10.62% 10.35%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $ 255,594 $6,931 $ 166,671 $6,013 $ 119,634 $5,974
Ratio of Expenses to Average Net Assets..... .97% 1.22% 1.01%(4) 1.26%(5) 1.01%(4) 1.27%(5)
Ratio of Net Investment Income to Average
Net Assets................................ .49% .25% .85%(4) .60%(5) 1.53%(4) 1.23%(5)
Portfolio Turnover Rate..................... 197% 197% 74% 74% 17% 17%
Average Commission Rate..................... $ .05 $ .05 $ 0.06 $ 0.06 N/A N/A
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1994 1994 1993 1993 1992 1992
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 13.78 $13.80 $ 13.13 $13.13 $ 12.35 $12.35
------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .18 .15 .27 .23 .30 .25
Net Gains on Securities..................... .01 .00 .67 .68 .78 .78
------- ------ ------- ------ ------- ------
Total Income from Investment Operations..... .19 .15 .94 .91 1.08 1.03
------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.18) (.15) (.27) (.23) (.30) (.25)
Dividends in Excess of Net Investment
Income.................................... (.01) (.00) (.02) (.01) (.00) (.00)
Dividends from Net Realized Capital Gains... (.11) (.11) (.00) (.00) (.00) (.00)
Dividends in excess of Net Realized Capital
Gains..................................... (.01) (.01) (.00) (.00) (.00) (.00)
------- ------ ------- ------ ------- ------
Total Distributions......................... (.31) (.27) (.29) (.24) (.30) (.25)
------- ------ ------- ------ ------- ------
Net Asset Value, End of Period............... $ 13.66 $13.68 $ 13.78 $13.80 $ 13.13 $13.13
======= ====== ======= ====== ======= ======
TOTAL RETURN................................. 1.41% 1.12% (3) 7.20% 7.00% (3) 8.90% 8.48%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $90,446 $7,521 $85,256 $7,707 $48,673 $2,767
Ratio of Expenses to Average Net Assets..... 1.07% 1.32% .34%(4) .59% (5) .26%(4) .51%(5)
Ratio of Net Investment Income to Average
Net Assets................................ 1.33% 1.08% 2.13%(4) 1.88% (5) 2.36%(4) 2.15%(5)
Portfolio Turnover Rate..................... 15% 15% 15% 15% 9% 9%
Average Commission Rate..................... N/A N/A N/A N/A N/A N/A
<CAPTION>
FOR THE PERIOD
YEAR DECEMBER 20,
YEAR ENDED ENDED 1989
MAY 31, MAY 31, (COMMENCEMENT OF
1991 1991 OPERATIONS) TO
INSTITUTIONAL RETAIL MAY 31, 1990
------------- ------- ----------------
Net Asset Value, Beginning of Period......... $ 10.77 $ 12.04 $ 10.00
------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .31 .04 .13
Net Gains on Securities..................... 1.58 .27 .71
------- ------- --------
Total Income from Investment Operations..... 1.89 .31 .84
------- ------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.31) (.00) (.07)
Dividends in Excess of Net Investment
Income.................................... (.00) (.00) (.00)
Dividends from Net Realized Capital Gains... (.00) (.00) (.00)
Dividends in excess of Net Realized Capital
Gains..................................... (.00) (.00) (.00)
------- ------- --------
Total Distributions......................... (.31) (.00) (.07)
------- ------- --------
Net Asset Value, End of Period............... $ 12.35 $ 12.35 $ 10.77
======= ======= ========
TOTAL RETURN................................. 18.10% 21.82%(1,2,3) 20.09%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $42,112 $ 1,389 $ 34,034
Ratio of Expenses to Average Net Assets..... .31%(4) .53%(2,5) .36%(2,4)
Ratio of Net Investment Income to Average
Net Assets................................ 2.90%(4) 2.94%(2,5) 3.30%(2,4)
Portfolio Turnover Rate..................... 11% 11% 5%
Average Commission Rate..................... N/A N/A N/A
</TABLE>
- ------------------
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales charge.
(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 advisers for the Institutional class for the
years ended May 31, 1993, 1992 and 1991 and for the period ended May 31,
1990 would have been 1.01% and 1.46%, 1.02% and 1.62%, 1.06% and 2.15%, and
1.11% and 2.55%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Retail class for the years ended May 31,
1996 and 1995 would have been 1.28% and .58% and 1.28% and 1.22%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the 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.
5
<PAGE> 309
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
EQUITY INCOME FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Equity Income Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(1) RETAIL(1)
------------- ---------- ------------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 12.66 $12.65 $ 11.01 $11.01 $ 10.00 $10.26
------- ------ ------ ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... .30 .31 .34 .33 .34 .26
Net Gains on Securities
(Realized and Unrealized)..... 2.73 2.68 1.79 1.77 .94 .75
------- ------ ------ ------ ------- ------
Total from Investment
Operations............. 3.03 2.99 2.13 2.10 1.28 1.01
------- ------ ------ ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (.31) (.27) (.34) (.32) (.27) (.26)
Dividends from Net Realized
Capital Gains................. (.51) (.51) (.14) (.14) (.00) (.00)
------- ------ ------ ------ ------- ------
Total Distributions...... (.82) (.78) (.48) (.46) (.27) (.26)
------- ------ ------ ------ ------- ------
Net Asset Value, End of Period.... $ 14.87 $14.86 $ 12.66 $12.65 $ 11.01 $11.01
======= ====== ====== ====== ======= ======
TOTAL RETURN...................... 24.62% 24.33%(3) 19.72% 19.37%(3) 14.34%(2) 13.18%(2,3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)........................ $ 127,130 $ 410 $61,978 $ 263 $36,194 $ 125
Ratio of Expenses to Average Net
Assets........................ 1.01% 1.26% 1.06%(4) 1.31%(5) .99%(2,4) 1.41%(2,5)
Ratio of Net Investment Income
to Average Net Assets......... 2.44% 2.17% 3.02%(4) 2.75%(5) 3.87%(2,4) 3.45%(2,5)
Portfolio Turnover Rate......... 35% 35% 53% 53% 12% 12%
Average Commission Rate......... $ 0.05 $ 0.05 $ 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 charge.
(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
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
advisers, administrator, and custodian for the Retail class for the period
ended May 31, 1995 would have been 1.45% and 3.40%, respectively.
6
<PAGE> 310
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 "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.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Mid Cap Regional, Equity Growth and Equity
Income Funds may not be changed without the vote of the holders of a majority of
their respective outstanding shares (as defined in "Miscellaneous"). The
investment objectives of the Small Cap Growth, International Equity and Core
Equity Funds may be changed without the vote of the holders of a majority of
their respective outstanding shares. Except as noted below under "Investment
Limitations," a Fund's investment policies may be changed without a vote of
shareholders. There can be no assurance that a Fund will achieve its objective.
See "Investment Objectives and Policies" in the Statement of Additional
Information for further information on the investments in which the Funds may
invest.
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 of
companies with market capitalizations ranging from $100 million to $2 billion
("Mid Cap Companies").
Because the Fund will invest in the securities of issuers which are
domiciled primarily in Ohio, Indiana, Kentucky and Pennsylvania, investment
return on the Mid Cap Regional Fund is dependent on the performance of a smaller
number of securities relative to the number held in other equity portfolios.
Consequently, the change in value of any one security may affect the overall
value of the Fund more than it would in another equity portfolio, and thereby
subject the market-based net asset value per share of the Fund to greater
fluctuations. In addition, the Fund is likely to be more susceptible to regional
economic, political and regulatory developments than other equity portfolios.
EQUITY GROWTH FUND
The investment objective of the Equity Growth 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
7
<PAGE> 311
be listed on a national securities exchange or will be unlisted securities with
an established over-the-counter market.
EQUITY INCOME FUND
The investment objective of the Equity Income Fund is to seek a competitive
total rate of return through investments in equity and equity equivalent
securities which carry premium current yields. Under normal conditions, at least
65% of the value of the Fund's total assets will be invested in income-producing
common stocks and securities convertible into common stocks assigned a rating of
Ba/BB or higher by Moody's Investors Service, Standard & Poor's Ratings Group
("S&P"), Fitch Investor Inc. ("Fitch"), Duff & Phelps ("Duff") or IBCA Inc.
("IBCA").
The Fund's advisers will generally attempt to select securities that
provide a higher yield than that of the general market and will generally
dispose of securities whose yields approach a market yield or that otherwise
fail to satisfy investment criteria.
SMALL CAP GROWTH FUND
The investment objective of the Small Cap Growth Fund is to provide long
term capital appreciation. The Fund will normally invest at least 80% of its
total assets in equity securities of companies with stock market capitalizations
of under $1.5 billion at the time of purchase. The sub-adviser will seek
companies with above-average growth prospects. Factors considered in selecting
such issuers include participation in a fast growing industry, a strategic niche
position in a specialized market, and fundamental value. The sub-adviser will
also consider the relationship between price and book value, and other factors
such as trading volume and bid-ask spreads in an effort to allow the Fund to
achieve diversification. As discussed below, while equity securities of small
public companies in which the Fund invests may at times yield greater returns on
investment than stocks of larger, more established companies, their positions in
the market may be more tenuous, subjecting them to increased price volatility,
which can result in a Fund share price with wider or more frequent fluctuations
than those of other equity portfolios.
SPECIAL RISK FACTORS -- SMALL CAPITALIZATION STOCKS
Securities held by the Small Cap Growth Fund will generally be issued by
public companies with small capitalizations relative to those which predominate
the major market indices, such as the S&P's 500 or the Dow Jones Industrial
Average.
The Fund has been designed to provide investors with potentially greater
long-term rewards than those provided by an investment in a fund that seeks
capital appreciation from equity securities of larger, more established
companies. Since small capitalization companies are generally not as well-known
to investors and have less of an investor following than larger companies, they
may provide opportunities for greater investment gains as a result of
inefficiencies in the marketplace.
Small capitalization companies typically are subject to a greater degree of
change in earnings and business prospects than larger, more established
companies. In addition, securities of smaller capitalized companies are traded
in lower volume than those issued by larger companies and may be more volatile.
As a result, the Fund may be subject to greater price volatility than a fund
consisting of larger capitalization stocks. By maintaining a broadly diversified
portfolio, the sub-adviser will attempt to reduce this volatility.
INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is to provide
capital growth consistent with reasonable investment risk. The Fund seeks to
achieve its investment objective by investing, under normal market conditions,
at least 80% of its total assets in equity securities of foreign issuers. The
Fund's assets will normally be invested in the securities of issuers located in
at least three foreign countries. Foreign investments may also include debt
obligations issued or guaranteed by foreign governments or their agencies,
authorities, instrumentalities or political subdivisions, including a foreign
state, province or municipality.
8
<PAGE> 312
The Fund will invest primarily in equity securities, including common and
preferred stocks, rights, warrants, securities convertible into common stocks
and American Depository Receipts ("ADRs") of companies included in the Morgan
Stanley Capital International Europe, Australia, Far East ("EAFE") Index, a
broadly diversified international index consisting of more than 1,000 equity
securities of companies located in Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the
United Kingdom. The Fund, however, is not an "index" fund, and is neither
sponsored by nor affiliated with Morgan Stanley Capital International. The Fund
does not anticipate making investments in markets where, in the judgment of the
adviser, property rights are not defined and supported by adequate legal
infrastructure. See "Special Risk Factors -- Foreign Securities and Currencies"
below for a discussion of this and other risks involved in foreign investments.
More than 25% of the Fund's assets may be invested in the securities of
issuers located in the same country. Investment in a particular country of 25%
or more of the Fund's total assets will make the Fund's performance more
dependent upon the political and economic circumstances of that country than a
mutual fund more widely diversified among issuers in different countries.
Criteria for determining the appropriate distribution of investments among
countries may include relative valuation, growth prospects, and fiscal,
monetary, and regulatory government policies.
SPECIAL RISK FACTORS -- FOREIGN SECURITIES AND CURRENCIES
The International Equity Fund may invest in securities issued by foreign
issuers either directly or indirectly through investments in American, European
or Global Depository Receipts (see "American, European and Global Depository
Receipts" below). Such securities may or may not be listed on foreign or
domestic stock exchanges.
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 Fund may be subject to greater fluctuation in price
than securities of domestic companies.
Since the Fund will invest substantially in securities denominated in or
quoted in currencies other than the U.S. dollar, changes in currency exchange
rates (as well as changes in market values) will affect the value in U.S.
dollars of securities held by the Fund. Foreign exchange rates are influenced by
trade and investment flows, policy decisions of governments, and investor
sentiment about these and other issues. In addition, costs are incurred in
connection with conversions between various currencies.
The expense ratio of the Fund can be expected to be higher than that of
funds investing in domestic securities. The costs of investing abroad are
generally higher for several reasons, including the cost of investment research,
increased costs of custody for
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foreign securities, higher commissions paid for comparable transactions
involving foreign securities, and costs arising from delays in settlements of
transactions involving foreign securities.
Interest and dividends payable on the Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by tax credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the return to the Fund's shareholders.
CORE EQUITY FUND
The investment objective of the Core Equity Fund is to seek a total rate of
return greater than that of the S&P 500. The two components of total rate of
return are current income and change in the value of portfolio securities. The
Fund seeks to achieve its objective by investing in a diversified portfolio of
common stocks of issuers with large capitalizations. The Fund normally invests
in three types of equity securities: (i) growth securities, defined as common
stocks having a five-year annual earnings-per-share growth rate of 10% or more,
with no decline in the annual earnings-per-share rate during the last five
years; (ii) securities with low price-to-earnings ratios (i.e., at least 20%
below the average of the companies included in the S&P 500); and (iii)
securities that pay high dividend yields (i.e., at least 20% above such
average). Under normal market conditions the Fund will invest 20% to 50% of its
total assets in each of these three types of equity securities.
The S&P 500 is an index composed of approximately 500 common stocks, most
of which are listed on the New York Stock Exchange (the "NYSE"). The adviser
believes that the S&P 500 is an appropriate benchmark for the Fund because it is
diversified, familiar to many investors and widely accepted as a reference for
common stock investments.
Standard & Poor's Ratings Group is not a sponsor of, or in any way
affiliated with, the Fund.
COMMON INVESTMENT POLICIES OF THE FUNDS
Other Investments with Equity Characteristics
Each Fund may hold other instruments with equity characteristics, such as
preferred stocks, securities convertible into common stock, rights, and
warrants.
Futures Contracts and Related Options
Each Fund (other than the Core Equity Fund) may invest in stock index
futures contracts and options on futures contracts to attempt to hedge against
changes in the value of securities that it holds or intends to purchase or to
maintain liquidity. The International Equity Fund may also invest in foreign
currency futures contracts and options in anticipation of changes in currency
exchange rates.
Futures contracts obligate the Funds, at maturity, to take or make delivery
of certain securities or the cash value of a securities index or, in the case of
the International Equity Fund, to take or make delivery of the cash value of a
stated amount of a foreign currency. 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 their portfolios 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, a Fund 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 their holdings.
Each Fund may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price at any time during the
option period. When 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
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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.
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
their assets, after taking into account unrealized profits and unrealized losses
on such contracts they have 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 greater than the amount of the principal invested as
initial margin 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.
Options
Each Fund may write covered call options, buy put options, buy call options
and sell or "write" secured put options on a national securities exchange and
issued by the Options Clearing Corporation for hedging purposes. Such
transactions may be effected on a principal basis with primary reporting dealers
in U.S. government securities in an amount not exceeding 5% of a Fund's net
assets, as described further in the Statement of Additional Information. Such
options may relate to particular securities or to various stock indices or bond
indices. Purchasing options is a specialized investment technique which entails
a substantial risk of a complete loss of the amounts paid as premiums to the
writer of the option.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is the consideration for undertaking the obligations under the option contract.
A put option for a particular security gives the purchaser the right to sell the
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
In contrast to an option on a particular security, an option on a securities
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option.
Each Fund may purchase and sell put options on portfolio securities at or
about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits its risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of and yield otherwise available from the underlying security, however,
will be partially offset by the amount of the premium paid for the put option
and any related transaction costs. Call options may be
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purchased by a Fund in order to acquire the underlying security at a later date
at a price that avoids any additional cost that would result from an increase in
the market value of the security. Each Fund may also purchase call options to
increase its return to investors at a time when the call is expected to increase
in value due to anticipated appreciation of the underlying security. Prior to
its expiration, a purchased put or call option may be sold in a closing sale
transaction (a sale by a Fund, prior to the exercise of an option that it has
purchased, of an option of the same series), and profit or loss from the sale
will depend on whether the amount received is more or less than the premium paid
for the option plus the related transaction costs.
In addition, each Fund may write covered call and secured put options. A
covered call option means that the Fund owns or has the right to acquire the
underlying security subject to call at all times during the option period. A
secured put option means that a Fund maintains in a segregated account with its
custodian cash or U.S. government securities in an amount not less than the
exercise price of the option at all times during the option period. Such options
will be listed on a national securities exchange and issued by the Options
Clearing Corporation and may be effected on a principal basis with primary
reporting dealers in the U.S.
The aggregate value of the securities subject to options written by a Fund
will not exceed 25% of the value of its net assets. In order to close out an
option position prior to maturity, a Fund may enter into a "closing purchase
transaction" by purchasing a call or put option (depending upon the position
being closed out) on the same security with the same exercise price and
expiration date as the option which it previously wrote.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a 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 a Fund closes out the option. In writing a secured put option, a
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 Funds.
Foreign Securities
Each of the Funds may invest up to 20% (100% in the case of the
International Equity Fund) of its total assets at the time of purchase in
securities issued by foreign entities and ADRs, EDRs and GDRs (defined below).
See "Special Risk Factors - Foreign Securities and Currencies" above.
American, European and Global Depository Receipts
Each Fund may invest in American Depository Receipts ("ADRs") and Standard
& Poor's Depository Receipts ("SPDRs"). The International Equity Fund may invest
in both sponsored and unsponsored ADRs, European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and other similar global instruments. ADRs
are receipts issued in registered form by a U.S. bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. SPDRs
are receipts designed to replicate the performance of the S&P 500. EDRs, which
are sometimes referred to as Continental Depository Receipts, are receipts
issued in Europe typically by non-U.S. banks or trust companies and foreign
branches of U.S. banks that evidence ownership of foreign or U.S. securities.
GDRs are receipts structured similarly to EDRs and are marketed globally. ADRs
may be listed on a national securities exchange or may be traded in the
over-the-counter markets. EDRs are designed for use in European exchange and
over-the-counter markets. GDRs are designed for trading in non-U.S. securities
markets. Investments in ADRs, EDRs and GDRs involve risks similar to those
accompanying direct investments in foreign securities, but those that are traded
in the over-the-counter market which do not have an active or
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substantial secondary market will be considered illiquid and, therefore, will be
subject to a Fund's limitation with respect to such securities. ADR prices are
denominated in U.S. dollars although the underlying securities may be
denominated in a foreign currency.
The principal difference between sponsored and unsponsored ADR, EDR and GDR
programs is that the latter are organized independently and without the
cooperation of the issuer of the underlying securities. Consequently, available
information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more
volatile.
Forward Currency Exchange Contracts
The Equity Income and International Equity 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 deemed economically appropriate for the reduction of risks inherent in the
ongoing management of either Fund. 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, a Fund will create a segregated account of liquid assets.
Exchange Rate-Related Securities
The Equity Income and International Equity Funds may invest in debt
securities for which the principal due 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 also 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 risks
associated with these securities. 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.
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. 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.
Short-Term Obligations
Each Fund may hold temporary cash balances which may be invested in various
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 repur-
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chase agreements and guaranteed investment contracts ("GICs"). During temporary
defensive periods, each Fund may hold up to 100% of its total assets in these
types of obligations.
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 a 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.
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.
In addition, the International Equity Fund may purchase shares of
investment companies investing primarily in foreign securities, including
"country funds" which have portfolios consisting exclusively of securities of
issuers located in one foreign country. Such "country funds" may be either
open-end or closed-end investment companies, and may include a portfolio or
portfolios of The CountryBaskets Index Fund, Inc. ("CountryBaskets"), a
registered, open-end management investment company that, through its portfolios,
seeks to provide investment results that substantially correspond to the price
and yield performance of a broad-based index of publicly traded equity
securities in a particular country, geographic region or industry sector.
The International Equity Fund may also purchase World Equity Benchmark
Shares(sm) issued by The Foreign Fund, Inc. ("WEBS") and similar securities of
other issuers. WEBS are shares of an investment company that invests
substantially all of its assets in securities included in the Morgan Stanley
Capital International indices for specific countries. Because the expense
associated with an investment in WEBS can be substantially lower than the
expense of small investments directly in the securities comprising the indices
it seeks to track, the adviser believes that investments in WEBS of countries
that are included in the EAFE Index can provide a cost-effective means of
diversifying the Fund's assets across a broader range of equity securities.
WEBS are listed on the American Stock Exchange (the "AMEX"), and were
initially offered to the public in 1996. The market prices of WEBS are expected
to fluctuate in accordance with both changes in the net asset values of their
underlying indices and supply and demand of WEBS on the AMEX. To date, WEBS have
traded at relatively modest discounts and premiums to their net asset values.
However, WEBS have a limited operating history, and information is lacking
regarding the actual performance and trading liquidity of WEBS for extended
periods or over complete market cy-
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cles. In addition, there is no assurance that the requirements of the AMEX
necessary to maintain the listing of WEBS will continue to be met or will remain
unchanged.
In the event substantial market or other disruptions affecting WEBS or
CountryBaskets should occur in the future, the liquidity and value of the
International Equity Fund's shares could also be substantially and adversely
affected, and the Fund's ability to provide investment results approximating the
performance of securities in the EAFE could be impaired. If such disruptions
were to occur, the Fund could be required to reconsider the use of WEBS,
CountryBaskets or other "country funds" as part of its investment strategy.
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.
Illiquid Securities
The Equity Growth Fund will not invest more than 10% of its net assets and
the Mid Cap Regional, Equity Income, Small Cap Growth, International Equity and
Core Equity Funds will not 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.
Risk Factors Associated with Derivative Instruments
The Funds may purchase certain "derivative" instruments. Derivative
instruments are instruments that derive value from the performance of underlying
securities, interest or currency exchange rates, or indices, and include (but
are not limited to) futures contracts.
Like all investments, derivative instruments involve several basic types of
risks which must be managed in order to meet investment objectives. The specific
risks presented by derivatives include, to varying degrees, market risk in the
form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
is based; liquidity risk that the Funds will be unable to sell a derivative
instrument when they want 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; extension risk that the expected duration of an
instrument may increase or decrease; 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 re-
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garding their actual performance over complete market cycles.
The risk to each Fund due to the use of derivatives will be limited to 10%
of the total value of the Fund's assets at the time of the derivatives
transaction. 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.
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. 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 Information under "Investment
Objectives and Policies.")
No Fund may:
1. (a) This paragraph (a) applies to the Mid Cap Regional, Equity Growth
and Equity Income Funds. Make loans, except that each of these Funds may
purchase or hold debt instruments, lend portfolio securities and enter into
repurchase agreements in accordance with its investment objective and policies.
(b) This paragraph (b) applies to the Small Cap Growth, International
Equity and Core Equity Funds. Make loans, except that each of these Funds may
purchase and hold debt instruments and enter into repurchase agreements in
accordance with its investment objective and policies and may lend portfolio
securities in an amount not exceeding one-third of its total assets.
2. (a) This paragraph (a) applies to the Mid Cap Regional, Equity Growth
and Equity Income Funds. Borrow money or issue senior securities, except that
each of these Funds 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 Small Cap Growth, International
Equity and Core Equity Funds. Borrow money, issue senior securities or mortgage,
pledge or hypothecate its assets except to the extent permitted under the 1940
Act.
3. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of 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, (any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions in the case
of the Small Cap Growth, International Equity and Core Equity Funds) and
repurchase agreements secured by such obligations;
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(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) Personal credit and business credit will be considered separate
industries.
4. Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities or, in
the case of the International Equity Fund, securities issued or guaranteed by
any foreign government, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of the outstanding voting securities of the issuer, except that up to 25% of
the value of the Fund's total assets may be invested without regard to such
limitations.
Additional investment limitations which are matters of fundamental policy
are as follows:
5. Neither the Mid Cap Regional Fund nor the Equity Income 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."
6. The Equity Growth 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.
For purposes of investment limitation No. 1, the Funds will treat, as a
matter of non-fundamental policy that may be changed without a vote of
shareholders, all supranational organizations as a single industry and each
foreign government (and of all of its agencies, as a separate industry.
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.
Generally, 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.
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
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one year, it is important to note that the annual total return of a class for
any one year in the period might have been greater or less than the average for
the entire period. The Funds may also advertise, from time to time, the total
returns of one or more classes of shares on a year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
The "yield" quoted in advertisements of the Equity Income Fund refers to
the income generated by an investment in a class of shares of over a 30-day
period identified in the advertisement. This income is then "annualized." The
amount of income so generated by the investment during the 30-day period is
assumed to be earned and reinvested at a constant rate and compounded
semi-annually; the annualized income is then shown as a percentage of the
investment.
Shareholders should note that the total return and yield of Retail shares
will be reduced by the amount of shareholder servicing fees that are payable
under the Services Plan. See "Shareholder Services Plan."
Investors may compare the performance of each class of shares of a Fund to
the performance of other mutual funds with comparable investment objectives, to
various mutual fund or market indices, such as the S&P 500, 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.
Yield and 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 processing purchase and redemption orders, the net asset value per
share of each Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined each day that the Exchange is open
for business.
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
With respect to each Fund, investments in securities traded on an exchange
are valued at the last quoted sale price for a given day, or if a sale is not
reported for that day, at the mean between the most recent quoted bid and asked
prices. Unlisted securities and securities traded on a national securities
market for which market quotations are readily available are valued at the mean
between the most recent bid and asked prices. Securities and other
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assets for which no quotations are readily available
are valued at their fair value under procedures approved by the Board of
Trustees. Absent unusual circumstances, short-term investments having maturities
of 60 days or less are valued on the basis of amortized cost unless the Trust's
Board of Trustees determines that this does 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 portfolio 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 in Oaks, Pennsylvania 19456.
From time to time, the Distributor, at its expense, may offer promotional
incentives to dealers. As of the date of this Prospectus, the Distributor
intends to offer certain promotional incentives, including trips and monetary
awards, to NatCity Investments, Inc. and other affiliates of National City.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily through
financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. (For
information on such fees, the Investor should review his agreement with the
institution or contact it directly.) In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby a
financial institution would perform various administrative support services for
its customers who are the beneficial owners of Retail shares and would receive
fees from the Funds for such services of up to .25% (on an annualized basis) of
the average daily net asset value of such shares. See "Shareholder Services
Plan." For direct purchases of shares, Investors should call 1-800-
622-FUND(3863) or to speak with a NatCity Investments professional, call
1-888-4NATCTY (462-8289).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact NatCity Investments, Inc., the Distributor
or their financial institutions for information as to applications and annual
fees. Investors should also consult their tax advisers to determine whether the
benefits of an IRA are available or appropriate.
The minimum investment is $500 for the initial purchase of Retail shares in
a Fund. All subsequent investments for Retail shares are subject to a minimum
investment of $250. Investments made in Retail shares through the Planned
Investment Program ("PIP"), a monthly savings program described below, are not
subject to the minimum initial and subsequent investment requirements or any
minimum account balance requirements described in "Other Redemption
Information." Purchases for an IRA through the PIP will be considered as
contributions for the year in which the purchases are made.
Under a PIP, 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 PIP by
completing an application obtained through a financial institution, such as
banks, brokers, or dealers selling Retail shares of the Funds, or by calling
1-800-622-FUND(3863). The program may be modified or terminated by an
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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, State Street Bank
and Trust Company (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:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % 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) 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;
(e) investors purchasing Fund shares through a payroll deduction plan; and
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail shares of
each Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND(3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in Retail shares in
determining the applicable sales charge. An Investor's aggregate investment in
Retail shares is the total value (based on the higher of current net asset value
or any Public Offering Price originally paid) of:
(a) current purchases
(b) Retail shares that are already beneficially owned by the Investor for
which a sales charge has been paid
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(c) Retail shares that are already beneficially owned by the Investor which
were purchased prior to July 22, 1990
(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. The Letter of Intent option is included on the
account application which may be obtained from the Investor's financial
institution or directly from the Trust by calling 1-800-622-FUND(3863). If an
Investor so elects, the 13 month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the Letter
of Intent must be equal to at least 4.0% of the amount indicated in the Letter
of Intent. During the term of a Letter of Intent, the Transfer Agent will hold
Retail shares representing 4.0% of the amount indicated in the Letter of Intent
in escrow for payment of a higher sales charge if the entire amount is not
purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13 month period or is redeemed within one year from the
time of fulfillment, 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 trust companies which
are affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation "NAM") customers that are large institutions, and
investment advisers and financial planners affiliated with National City
("RIAs") who charge an advisory, consulting or other fee for their services and
buy shares for their own accounts or the accounts of their clients
("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, NAM or RIAs 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.
It is the responsibility of the Banks, NAM and RIAs 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, NAM or RIAs. Confirmations
of share purchases and redemptions will be sent to the Banks and NAM and RIAs.
Beneficial ownership of Institutional shares will be recorded by the Banks, NAM
or RIAs 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 next determined after receipt of the order 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
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will be executed. If funds are not received by such date, the order will not be
accepted and notice thereof will be given to the Bank or financial institution
placing the order. Purchase orders for which payment has not been received or
accepted will be returned after prompt inquiry to the sending Bank or
institution.
REDEMPTION OF RETAIL SHARES
Redemption orders must be placed in writing or by telephone to the same
financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND(3863). Redemption proceeds
are paid by check or credited to the Investor's account with his financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks, NAM or RIAs. It is the responsibility of the Banks, NAM or RIAs 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 the Banks, NAM or RIAs may charge their Customers'
accounts for services. Information relating to such services and charges, if
any, is available from the Banks, NAM or RIAs.
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 who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. 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 $10,000
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 $10,000, 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 who purchased shares directly from the Trust may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or Armada Funds at the
address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is
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<PAGE> 326
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 Transfer Agent's system. The
Plan allows the shareholder to have a fixed minimum sum of $250 distributed at
regular intervals. The shareholder's account must have a minimum value of $5,000
to be eligible for the Plan. Additional information regarding this service may
be obtained from an Investor's financial institution or the Transfer Agent at
1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem, at net asset value, any account maintained by a
shareholder that has a value of less than $500 due to redemptions where the
shareholder does not increase the amount in the account to at least $500 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 5 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his investment should purchase shares by Federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds.
Payment to Shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (each a "no load Fund") at the net asset value per share on the
date of exchange. 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 load. In addition, shareholders of a no
load Fund may exchange Retail shares for Retail shares of a load Fund subject to
payment of the applicable sales load. However, shareholders exchanging Retail
shares of a no load Fund which were received in a previous exchange transaction
involving Retail shares of a load Fund will not be required to pay an additional
sales charge upon notification of the reinvestment of the equivalent amount into
the Retail shares of a load Fund. Shareholders contemplating an exchange should
carefully review the Prospectus of the Fund into which the exchange is being
considered. An Armada Funds Prospectus may be obtained from NatCity Investments,
Inc., an Investor's financial institution or by calling 1-800-622-FUND(3863).
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
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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.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified funds over a specified period of time, and
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this Prospectus. Because purchases of
Retail shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent in connection with the systematic
exchange program. A shareholder may apply for participation in this program
through his financial institution or by calling 1-800-622-FUND(3863).
DISTRIBUTION AGREEMENT
Under the Trust's Distribution Agreement and related Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act, the Trust pays the following
compensation to the Distributor for services provided and expenses assumed in
providing the Trust advertising, marketing, prospectus printing and other
distribution services: (i) an annual base fee of $1,250,000, plus (ii) incentive
fees related to asset growth. Such compensation is payable monthly and accrued
daily among the Trust's investment funds with respect to which the Distributor
is distributing shares. In the case of each such fund, such compensation shall
not exceed .10% per annum of the fund's average net assets.
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 custom-
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ers. 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 Mid Cap Regional, Small Cap
Growth and International Equity Funds are declared and paid annually; dividends
from the net investment income of the Equity Growth, Equity Income and Core
Equity Funds are declared and paid quarterly. With respect to each Fund, net
income for dividend purposes consists of dividends, distributions and other
income on the Fund's assets, less the accrued expenses of the Fund. Any net
realized capital gains will be distributed at least annually. Dividends and
distributions will reduce the Funds' net asset value per share by the per share
amount thereof.
Shareholders of the Funds may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class of any Armada Funds
at the net asset value of such shares on the ex-dividend date. Shareholders must
make such election, or any revocation thereof, in writing to their Banks or
financial institutions. 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 generally relieves a Fund of liability for federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by the Fund will be taxable as ordinary income to their
respective shareholders who are not currently exempt from federal income taxes,
whether such income is received in cash or reinvested in additional shares.
(Federal income taxes for distributions to an IRA or to a qualified retirement
plan are deferred under the Code.) For corporate shareholders, the dividends
received deduction will apply to such distributions to the extent of the gross
amount of qualifying dividends received by the distributing Fund from domestic
corporations for the taxable year.
Substantially all of each Fund's net realized long-term capital gains, if
any, will be distributed at least annually to Fund shareholders. A Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by sharehold-
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ers 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 charge applicable to the new shares
(by virtue of the Trust's exchange privilege), the amount equal to such
reduction may not be included in the tax basis of the shareholder's exchanged
shares but may be included (subject to this limitation) in the tax basis of the
new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations, and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City serves as the investment adviser to the Mid Cap Regional,
Small Cap Growth and International Equity Funds. National City, National City
Columbus and National City Kentucky ("National City Banks") serve as investment
advisers to the Equity Growth and Equity Income Funds. NAM serves as investment
adviser to the Core Equity Fund. The National City Banks and NAM are
wholly-owned subsidiaries of National City Corporation. The National City Banks
provide trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. The National City Banks are
member banks of the Federal Reserve System and the Federal Deposit Insurance
Corporation. NAM is a registered investment adviser providing investment
advisory and related services.
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On June 30, 1997, the Trust Departments of National City, National City
Columbus and National City Kentucky had approximately $10.7 billion, $1.5
billion and $5.6 billion, respectively, in assets under management, and
approximately $21.5 billion, $11.6 billion and $13.8 billion, respectively, in
total trust assets. As of the same date, NAM managed over $7.7 billion for a
diverse group of clients. Principal offices of each of the investment advisers
are as follows:
National City
1900 East Ninth Street
Cleveland, Ohio 44114
National City Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Kentucky
National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
National Asset Management Corporation
101 South Fifth Street
Louisville, Kentucky 40202
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Mid Cap Regional, Equity Growth, Equity Income, Small Cap
Growth, International Equity and Core Equity Funds' investment policies, the
advisers have agreed to manage such Funds, make decisions with respect to and
place orders for all purchases and sales of such Funds' securities, and maintain
such Funds' records relating to such purchases and sales.
- - Lawrence E. Baumgartner is the person primarily responsible for the day to day
management of the Mid Cap Regional Fund. Mr. Baumgartner, employed by National
City as President of Broad Street Asset Management Co. since July 1994, had
been managing assets for The State Teachers Retirement System of Ohio since
1987 and has been the Portfolio Manager of the Mid Cap Regional Fund since its
inception.
The Equity Growth Fund is managed by the Equity Growth Style Team of
National City's Asset Management Group. Members of the team are Eric S. Fuchs
and Eugene March.
- - Eric S. Fuchs, a Vice President at National City, heads the management team.
His 20 years of equity investment experience encompasses research and money
management. After co-managing several equity funds at Twentieth Century, he
was an equity growth pension manager at Waddell & Reed Asset Management.
- - Eugene March, a Chartered Financial Analyst and an equity analyst with
National City, has been with the bank for 18 years. He holds an MBA from
Cleveland State. Eugene joined the Equity Growth Style Team January 1997.
The Equity Income Fund is managed by the Equity Value Style Team of
National City's Asset Management Group. Members of the team are James R. Kirk
and Mary Jane Matts.
- - A Chartered Financial Analyst, James R. Kirk heads the management team. He is
a Vice President and Chief Investment Strategist at National City and has been
part of the management team since September 28, 1995. Mr. Kirk's investment
experience includes a broad background in research, portfolio management and
general investment management. Prior to joining National City, he was Chief
Investment Officer at Society Asset Management.
- - Mary Jane Matts is a Chartered Financial Analyst and a Vice President at
National City. She has eight years of investment experience including
positions in research, portfolio management and performance measurement. Prior
to joining the Equity Value Style Team on August 19, 1996, Ms. Matts was the
Director of Equity Research for Key Corp.
- - David Cooley is the person primarily responsible for the day-to-day management
of the International Equity Fund. Mr. Cooley, a Vice President at National
City, has eight years of investment experience including fixed income
research, equity research and internal equities management. Mr. Cooley is a
Chartered Financial Analyst and has managed the International Equity Fund
since its inception. Prior to that time, he was with Key Corp.
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The Core Equity Fund is managed by the Investment Management Group of NAM.
The Investment Management Group makes the investment decisions for the Core
Equity Fund. No person is primarily responsible for making recommendations to
the Investment Management Group.
For the services provided and expenses assumed pursuant to the Advisory
Agreements relating to the Mid Cap Regional, Equity Growth, Equity Income, Small
Cap Growth, International Equity and Core Equity 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.
SUB-INVESTMENT ADVISER
Wellington Management Company, LLP (the "sub-adviser") serves as the
sub-adviser to the Small Cap Growth Fund under a sub-advisory agreement (the
Sub-Advisory Agreement") with National City as the investment adviser.
Pursuant to the Sub-Advisory Agreement and subject to the supervision of
the adviser and of the Trust's Board of Trustees and in accordance with the
Small Cap Growth Fund's investment policies, the sub-adviser has agreed to
assist the adviser in providing a continuous investment program for the Small
Cap Growth Fund and in determining investments for the Fund. The sub-adviser
will maintain the Trust's records relating to purchases and sales effected by
it. For the services provided and expenses assumed pursuant to the Sub-Advisory
Agreement, the sub-adviser is entitled to an advisory fee, payable by the
adviser, calculated daily and payable monthly, at the maximum annual rate of
.75% of the average daily net assets of the Fund. The sub-adviser may
occasionally waive all or a portion of its fee from the adviser.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
each Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive with respect to each
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .045% of the next $200,000,000 of its net assets
and .02% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 42 separate classes or
series of shares of beneficial interest ("shares"). Twelve of these classes or
series, which represent interests in the Equity Growth Fund (Class H and Class
H-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), International
Equity Fund (Class U and Class U-Special Series 1), Core Equity Fund (Class W
and Class W-Special Series 1) and Small
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<PAGE> 332
Cap Growth Fund (Class X and Class X- Special Series 1), are described in this
Prospectus. Class H, Class M, Class N, Class U, Class W and Class X shares
constitute the Institutional class or series of shares; and Class H-Special
Series 1, Class M-Special Series 1, Class N-Special Series 1, Class U-Special
Series 1, Class W-Special Series 1, and Class X-Special Series 1 shares
constitute the Retail class or series of shares. The other Funds of the Trust
are:
Money Market Fund
(Class A and Class A -- Special Series 1)
Government Fund
(Class B and Class B -- Special Series 1)
Treasury Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Fund
(Class D and Class D -- Special Series 1)
Fixed Income Fund
(Class I and Class I -- Special Series 1)
Ohio Tax Exempt Fund
(Class K and Class K -- Special Series 1)
National Tax Exempt Fund
(Class L and Class L -- Special Series 1)
Enhanced Income Fund
(Class O and Class O -- Special Series 1)
Total Return Advantage Fund
(Class P and Class P -- Special Series 1)
Pennsylvania Tax Exempt Fund
(Class Q and Class Q -- Special Series 1)
Intermediate Government Fund
(Class R and Class R -- Special Series 1)
GNMA Fund
(Class S and Class S -- Special Series 1)
Pennsylvania Municipal Fund
(Class T and Class T -- Special Series 1)
Equity Index Fund
(Class V and Class V -- Special Series 1)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such Fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment Funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Services Plan, only
the holders of Retail shares in an investment fund are, or would be entitled to
vote on matters submitted to a vote of shareholders (if any) concerning the
Services Plan. Voting rights are not cumulative, and accordingly, the holders of
more than 50% of the aggregate shares of the Trust may elect all of the trustees
irrespective of the vote of the other shareholders.
As stated previously, 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.
29
<PAGE> 333
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of September 26, 1997, National City held beneficially or of record
approximately 54.26%, 43.27%, 39.08%, 81.66%, 89.75% and 99.85%, of the
outstanding Institutional shares of the Mid Cap Regional, Equity Growth, Equity
Income, Small Cap Growth, International Equity and Core Equity Funds,
respectively. As of September 26, 1997, National City Columbus held beneficially
or of record approximately 9.62%, 16.07%, 1.93%, 3.45%, 6.77%, and 0.10%, of the
outstanding Institutional shares of the Mid Cap Regional, Equity Growth, Equity
Income, Small Cap Growth, International Equity and Core Equity Funds. As of
September 26, 1997, National City Kentucky held beneficially or of record
approximately 5.97%, 5.42%, 1.85%, 0.19%, 0.00%, and 0.00%, of the outstanding
Institutional shares of the Mid Cap Regional, Equity Growth, Equity Income,
Small Cap Growth, International Equity and Core Equity Funds. National City,
National City Columbus and National City Kentucky do not have any economic
interest in such shares which are held solely for the benefit of their
customers, but may be deemed to be controlling persons of the Funds within the
meaning of the 1940 Act by reason of their record ownership of such shares. The
names of beneficial owners and record owners who are controlling shareholders
under the 1940 Act may be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to
P.O. Box 8421, Boston, Massachusetts 02266-8421. 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 and, in the case of the Small
Cap Growth Fund, the sub-adviser bear all expenses in connection with the
performance of their services. Each Fund of the Trust bears its own expenses
incurred in its operations including: taxes; interest; fees (including fees paid
to its trustees and officers); SEC fees; state securities qualification fees;
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders; expenses related to the Distribution
Plan; advisory fees; administration fees and expenses; charges of the custodian
and Transfer Agent; certain insurance premiums; outside auditing and legal
expenses; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
in connection with the purchase of its portfolio securities. Under the Services
Plan, the Retail shares in the Funds also bear the expense of shareholder
servicing fees.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent accountants.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both the
custodian and an investment adviser, a procedure has been estab-
30
<PAGE> 334
lished requiring three annual verifications, two of which are to be unannounced,
of all investments held pursuant to the Custodian Services Agreement, to be
conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
31
<PAGE> 335
ARMADA FUNDS
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES Robert D. Neary
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, Inc.
Leigh Carter
Retired President and Chief Operating
Officer,
B.F. Goodrich Company
Director:
Acromed Corporation
Adams Express Company
Kirtland Capital Corp.
Morrison Products
Petroleum & Resources Corp.
John F. Durkott
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
Richard W. Furst, Dean
Professor of Finance and Dean, Carol Martin
Gatton College of Business and Economics,
University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
Gerald L. Gherlein
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
Meridia Health System
WVIZ Educational Television
J. William Pullen
President and Chief Executive Officer,
Whayne Supply Company
Richard B. Tullis
Chairman Emeritus, Harris Corporation
Director:
Hamilton Beach/Proctor-Silex, Inc.
NACCO Materials Handling Group, Inc.
Waste-Quip, Inc.
<PAGE> 336
ARMADA FUNDS LOGO BULK RATE
Oaks, Pennsylvania 19456 U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
AF-808 (9/97)
<PAGE> 337
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 30, 1997
MID CAP REGIONAL FUND
EQUITY GROWTH FUND
EQUITY INCOME FUND
SMALL CAP GROWTH FUND
INTERNATIONAL EQUITY FUND
CORE EQUITY 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, 1997 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at
1-800-622-FUND(3863), Oaks, Pennsylvania 19456.
<PAGE> 338
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION ....................................... 1
INVESTMENT OBJECTIVES AND POLICIES ........................................ 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ............................ 13
DESCRIPTION OF SHARES ..................................................... 17
ADDITIONAL INFORMATION CONCERNING TAXES ................................... 19
TRUSTEES AND OFFICERS ..................................................... 22
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS ....................... 27
SHAREHOLDER SERVICES PLAN ................................................. 32
PORTFOLIO TRANSACTIONS .................................................... 32
AUDITORS .................................................................. 34
COUNSEL ................................................................... 34
YIELD AND PERFORMANCE INFORMATION ......................................... 34
MISCELLANEOUS ............................................................. 39
FINANCIAL STATEMENTS ...................................................... 41
APPENDIX A ................................................................ 1
APPENDIX B ................................................................ 1
</TABLE>
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<PAGE> 339
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
Mid Cap Regional, Equity Growth, Equity Income, Small Cap Growth, International
Equity and Core Equity 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.
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.
FOREIGN SECURITIES
- ------------------
Unanticipated political or social developments may affect the
value of the International Equity Fund's investments in emerging market
countries and the availability to the Fund of additional investments in those
countries. The small size, relatively unseasoned nature of the securities
markets and limited volume of trading in securities in certain of these
countries may make the Fund's investments there illiquid and more volatile than
investments in Japan or most Western European countries. In addition, the Fund
may be required to establish special custodial or other arrangements before
making certain investments. Moreover, there may be little financial or
accounting information available with respect to issuers located in certain
emerging market countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.
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 and International Equity Funds are authorized to
enter into forward currency exchange contracts. These contracts involve an
obligation
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<PAGE> 340
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 Funds 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 Equity Income and International Equity 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 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 and International Equity
Funds 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 Funds'
securities denominated in such foreign currency. Similarly, when the obligations
held by the Funds create a short position in a foreign currency, the Funds 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 Funds 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 cash or liquid securities
equal to the amount of the Equity Income or International Equity Fund's assets
that could be required to consummate forward contracts will be established with
the Trust'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 cash or 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)
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<PAGE> 341
permitting the Fund to buy the same currency at a price no higher than the
Fund's price to sell the currency. A forward contract to buy a foreign currency
is "covered" if the Funds hold a forward contract (or call option) permitting
the Funds to sell the same currency at a price as high as or higher than the
Funds' price to buy the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
- -------------------------------------
Each Fund (other than the Core Equity Fund) may invest in
futures contracts and related options. For a detailed description
of these investments and related risks, see Appendix B attached to
this Statement of Additional Information.
-3-
<PAGE> 342
"COVERED CALL" OPTIONS
- ----------------------
As described in the Prospectus, each Fund may write covered
call options. Such options may relate to particular securities, stock indices,
financial instruments, or foreign currencies and may or may not be listed on a
domestic or foreign securities exchange or issued by the Options Clearing
Corporation. Options trading is a highly specialized activity which entails
greater than ordinary investment risk. Options on particular securities may be
more volatile than the underlying instruments, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves.
A Fund will write call options only if they are "covered." The
option is "covered" if the Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, liquid assets
of equal value are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if the Fund maintains with its custodian a
portfolio of securities substantially replicating the movement of the index, or
liquid assets equal to the contract value. A call option is also covered if the
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
A Fund's obligation to sell a security subject to a covered
call option written by it may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or to permit the writing
of a new option containing different terms on such underlying security. The cost
of such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the optioned security is
delivered upon exercise with the result that the writer
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<PAGE> 343
in such circumstances will be subject to the risk of market decline
or appreciation in the security during such period.
When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the current bid price. If an option written by a Fund expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction, it
will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by the
Fund is exercised, the proceeds of the sale will be increased by the net premium
originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in
certain options. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a securities exchange may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
FOREIGN GOVERNMENT OBLIGATIONS
- ------------------------------
The International Equity Fund may purchase debt obligations
issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their agencies,
authorities or instrumentalities. The percentage of assets invested in
securities of a particular
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<PAGE> 344
country or denominated in a particular currency will vary in
accordance with the adviser's assessment of gross domestic product
in relation to aggregate debt, current account surplus or deficit,
the trend of the current account, reserves available to defend the
currency, and the monetary and fiscal policies of the government.
WARRANTS
- --------
Warrants enable the owner to subscribe to and purchase a
specified number of shares of the issuing corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The purchase of warrants
involves the risk that the purchaser could lose the purchase value of the
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities entitle the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock. The
value of the convertibility feature depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities, the advisers will
consider, among other factors, the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of the
Fund's portfolio as to issuers; and the ratings of the securities. Since credit
rating agencies may fail to timely change the credit ratings of securities to
reflect subsequent events, the adviser will consider whether such issuers will
have sufficient cash flow and profits to meet required principal and interest
payments. A Fund may retain a portfolio
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<PAGE> 345
security whose rating has been changed if the adviser(s) deem that retention of
such security is warranted.
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 portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between the Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, a Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
Government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the advisers. In the event an issuer
of a variable or floating rate obligation defaulted
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<PAGE> 346
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 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 adviser(s) 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.
-8-
<PAGE> 347
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 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
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<PAGE> 348
Fund may decline below the price at which it is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by the
Fund under the Investment Company Act of 1940.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
Each Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the 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
- ------------------
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. 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. 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.
-10-
<PAGE> 349
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 a Fund to receive certain favorable
tax treatment. Portfolio turnover will not be a limiting factor in making
investment decisions.
ADDITIONAL INVESTMENT LIMITATIONS APPLICABLE TO THE MID CAP
- -----------------------------------------------------------
REGIONAL, EQUITY GROWTH AND EQUITY INCOME FUNDS
- -----------------------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Mid Cap Regional, Equity Growth and Equity Income 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).
The Mid Cap Regional, Equity Growth and Equity Income
Funds may not:
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
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<PAGE> 350
its investment advisers owning beneficially more than one-half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
In addition, the Mid Cap Regional Fund and Equity Income 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 Equity Growth 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.
ADDITIONAL INVESTMENT LIMITATIONS APPLICABLE TO THE SMALL CAP
- -------------------------------------------------------------
GROWTH, INTERNATIONAL EQUITY AND CORE EQUITY FUNDS
- --------------------------------------------------
In addition to the investment limitations disclosed in
the Prospectus, the Small Cap Growth, International Equity and Core
Equity Funds are subject to the following investment limitations
which may not be changed without approval of the holders of a
majority of the outstanding shares of the Fund (as defined under
"Description of Shares" below).
The Small Cap Growth, International Equity and Core
Equity Funds may not:
1. Purchase or sell real estate, except that each Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with its
investment objective and policies each Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices; (b) purchase and sell options on futures contracts or
indices; and (c) purchase publicly traded securities of companies engaging in
whole or in part in such activities.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of illiquid securities and except to the extent that the
purchase of obligations directly from the issuer thereof in accordance with its
investment objective, policies and limitations may be deemed to be underwriting.
-12-
<PAGE> 351
In addition to the above fundamental limitations, these
Funds are subject to the following non-fundamental limitations,
which may be changed without a shareholder vote:
The Small Cap Growth, International Equity and Core
Equity Funds may not:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles,
spreads, or any combination thereof, except as consistent with the Fund's
investment objective and policies, for transactions in options on securities or
indices of securities, futures contracts and options on futures contracts and in
similar investments.
3. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to its transactions in futures contracts and related
options, options on securities or indices of securities and similar instruments,
and (b) it may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 15% of its net assets in illiquid
securities.
These Funds do not intend to purchase securities while
their outstanding borrowings are in excess of 5% of their
respective assets. Securities held in escrow or separate accounts
in connection with a Fund's investment practices are not deemed to
be pledged for purposes of this limitation.
Each of these Funds reserves the right to engage in securities
lending, although it does not presently have the intent of doing so.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co., formerly SEI Financial Services Company (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
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<PAGE> 352
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, 1997, sales loads paid by
shareholders of the Mid Cap Regional, Equity Growth and Equity Income Funds
totalled $3,160, $5,394 and $72, respectively. As of May 31, 1997, the Small Cap
Growth, International Equity and Core Equity Funds had not commenced operations.
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.
-14-
<PAGE> 353
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Funds, based on the value of the Funds' net assets and
number of outstanding shares on May 31, 1997 are as follows:
TABLE
-----
<TABLE>
<CAPTION>
MID CAP REGIONAL FUND
---------------------
<S> <C> <C>
Net Assets of Retail Shares $4,928,691
Outstanding Retail Shares 329,602
Net Asset Value Per Share
($4,928,691 / 329,602) $14.95
Sales Charge, 3.75% of
offering price (3.88% of
net asset value per share) $0.58
Offering to Public $15.53
<CAPTION>
Equity Growth Fund
------------------
<S> <C>
Net Assets of Retail Shares .................................... $6,931,149
Outstanding Retail Shares ...................................... 371,276
Net Asset Value Per Share
($6,931,149 / 371,276) ......................................... $18.67
Sales Charge, 3.75% of
offering price (3.91% of
net asset value per share) ..................................... $0.73
Offering to Public ............................................. $19.40
<CAPTION>
Equity Income Fund
------------------
<S> <C>
Net Assets of Retail Shares ...................................... $409,603
Outstanding Retail Shares ........................................ 27,558
Net Asset Value Per Share
($409,603 / 27,558) ............................................. $14.86
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) ....................................... $0.58
Offering to Public ............................................... $15.44
</TABLE>
-15-
<PAGE> 354
<TABLE>
<CAPTION>
International Equity Fund*
--------------------------
<S> <C>
Net Assets of Retail Shares ................................... $10,000,000
Outstanding Retail Shares ..................................... 1,000,000
Net Asset Value Per Share ..................................... $10.00
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) .................................... $.39
Offering to Public ............................................ $10.39
<CAPTION>
Small Cap Growth Fund*
----------------------
<S> <C> <C>
Net Assets of Retail Shares $10,000,000
Outstanding Retail Shares 1,000,000
Net Asset Value Per Share $10.00
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) $.39
Offering to Public $10.39
<FN>
* Amounts are estimated as the Fund had not commenced operations
as of May 31, 1997.
</TABLE>
-16-
<PAGE> 355
<TABLE>
Core Equity Fund*
-----------------
<S> <C>
Net Assets of Retail Shares ................................... $10,000,000
Outstanding Retail Shares ..................................... 1,000,000
Net Asset Value Per Share ..................................... $10.00
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share) .................................... $.39
Offering to Public ............................................ $10.39
<FN>
* Amounts are estimated as the Fund had not commenced operations
as of May 31, 1997.
</TABLE>
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as
described in the Prospectus. Any rights an Investor may have (or have waived) to
reduce the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
By use of the exchange privilege, the Investor authorizes the
Trust's Transfer Agent or his financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 42 classes
or series of shares. Six of these classes
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<PAGE> 356
or series, which represent interests in the Equity Growth Fund (Class H and
Class H - 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),
International Equity Fund (Class U and Class U - Special Series 1), Core Equity
Fund (Class W and Class W - Special Series 1) and Small Cap Growth Fund (Class X
and Class X - Special Series 1) are described in this Statement of Additional
Information and the related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
class in a particular investment fund have equal voting rights except that only
Retail shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if any) relating to shareholder servicing
fees that are allocable to such shares.
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
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<PAGE> 357
such fund involved to be redeemed at a price which is equal to their net asset
value and which may be paid in cash or by distribution of the securities or
other consideration received from the sale and conveyance; (b) sell and convert
an investment fund's assets into money and, in connection therewith, to cause
all outstanding shares of such fund involved to be redeemed at their net asset
value; or (c) combine the assets belonging to an investment fund with the assets
belonging to another investment fund of the Trust, if the Board of Trustees
reasonably determines that such combination will not have a material adverse
effect on shareholders of any fund participating in such combination, and, in
connection therewith, to cause all outstanding shares of any fund to be redeemed
at their net asset value or converted into shares of another class of the Trust
shares at net asset value. In the event that shares are redeemed in cash at
their net asset value, a shareholder may receive in payment for such shares an
amount that is more or less than his original investment due to changes in the
market prices of the fund's securities. The exercise of such authority by the
Board of Trustees will be subject to the provisions of the 1940 Act, and the
Board of Trustees will not take any action described in this paragraph unless
the proposed action has been disclosed in writing to the fund's shareholders at
least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
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
-19-
<PAGE> 358
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 (the
"short-short test"): (1) stock and securities (as defined in Section 2(a)(36) of
the 1940 Act; (2) options, futures and forward contracts other than those on
foreign currencies; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock and securities (and options and futures
with respect to stocks and securities). Interest (including original issue
discount and, with respect to taxable debt securities and non taxable debt
securities acquired after April 30, 1993, accrued market discount) received by a
Fund upon maturity or disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of this requirement. However, any other
income which is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
Effective for taxable years beginning after August 4, 1997, the recently enacted
Taxpayer Relief Act of 1997 repeals the short-short test.
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
-20-
<PAGE> 359
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.
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."
-21-
<PAGE> 360
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
-22-
<PAGE> 361
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994; Director,
Zurn Industries, Inc.
(building products and
construction services),
since June 1995.
Leigh Carter* Trustee Retired President and
13901 Shaker Blvd., #6B Chief Operating Officer,
Cleveland, OH 44120 B.F. Goodrich Company,
Age 72 August 1986 to September
1990; Director, Adams
Express Company (closed-end
investment company), since
April 1982; Director,
Acromed Corporation;
(producer of spinal
implants), since June 1992;
Director, Petroleum &
Resources Corp., since April
1987; Director, Morrison
Products (manufacturer of
blower fans and air moving
equipment), since April
1983; Director, Kirtland
Capital Corp. (privately
funded investment group),
since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 53 Center, Inc., since
January 1982; partner,
Kittles Bloomington Property
Company, since January 1981;
partner, KK&D (Affiliated
Real Estate Companies of
Kittle's Home Furnishings
Center), since January 1989.
</TABLE>
-23-
<PAGE> 362
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed
Corporation (restaurant
group), since 1990;
Director; Foam Design, Inc.,
(manufacturer of industrial
and commercial foam
products), since 1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health
System (four hospital health
system); Trustee, WVIZ
Educational Television
(public television).
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
Executive Officer, American
Contractors Rentals & Sales
(rental subsidiary of Whayne
Supply Co.), since 1988.
Richard B. Tullis Trustee Chairman Emeritus, Harris
5150 Three Village Drive Corporation (electronic
Lyndhurst, Ohio 44124 communication and
Age 84 information processing
equipment), since October
1985; Director, NACCO
Materials Handling Group,
Inc. (manufacturer of
industrial fork lift
trucks), since 1984;
Director, Hamilton
Beach/Proctor-Silex, Inc.
(manufacturer of household
appliances), since 1990;
Director, Waste-Quip, Inc.
(waste handling equipment),
since 1989.
</TABLE>
-24-
<PAGE> 363
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ----------------------
<S> <C> <C>
Herbert R. Martens, Jr. President Executive Vice President,
c/o NatCity Investments, Inc. National City Corporation
1965 East Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman
Age 45 and Chief Executive
Officer, NatCity
Investments, Inc., since
July 1995 (investment
banking); President and
Chief Executive Officer,
Raffensberger, Hughes & Co.
from 1993 until 1995
(broker-dealer); President,
Reserve Capital Group, from
1990 until 1993.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP, Philadelphia,
1345 Chestnut Street Pennsylvania
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP
- --------------------
<FN>
* Mr. Carter is considered by the Trust to be an "interested person" of
the Trust as defined in the 1940 Act.
</TABLE>
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as Administrator 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, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
-25-
<PAGE> 364
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1997:
<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>
Robert D. Neary, Trustee, $18,750 $0 $0 $18,750
Chairman
Thomas R. Benua, Jr., $17,500 $0 $0 $17,500
Trustee*
Leigh Carter, Trustee $17,500 $0 $0 $17,500
John F. Durkott, Trustee $17,500 $0 $0 $17,500
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
J. William Pullen, Trustee $17,500 $0 $0 $17,500
Richard B. Tullis, Trustee $18,750 $0 $0 $18,750
</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.
- --------
* Mr. Benua resigned as trustee as of July 17,1997.
-26-
<PAGE> 365
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
- -------------------
National City serves as investment adviser to the Mid Cap
Regional, Small Cap Growth and International Equity Funds; National City Bank of
Columbus and National City Bank of Kentucky serve as investment advisers to the
Equity Growth and Equity Income Funds; and NAM serves as investment adviser to
the Core Equity Fund. The advisers are affiliates of National City Corporation,
a bank holding company with $52 billion in assets, and headquarters in
Cleveland, Ohio and nearly 900 branch offices in four states. Through its
subsidiaries, National City Corporation has been managing investments for
individuals, pension and profit-sharing plans and other institutional investors
for over 75 years and currently manages over $41 billion in assets. From time to
time, the advisers may voluntarily waive fees or reimburse the Trust for
expenses.
Pursuant to the Advisory Agreement, the Trust incurred
advisory fees in the following amounts for the fiscal years ended May 31, 1997,
1996 and 1995: (i) $982,053, $571,860 and $183,900 (after waivers of $27,051)
with respect to the Mid Cap Regional Fund; (ii) $1,612,194, $1,114,914 and
$814,885 for the Equity Growth Fund and (iii) $669,107, $370,633 and $131,109
(after waivers of $39,122) with respect to the Equity Income Fund. As of May 31,
1997, the Small Cap Growth, International Equity and Core Equity Funds had not
yet commenced operations.
-27-
<PAGE> 366
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 Agreements relating to the Mid Cap Regional and
Equity Income Funds were approved by their sole shareholder prior to the Funds'
commencement of investment operations. The Advisory Agreement relating to the
Equity Growth Fund was approved by the shareholders of such Fund on September
26, 1990. The Advisory Agreement with NAM relating to the Core Equity Fund was
approved by its sole shareholder prior to the Fund's commencement of operations.
The Advisory Agreement with National City Bank relating to the Small Cap Growth
and International Equity Funds was approved by their sole shareholders prior to
the Funds' commencement of operations. Unless sooner terminated, the Advisory
Agreements will continue in effect with respect to a particular Fund until
September 30, 1997 and from year to year thereafter, subject to annual approval
by the Trust's Board of Trustees, or by a vote of a majority of the outstanding
shares of such Fund (as defined in the Funds' Prospectus) and a majority of the
trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. The Advisory Agreements may be terminated by the Trust or the
advisers on 60 days written notice, and will terminate immediately in the event
of its assignment.
If expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the advisers
will reimburse the Trust for any such excess with respect to the Funds to the
extent described in any written undertaking provided by the advisers to such
state. To the Trust's knowledge, as of the date of this Statement of Additional
Information, the most restrictive expense limitation applicable to the Trust
provides that annual expenses (as defined by statute) may not exceed 2.5% of the
first $30 million, 2% of the next $70 million and 1.5% of the remaining average
net assets of a particular Fund. Such amount, if any, will be estimated,
reconciled and paid on a monthly basis. The fees Banks may charge to Customers
for services provided in connection with their investments in the Trust are not
covered by the state securities expense limitations described above.
-28-
<PAGE> 367
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
the fiscal years ended May 31, 1997, 1996 and 1995: $130,930, $76,026 and
$23,006 (after waivers of $5,121) with respect to the Mid Cap Regional Fund;
$208,810, $148,244 and $108,651 with respect to the Equity Growth Fund and
$89,214, $49,418 and $17,597 (after waivers of $5,100) with respect to the
Equity Income Fund. As of May 31, 1997, the Small Cap Growth, International
Equity and Core Equity Funds had not commenced operations.
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by Rule
12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's Board
of Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement relating to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the Trust
and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in the Plan that would materially increase the
distribution expenses of a Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial interest
in the Plan or related agreement. The Plan and related agreement may be
terminated as to a particular Fund by a vote of the Trust's
-29-
<PAGE> 368
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 compensate 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. The Plan provides that the
Trust will pay the Distributor an annual base fee of $1,250,000 plus incentive
fees based upon asset growth payable monthly and accrued daily by all of the
Trust's investment funds with respect to which the Distributor is distributing
shares.
The Plan has been approved, and will continue in effect for
successive one year periods provided that such continuance is specifically
approved by (1) the vote of a majority of the trustees who are not parties to
the Plan or interested persons of any such party and who have no direct or
indirect financial interest in the Plan and (2) the vote of a majority of the
entire Board of Trustees.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $10,817, $13,891 and $6,746 with respect to the Mid Cap
Regional, Equity Growth and Equity Income Funds. Of the aggregate amounts paid
to the Distributor by the Trust with respect to the Mid Cap Regional Fund,
$3,245 was attributable to distribution services and $7,572 was attributable to
marketing/consultation. Of the aggregate amount paid to the Distributor by the
Trust with respect to the Equity Growth Fund, $4,167 was attributable to
distribution services and $9,723 was attributable to marketing/consultation. Of
the aggregate amounts paid to the Distributor by the Trust with respect to the
Equity Income Fund, $2,024 was attributable to distribution services and $4,722
was attributable to marketing/consultation. Distribution services include
broker/dealer and investor support, voice response development, wholesaling
services, legal review and NASD filings and transfer agency management.
Marketing/Consultation includes planning and development, market and industry
research and analysis and marketing strategy and planning.
For the period from June 1, 1996 to March 7, 1997, the Trust
paid its previous distributor, 440 Financial Distributors, Inc. ("440
Financial") $53,034, $83,467 and $38,334 with respect to the Mid Cap Regional,
Equity Growth and Equity Income Funds.
-30-
<PAGE> 369
As of May 31, 1997, the Small Cap Growth, International
Equity and Core Equity Funds had not commenced operations.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (v) respond to correspondence by security brokers
and others relating to its duties; and (vi) make periodic reports to the Board
of Trustees concerning the Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Funds harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Funds reimburse National City Bank for its
direct and indirect costs and expenses incurred in rendering custodial services,
except that the costs and expenses borne by each Fund in any year may not exceed
$.225 for each $1,000 of average gross assets of such Fund.
State Street Bank and Trust Company (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.
-31-
<PAGE> 370
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented the
Services Plan with respect to Retail shares in each of the Funds. Pursuant to
the Services Plan, the Trust may enter into agreements with financial
institutions pertaining to the provision of administrative services to their
customers who are the beneficial owners of Retail shares in consideration for
the payment of up to .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 Equity Growth and Equity Income Funds. Pursuant
to its Advisory Agreement with the Trust, National City is responsible for
making decisions with respect to and placing orders for all purchases and sales
of portfolio securities for the Mid Cap Regional, Small Cap Growth and
International Equity Funds. Pursuant to the Advisory Agreement with the Trust,
NAM is responsible for making decisions with respect to and placing orders for
all purchases and sales of portfolio securities for the Core Equity Fund. 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, 1997, 1996 and 1995, the
Mid Cap Regional , Equity Growth and Equity Income Funds paid $421,322, $356,904
and $217,900; $803,733, $265,644 and $80,991; $403,726 and $102,100 and $68,108
in brokerage commissions, respectively. As of May 31, 1997, the Small Cap
Growth, International Equity and Core Equity Funds had not yet commenced
operations.
-32-
<PAGE> 371
While the advisers generally seek competitive spreads or
commissions, they may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the advisers in their best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is prompt
execution of orders in an effective manner at the most favorable price. Subject
to this consideration, dealers who provide supplemental investment research to
the advisers may receive orders for transactions by a Fund. Information so
received is in addition to and not in lieu of services required to be performed
by the advisers and does not reduce the fees payable to the advisers by the
Fund. Such information may be useful to the advisers in 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 , National City Kentucky and NAM have agreed to maintain their
policy and practice of conducting their Trust Departments independently of their
Commercial Departments. In making investment recommendations for the Trust,
Trust Department personnel will not inquire or take into consideration whether
the issuer of securities proposed for purchase or sale for the Trust's account
are customers of the Commercial Department. In dealing with commercial
customers, the Commercial Department will not inquire or take into consideration
whether securities of those customers are held by the Trust.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the advisers. Such other Funds, investment companies and
accounts may also invest in the same securities as such Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, the transaction will be averaged
as to price, and available investments allocated as to amount, in a manner which
the advisers believe to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or
-33-
<PAGE> 372
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, 1997, for the Mid Cap Regional, Equity
Growth and Equity Income 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 under "Financial
Statements," 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 LLP (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered
hereby.
YIELD AND PERFORMANCE INFORMATION
---------------------------------
The Equity Income Fund's "yield" described in the Prospectus
is calculated by dividing each Fund's net investment income per share earned
during a 30-day period (or another period permitted by the rules of the SEC) by
the net asset value per share on the last day of the period and annualizing the
result on a semi-annual basis by adding one to the quotient, raising the sum to
the power of six, subtracting one from the result and then doubling the
difference. The Fund's net investment income per share earned during the period
is based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
-34-
<PAGE> 373
a-b
Yield = 2 [(------)6 - 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.
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, 1997, the yields of the
Retail and Institutional shares of the Mid Cap Regional,
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<PAGE> 374
Equity Growth and Equity Income Funds were 0.44% and 0.69%, .04% and .31% and
2.29% and 2.61%, respectively.
Each Fund computes its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
Each Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
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
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<PAGE> 375
charges at the end of the measuring period covered by the computation.
The average annual total returns for the one year period ended
May 31, 1997 were 18.68% (after taking the sales load into account) and 23.26%
(without taking into account any sales load), for the Mid Cap Regional Fund's
Retail shares and 23.61% 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, 1997 were 18.78% (after taking into account the
sales load) and 20.43% (without taking into account any sales load), for its
Retail shares and 21.37% for the Institutional shares.
The average annual total returns for the one year period
ending May 31, 1997 were 24.41% (after taking the sales load into account) and
29.24% (without taking into account any sales load), for the Equity Growth
Fund's Retail Shares and 29.57% for the Equity Growth Fund's Institutional
shares. The average annual total returns since the Equity Growth Fund's
commencement of operations through May 31, 1997 were 13.48% (after taking into
account the sales load) and 14.06% (without taking into account any sales load),
for its Retail shares and 14.31% for the Institutional shares.
The average annual total returns for the one year period ended
May 31, 1997 were 19.69% (after taking the sales load into account) and 24.33%
(without taking into account any sales load), for the Equity Income Fund's
Retail shares and 24.62% 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, 1997 were 17.69% (after taking into account the sales
load) and 19.32% (without taking into account any sales load), for its Retail
shares and 19.62% 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
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<PAGE> 376
value. A Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. A Fund will, however, disclose
the maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sale charges would reduce the
performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, 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> 377
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.
The following shareholders beneficially owned 5% or more
of the outstanding Institutional shares of the Mid Cap Regional
Fund as of August 31, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Mid Cap Regional Fund Shares Shares
- --------------------- ------ ------
<S> <C> <C>
National City Corporation 2,640,172 19.30%
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
To the Trust's knowledge, no shareholder beneficially held 5%
or more of the outstanding Retail shares of the Mid Cap Regional Fund as of
September 25, 1997.
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Equity Income Fund as of September
23, 1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Shares Shares
------------- ------
<S> <C> <C>
National City Bank Cleveland 3,106,654.0600 32.89%
National City Non Contributory
Retirement Trust
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
CIO National City Bank 1,358,760.0210 14.38%
Sheldon & Co. - Pathway 49
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 857,899.4400 9.08%
Daily Valuation Account
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Equity Income Fund as of August 31,
1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Equity Income Fund Shares Shares
------------------ ------ ------
<S> <C> <C>
National City Corp.
1900 East Ninth Street 3,090,730 33.85%
Cleveland, Ohio 44114
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail Shares of the Equity Income Fund as of September 23,
1997:
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
------------- ------
<S> <C> <C>
Wheat First FBO A/C 4232-2916 5,119.4930 17.64%
Carroll C. Hornans TTFE
Alan & Carroll C. Hornans
Declaration of TR U/A 5/19/92
1190 Sugar Sands Blvd. Apt. 517
Rivera Beach, FL 33404-3141
James R. Kirk 2,328.0650 8.02%
29752 Devonshire Oval
Westlake, OH 44145-3896
Wheat First FBO A/C 3935-1781 2,114.9300 7.29%
Lawanah Harris IRA
WFS AS Custodian
U/A DTI 9/09/96
244 Natale Dr.
Cortland, OH 44410-1519
Wheat First FBO A/C 2607-8161 1,840.9430 6.34%
David A. Daberko TTFE
Rosi J. Daberko Trust
U/A DTD 12/18/95
33851 Old Kinsman Rd.
Chagrin Falls, OH 44022-6624
Wheat First FBO A/C 7970-4910 1,629.4730 5.62%
Nelvad Upshaw IRA
WPS as Custodian
U/A DTD 9/9/96
15100 Minerva Ave.
Dolton, IL 60419-2873
</TABLE>
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<PAGE> 378
The following shareholders beneficially owned 5% or more
of the outstanding Institutional shares of the Equity Growth Fund
as of August 31, 1997:
<TABLE>
<CAPTION>
Number of Percentage of
Institutional Institutional Outstanding
Equity Growth Fund Shares Shares
- ------------------ ------ ------
<S> <C> <C>
National City Corporation 3,093,964 22.23%
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
The following shareholders beneficially owned 5% or more
of the outstanding Institutional shares of the International Equity
Fund as of August 31, 1997.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
International Equity Fund Shares Shares
- ------------------------- ------ ------
<S> <C> <C>
National City Corporation 6,233,347 73.48%
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the International Equity Fund as of
September 23, 1997.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Shares Shares
------ ------
<S> <C> <C>
National City Bank 6,233,346.6340 71.88%
Non-Contributory RET Trust
Trust Mutual FDS/01-616199402
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 1,050,651.2990 12.11%
C/O National City 844,018.6620 9.73%
Trust Mutual FDS/01-999999782
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding retail shares of the International Equity Fund as of
September 23, 1997.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Number of Institutional
Retail Shares Shares
------ ------
<S> <C> <C>
Mary Jane Matts 102.0410 47.08%
425 W. Lakeside Ave. Apt 508
Cleveland, OH 44113-1027
SEI Investments Co. 100.0000 46.18%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Small Cap Growth Fund as of August
31, 1997.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Small Cap Growth Fund Shares Shares
- --------------------- ------ ------
<S> <C> <C>
National City Corporation 1,893,587 88.00%
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Core Equity fund as of August 31,
1997.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Institutional Institutional
Core Equity Fund Shares Shares
- ---------------- ------ ------
<S> <C> <C>
National City Corporation 10,451,067 99.94%
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
The following shareholders beneficially owned 5% or more of
the outstanding Retail Shares of the Small Cap Growth Fund as of September 23,
1997.
<TABLE>
<CAPTION>
Percentage of
Number of Outstanding
Retail Retail
Shares Shares
------ ------
<S> <C> <C>
Lyn A. Hayes 278-8100 56.51%
P. Hayes JT Ten
Sandalwood LN.
Strongesville, OH 44136-5717
Mary Jane Matts 100.1000 20.29%
W. Lakeside Ave. Apt. 508
Cleveland, OH 44113-1027
SEI Investments Co. 100.1000 20.27%
Attn: Rob Silvestri
Freedom Valley Drive
, PA 19456
</TABLE>
To the Trust's knowledge, no shareholder beneficially held 5%
or more of the outstanding Retail classes of the Equity Growth Fund as of August
31, 1997.
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<PAGE> 379
The following Shareholders beneficially owned 5% or more of
the outstanding Institutional shares of the Core Equity Fund as of September 23,
1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Percentage of
Number of Outstanding
Institutional Institutional
Shares Shares
-------------- -------------
National City
Non-Contributory RET Trust 10,451,067.0380 99.86%
Trust Mutual FDS
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
The following Shareholders beneficially owned 5% or more of
the outstanding Retail Shares of the Core Equity Fund as of September 23, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Percentage of
Number of Outstanding
Retail Shares Retail Shares
-------------- -------------
Wheat First Securities, Inc.
Don S. Wood & 250.5010 48.36%
Janice W. Wood
8703 Hickory Ct.
Louisville, KY 40242-3478
SEI Investments Co. 100.0000 19.31%
Attn: Rob Silvestri
One Freedon Valley Drive
Oaks, PA 19456
Wheat First Securities, Inc. 81.4800 15.73%
Bradford Thomas Divine
111 Fairway Dr.
Central City, KY 42330-2036
Wheat First Securities, Inc. 71.5200 13.81%
Stephen W. Divine
P.O. Box 1275
Owensboro, KY 42302-1275
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1997 are hereby incorporated herein by
reference. Copies of the Funds' annual report may be obtained by calling the
Trust at 1-800-622-FUND (3863) or by writing to the Trust , Oaks, Pennsylvania
19456.
-41-
<PAGE> 380
APPENDIX A
----------
DESCRIPTION OF RATINGS
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt
A-1
<PAGE> 381
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating and is
currently highly vulnerable to nonpayment.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
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<PAGE> 382
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the
bonds. The rating may be revised prior to delivery if changes
occur in the legal documents or the underlying credit quality of
the bonds.
A-3
<PAGE> 383
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA"
A-4
<PAGE> 384
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" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over
time by adverse economic changes. However, business and financial
alternatives can be identified, which could assist the obligor in
satisfying its debt service requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the instrument.
"CCC" - Bonds have certain identifiable characteristics
that, if not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
"CC" - Bonds are minimally protected. Default in
payments of interest seems probable over time.
"C" - Bonds are in imminent default in payment of
interest or principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified
A-5
<PAGE> 385
by the addition of a plus (+) or minus (-) sign to show relative standing within
these major rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the
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rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
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COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions
have a strong ability for repayment of senior short-term
promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings
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trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions 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" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure against
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disruption in debt service. Operating factors and market access may be subject
to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"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.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
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"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory
capacity for timely repayment.
"A3" - Obligations are supported by an adequate
capacity for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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APPENDIX B
As stated in the Prospectus, the Mid Cap Regional , Equity
Growth, Equity Income, Small Cap Growth and International Equity Funds (the
"Funds") 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.
A 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. A Fund may do so either to hedge the value of the 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 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, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its Fund holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the Fund will decline prior to the time of sale.
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II. Margin Payments
---------------
Unlike purchases or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with the Custodian an amount of cash or cash equivalents, known as
initial margin, based on the value of the contract. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the advisers may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures
by the Funds 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, a 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.
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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, a 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, a 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 a 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 a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between
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the movements in the cash market and movements in the price of futures, a
correct forecast of general market trends or interest rate movements by the
adviser may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
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 will continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the
advisers ability to predict correctly movements in the direction of the market.
For example, if a 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 a 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. A Fund may
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have to sell securities at a time when it may be disadvantageous to do so.
IV. Options on Futures Contracts
----------------------------
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Funds 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 Funds because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
V. Other Matters
-------------
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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FORM N-1A
Part C - Other Information
Item 24. Financial Statements and Exhibits
(A) Financial Statements
(1) Included in Parts A of the Registration Statement are
the following audited financial statements:
(a) Financial Highlights for the Money Market Fund
for the fiscal years ended May 31, 1988, 1989, 1990, 1991,
1992, 1993, 1994, 1995, 1996 and 1997;
(b) Financial Highlights for the Government Fund
for the fiscal years ended May 31, 1988, 1989, 1990, 1991,
1992, 1993, 1994, 1995, 1996 and 1997;
(c) Financial Highlights for the Treasury Fund for
the period from June 16, 1994 (commencement of operations)
to May 31, 1995, and the fiscal years ended May 31, 1996 and
1997;
(d) Financial Highlights for the Tax Exempt Fund
for the period from July 20, 1988 (commencement of
operations) to May 31, 1989, and the fiscal years ended May
31, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997;
(e) Financial Highlights for the Pennsylvania Tax
Exempt Fund for the period from August 8, 1994 (commencement
of operations) to April 30, 1995, the fiscal year ended
April 30, 1996, the period from May 1, 1996 to May 31, 1996
and the fiscal year ended May 31, 1997;
(f) Financial Highlights for the Total Return
Advantage Fund for the period July 7, 1994 (commencement of
operations) to May 31, 1995, and the fiscal years ended May
31, 1996 and 1997;
(g) Financial Highlights for the Fixed Income Fund
for the period from December 20, 1989 (commencement of
operations) to May 31, 1990, and the fiscal years ended May
31, 1991, 1992, 1993, 1994, 1995, 1996 and 1997;
(h) Financial Highlights for the Enhanced Income
Fund for the period July 7, 1994 (commencement of
operations) to November 30, 1994, and the fiscal years ended
May 31, 1995, 1996 and 1997;
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(i) Financial Highlights for the GNMA Fund for the
period from August 10, 1994 (commencement of operations) to
April 30, 1995, the fiscal year ended April 30, 1996, the
period from May 1, 1996 to May 31, 1996 and the fiscal year
ended May 31, 1997;
(j) Financial Highlights for the Intermediate
Government Fund for the period from August 10, 1994
(commencement of operations) to April 30, 1995, the year
ended April 30, 1996, the period from May 1, 1996 to May 31,
1996 and the fiscal year ended May 31, 1997;
(k) Financial Highlights for the Mid Cap Regional
Fund for the period from July 26, 1994 (commencement of
operations) to May 31, 1995, and the fiscal years ended May
31, 1996 and 1997;
(l) Financial Highlights for the Equity Growth
Fund for the period from December 20, 1989 (commencement of
operations) to May 31, 1990, and the fiscal years ended May
31, 1991, 1992, 1993, 1994, 1995, 1996 and 1997;
(m) Financial Highlights for the Equity Income
Fund for the period from July 1, 1994 (commencement of
operations) to May 31, 1995, and the fiscal years ended May
31, 1996 and 1997;
(n) Financial Highlights for the Ohio Tax Exempt
Fund for the period from January 5, 1990 (commencement of
operations) to May 31, 1990, and the fiscal years ended May
31, 1991, 1992, 1993, 1994, 1995, 1996 and 1997; and
(o) Financial Highlights for the Pennsylvania
Municipal Fund for the period from August 10, 1994
(commencement of operations) to April 30, 1995, the fiscal
year ended April 30, 1996, the period from May 1, 1996 to
May 31, 1996 and the fiscal year ended May 31, 1997.
(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, 1997:
(a) For the Money Market Fund, Government Fund,
Treasury Fund, Tax Exempt Fund and Pennsylvania Tax
Exempt Fund:
Portfolio of Investments - May 31, 1997.
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Statement of Assets and Liabilities - May 31,
1997.
Statement of Operations - for the year ended
May 31, 1997.
Statements of Changes in Net Assets - for the year
ended May 31, 1997.
Notes to Financial Statements.
(b) For the Mid Cap Regional, Equity Growth and
Equity Income Funds:
Portfolio of Investments - May 31, 1997. Statement of
Assets and Liabilities - May 31, 1997. Statement of
Operations - for the year ended May 31, 1997.
Statements of Changes in Net Assets - for the year
ended May 31, 1997. Notes to Financial Statements.
(c) For the Total Return Advantage, Fixed Income,
Enhanced Income, GNMA and Intermediate Government Funds:
Portfolio of Investments - May 31, 1997. Statement of
Assets and Liabilities - May 31, 1997. Statement of
Operations - for the year ended May 31, 1997.
Statements of Changes in Net Assets - for the year
ended May 31, 1997. Notes to Financial Statements.
(d) For the Ohio Tax Exempt and Pennsylvania
Municipal Funds:
Portfolio of Investments - May 31, 1997. Statement of
Assets and Liabilities - May 31, 1997. Statement of
Operations - for the year ended May 31, 1997.
Statements of Changes in Net Assets - for the year
ended May 31, 1997. Notes to Financial Statements.
(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 ("PEA No. 1").
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(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 ("PEA No. 6").
(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 ("PEA No. 23").
(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
("PEA No. 26").
(d) Certificate of Classification of Shares
reflecting the creation of Special Series 1 in the Money
Market, Government, Treasury, Tax Exempt, Equity, Bond and
Ohio Tax Exempt Portfolios as filed with the Office of
Secretary of State of Massachusetts on December 11, 1989 is
incorporated herein by reference to Exhibit 1(d) to PEA No.
26.
(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 PEA No.
26.
(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 PEA No. 26.
(g) 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,
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Class S and Class S-Special Series 1 shares, and Class T and
Class T-Special Series 1 shares representing interests in
the Pennsylvania Tax Exempt, Intermediate Government, GNMA
and Pennsylvania Municipal Funds, respectively, as filed
with the Office of the Secretary of State of Massachusetts
on September 10, 1996 is incorporated herein by reference to
Exhibit 1(g) to Post-Effective Amendment No. 33 to
Registrant's Registration Statement filed on April 11, 1997
("PEA No. 33").
(h) Certificate of Classification of Shares
reflecting the creation of Class U and Class U-Special
Series 1 shares, Class V and Class V-Special Series 1 shares
and Class W and Class W-Special Series 1 shares representing
interests in the International Equity, Equity Index and Core
Equity Funds, respectively, as filed with the Office of the
Secretary of State of Massachusetts on June 27, 1997 is
incorporated herein by reference to Exhibit 1(h) to
Post-Effective Amendment No. 35 to Registrant's Registration
Statement filed on July 22, 1997 ("PEA No. 35").
(i) Certificate of Classification of Shares
reflecting the creation of Class X and Class X-Special
Series 1 shares and Class Y and Class Y-Special Series 1
shares representing interests in the Small Cap Growth Fund
and Real Return Advantage Funds, respectively, as filed with
the Office of the Secretary of State of Massachusetts on
June 27, 1997 is incorporated herein by reference to Exhibit
1(i) to PEA No. 35.
(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 ("Pre-Effective
Amendment No. 2").
(a) Amendment No. 1 to Code of Regulations is
incorporated herein by reference to Exhibit 2(a) to PEA No.
6.
(b) Amendment No. 2 to Code of Regulations as
approved and adopted by Registrant's Board of Trustees on
July 17, 1997 is incorporated herein by reference to
Exhibit 2(b) to PEA No. 35.
(3) None.
(4) (a) Specimen copy of share certificate for Class A units
of beneficial interest is incorporated herein
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<PAGE> 401
by reference to Exhibit 4(a) to Pre-Effective Amendment No.
2.
(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 ("PEA No.
13").
(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.
(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 PEA No.
13.
(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.
(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 PEA No.
13.
(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.
(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 PEA No.
13.
(i) 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 ("PEA No. 10").
(j) 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 PEA No.
10.
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<PAGE> 402
(k) Specimen copy of share certificate for Class I
units of beneficial interest is incorporated herein by
reference to Exhibit 4(k) to PEA No. 10.
(l) 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 PEA No.
10.
(m) Specimen copy of share certificate for Class K
units of beneficial interest is incorporated herein by
reference to Exhibit 4(m) to PEA No. 10.
(n) 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 PEA No.
10.
(5) (a) 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 ("PEA No. 14").
(b) Investment Advisory Agreement for the Money
Market Portfolio (Trust), Government Portfolio (Trust),
Treasury Portfolio (Trust) and Tax Exempt Portfolio (Trust)
among Registrant, National City Bank, BancOhio National Bank
and First National Bank of Louisville dated September 26,
1990 is incorporated herein by reference to Exhibit 5(g) to
PEA No. 14.
(c) 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 ("PEA No.
21").
(d) 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 PEA No. 21.
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<PAGE> 403
(e) 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 PEA No. 21.
(f) 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 ("PEA No. 20").
(g) Investment Advisory Agreement for the
Pennsylvania Tax Exempt, Intermediate Government, GNMA and
Pennsylvania Municipal Funds between Registrant and National
City Bank dated September 9, 1996, is incorporated herein by
reference to Exhibit 5(g) to PEA No. 33.
(h) Sub-Advisory Agreement for the Pennsylvania
Tax Exempt and Pennsylvania Municipal Funds between
National City Bank and Weiss, Peck & Greer L.L.C. dated
September 9, 1996, is incorporated herein by reference
to Exhibit 5(h) to PEA No. 33.
(i) Investment Advisory Agreement for the Core Equity
Fund between Registrant and National Asset Management
Corporation dated July 31, 1997.
(j) Investment Advisory Agreement for the Small Cap
Growth, Equity Index, Real Return Advantage and International
Equity Funds between Registrant and National City Bank dated
July 31, 1997.
(k) Sub-Advisory Agreement between National City Bank
and Wellington Management Company, LLP with respect to the
Small Cap Growth Fund dated July 31, 1997.
(6) Distribution Agreement between Registrant and SEI
Financial Services Company dated March 8, 1997, is
incorporated herein by reference to Exhibit 6 to PEA No. 33.
(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
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<PAGE> 404
Registration Statement filed on December 30, 1994 ("PEA
No. 22").
(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 PEA No. 22.
(c) Exhibit A to the Custodian Services Agreement
between Registrant and National City Bank dated July 31,
1997.
(9) (a) Administration and Accounting Services Agreement
between Registrant and PFPC Inc., dated March 1, 1993 is
incorporated by reference to Exhibit 9(l) to Post-Effective
Amendment No. 16 to Registrant's Registration Statement filed
on March 1, 1993 ("PEA No. 16").
(b) Exhibit A to the Administration and Accounting
Services Agreement dated March 1, 1993 between Registrant and
PFPC Inc., dated July 31, 1997.
(c) Transfer Agency and Service Agreement (the
"Transfer Agency Agreement") between Registrant and State
Street Bank and Trust Company dated March 1, 1997, is
incorporated herein by reference to Exhibit 9(d) to PEA No.
33.
(d) Revised Shareholder Services Plan and Servicing
Agreement adopted by the Board of Trustees February 15, 1997,
is incorporated herein by reference to Exhibit 9(e) to PEA No.
33.
(e) Blue Sky Services Agreement between the
Registrant and SEI Fund Resources dated December 2, 1996, is
incorporated herein by reference to Exhibit 9(f) to PEA No.
33.
1(10) Opinion and consent of counsel.
(11) (a) Consent of Drinker Biddle & Reath LLP.
(b) Consent of Ernst & Young LLP.
(c) Consent of Coopers & Lybrand L.L.P.
- --------
1 To be filed under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
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<PAGE> 405
(d) Opinion and Consent of Squires, Sanders &
Dempsey.
(12) Inapplicable.
(13) Purchase Agreements between Registrant and
McDonald & Company Securities, Inc. are incorporated
herein by reference to Exhibit 13 to PEA No. 1.
(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 ("PEA No. 5").
(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
PEA No. 13.
(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 PEA No. 13.
(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
PEA No. 13.
(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
PEA No. 21.
(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 PEA No. 21.
(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
PEA No. 21.
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<PAGE> 406
(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 PEA No. 21.
(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 PEA No. 20.
(j) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the Pennsylvania
Tax Exempt Fund dated September 6, 1996, is incorporated
herein by reference to Exhibit 13(j) to PEA No. 33.
(k) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the Intermediate
Government Fund dated September 6, 1996, is incorporated
herein by reference to Exhibit 13(k) to PEA No. 33.
(l) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the GNMA Fund
dated September 6, 1996, is incorporated herein by reference
to Exhibit 13(l) to PEA No. 33.
(m) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the Pennsylvania
Municipal Fund dated September 6, 1996, is incorporated herein
by reference to Exhibit 13(m) to PEA No. 33.
(n) Purchase Agreement between Registrant and SEI
Investments Distribution Co., ("SIDC") with respect to the
Core Equity Fund dated ____________, 1997.
(o) Purchase Agreement between Registrant and SIDC
with respect to the International Equity Fund dated
___________, 1997.
(p) Form of Purchase Agreement between Registrant and
SEI with respect to the Equity Index Fund is incorporated
herein by reference to Exhibit 13(p) to PEA No. 33.
(q) Form of Purchase Agreement between Registrant and
SEI with respect to the Real Return Advantage Fund is
incorporated herein by reference to Exhibit 13(q) to PEA No.
33.
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<PAGE> 407
(r) Purchase Agreement between Registrant and SEI
with respect to the Small Cap Growth Fund dated _________,
1997.
(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
("Pre-Effective Amendment No.1").
(b) Registrant's Revised Service and Distribution
Plan, is incorporated herein by reference to Exhibit 15(b) to
PEA No. 33.
(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 ("PEA No. 15").
(b) Schedules for Computation of Performance
Quotations for the Treasury, Mid Cap Regional, Equity Growth
and Equity Income Portfolios and the Enhanced Income and Total
Return Advantage Funds and the Pennsylvania Tax Exempt, the
Pennsylvania Municipal, the Intermediate Government and the
GNMA Funds are incorporated herein by reference to Exhibit 16
to PEA No. 22.
(17) (a) Financial Data Schedule as of May 31, 1997 for
the Money Market Fund (Institutional Class).
(b) Financial Data Schedule as of May 31, 1997 for the
Money Market Fund (Retail Class).
(c) Financial Data Schedule as of May 31, 1997 for the
Government Fund (Institutional Class).
(d) Financial Data Schedule as of May 31, 1997 for the
Government Fund (Retail Class).
(e) Financial Data Schedule as of May 31, 1997 for the
Treasury Fund (Institutional Class).
(f) Financial Data Schedule as of May 31, 1997 for the
Treasury Fund (Retail Class).
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<PAGE> 408
(g) Financial Data Schedule as of May 31, 1997 for the
Tax Exempt Fund (Institutional Class).
(h) Financial Data Schedule as of May 31, 1997 for the
Tax Exempt Fund (Retail Class).
(i) Financial Data Schedule as of May 31, 1997 for the
Equity Growth Fund (Institutional Class).
(j) Financial Data Schedule as of May 31, 1997 for the
Equity Growth Fund (Retail Class).
(k) Financial Data Schedule as of May 31, 1997 for the
Fixed Income Fund (Institutional Class).
(l) Financial Data Schedule as of May 31, 1997 for the
Fixed Income Fund (Retail Class).
(m) Financial Data Schedule as of May 31, 1997 for the
Equity Income Fund (Institutional Class).
(n) Financial Data Schedule as of May 31, 1997 for the
Equity Income Fund (Retail Class).
(o) Financial Data Schedule as of May 31, 1997 for the
Mid Cap Regional Fund (Institutional Class).
(p) Financial Data Schedule as of May 31, 1997 for the
Mid Cap Regional Fund (Retail Class).
(q) Financial Data Schedule as of May 31, 1997 for the
Enhanced Income Fund (Institutional Class).
(r) Financial Data Schedule as of May 31, 1997 for the
Enhanced Income Fund (Retail Class).
(s) Financial Data Schedule as of May 31, 1997 for the
Total Return Advantage Fund (Institutional Class).
(t) Financial Data Schedule as of May 31, 1997 for the
Total Return Advantage Fund (Retail Class).
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<PAGE> 409
(u) Financial Data Schedule as of May 31, 1997 for the
Ohio Tax Exempt Fund (Institutional Class).
(v) Financial Data Schedule as of May 31, 1997 for the
Ohio Tax Exempt Fund (Retail Class).
(w) Financial Data Schedule as of May 31, 1997, for
the GNMA Fund (Institutional Class).
(x) Financial Data Schedule as of May 31, 1997, for
the GNMA Fund (Retail Class).
(y) Financial Data Schedules as of May 31, 1997, for
the Intermediate Government Fund (Institutional
Class).
(z) Financial Data Schedules as of May 31, 1997, for
the Intermediate Government Fund (Retail Class).
(aa) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Tax Exempt Fund (Institutional
Class).
(bb) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Tax Exempt Fund (Retail Class).
(cc) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Municipal Fund (Institutional Class).
(dd) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Municipal Fund (Retail Class).
(18) Revised Plan Pursuant to Rule 18f-3 for Operation
of a Dual-Class System, is incorporated herein by
reference to Exhibit 18 to PEA No. 33.
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.
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<PAGE> 410
Item 26. NUMBER OF HOLDERS OF SECURITIES. The following information is as
of August 31, 1997:
<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) 45,307 23,696 21,611
Class B units of
beneficial interest
(Government Fund) 4,669 2,753 1,916
Class C units of
beneficial interest
(Treasury Fund) 2,653 2,414 239
Class D units of
beneficial interest
(Tax Exempt Fund) 2,946 2,104 842
Class H units of
beneficial interest
(Equity Growth Fund) 6,159 5,648 511
Class I units of
beneficial interest
(Fixed Income
Fund) 2,591 2,442 149
Class K units of
beneficial interest
(Ohio Tax Exempt
Fund) 937 836 101
Class M units of
beneficial interest
(Equity Income
Fund) 3,703 3,642 61
Class N units of
beneficial interest
(Mid Cap Regional
Fund) 4,804 4,208 596
Class O units of
beneficial interest
(Enhanced Income
Fund) 302 277 25
Class P units of
beneficial interest
(Total Return
Advantage Fund) 1,072 1,057 15
--
</TABLE>
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<PAGE> 411
<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders Institutional Retail
-------------- ----------------- ------------- ------
<S> <C> <C> <C>
Class Q units of
beneficial interest
(Pennsylvania Fund) 1,373 1,264 109
Class R units of
beneficial interest
(Intermediate
Government Fund) 2,863 2,856 7
Class S units of
beneficial interest
(GNMA Fund) 2,954 2,936 18
Class T units of
beneficial interest
(Pennsylvania
Municipal Fund) 398 389 9
Class U units of
beneficial interest
(International Equity
Fund) 88 83 5
-- -- -
Class V units of
beneficial interest
(Equity Index Fund) 0 0 0
Class W units of
beneficial interest
(Core Equity Fund) 21 13 8
-- -- -
Class X units of
beneficial interest
(Small Cap Growth
Fund) 47 42 5
Class Y units of
beneficial interest
(Real Return Advantage
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 Article 6 of the Distribution Agreement, incorporated by
reference as Exhibit (6) hereto, and Sections 12 and 6, respectively, of the
Custodian Services and Transfer Agency Agreements, incorporated by reference as
Exhibits (8)(a) and (9)(h) hereto. In Article 6 of the Distribution Agreement,
the Trust agrees to indemnify and hold harmless the Distributor and each of its
directors and officers and each person, if any, who controls the Distributor
within the meaning of Section 15 of the 1933 Act against any loss, liability,
claim, damages or
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<PAGE> 412
\
expense (including the reasonable cost of investigating or defending any alleged
loss, liability, claim, damages or expense and reasonable counsel fees and
disbursements incurred in connection therewith), arising by reason of any person
acquiring any Shares, based upon the ground that the registration statement,
prospectus, Shareholder reports or other information filed or made public by the
Trust (as from time to time amended) included an untrue statement of a material
fact or omitted to state a material fact required to be stated or necessary in
order to make the statements made not misleading. However, the Trust does not
agree to indemnify the Distributor or hold it harmless to the extent that the
statements or omission was made in reliance upon, and in conformity with,
information furnished to the Trust by or on behalf of the Distributor.
In addition, Section 9.3 of Registrant's Declaration of Trust
dated January 28, 1986, incorporated by reference as Exhibit (1) hereto,
provides as follows:
9.3 INDEMNIFICATION OF TRUSTEES, REPRESENTATIVES AND
EMPLOYEES. The Trust shall indemnify each of its Trustees
against all liabilities and expenses (including amounts paid
in satisfaction of judgments, in compromise, as fines and
penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit
or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a
Trustee or thereafter, by reason of his being or having been
such a Trustee EXCEPT with respect to any matter as to which
he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of
his duties, provided that as to any matter disposed of by a
compromise payment by such person, pursuant to a consent
decree or otherwise, no indemnification either for said
payment or for any other expenses shall be PROVIDED unless the
Trust shall have received a written opinion from independent
legal counsel approved by the Trustees to the effect that if
either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of bad faith had
been adjudicated, it would in the opinion of such counsel have
been adjudicated in favor of such person. The rights accruing
to any person under these provisions shall not exclude any
other right to which he may be lawfully entitled, PROVIDED
that no person may satisfy any right of indemnity or
reimbursement hereunder except out of the property of the
Trust. The Trustees may make advance payments in connection
with the indemnification under this Section 9.3, PROVIDED that
the indemnified person shall have provided a secured
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<PAGE> 413
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
misconduct, any Property at any time held for the account of
the relevant Fund or the Trust shall be security therefor.
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<PAGE> 414
Section 6 of Registrant's Transfer Agency Agreement provides
as follows:
6 Indemnification
---------------
6.1 The Bank shall not be responsible for, and the Fund
shall on behalf of the applicable Portfolio indemnify
and hold the Bank harmless from and against, any and
all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or
attributable to:
(a) All actions of the Bank or its agents or
subcontractors required to be taken pursuant
to this Agreement, provided that such
actions are taken in good faith and without
negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or
willful misconduct which arise out of the
breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its
agents or subcontractors of information,
records, documents or services which (i) are
received by the Bank or its agents or
subcontractors, and (ii) have been prepared,
maintained or performed by the Fund or any
other person or firm on behalf of the Fund
including but not limited to any previous
transfer agent or registrar.
(d) The reliance on, or the carrying out by the
Bank or its agents or subcontractors of any
instructions or requests of the Fund on
behalf of the applicable Portfolio.
(e) The offer or sale of Shares in violation of
any requirement under the federal securities
laws or regulations or the securities laws or
regulations of any state that such Shares be
registered in such state or in violation of
any stop order or other determination or
ruling by any federal agency or any state
with respect to the offer or sale of such
Shares in such state.
(f) The negotiations and processing of checks
made payable to prospective or existing
Shareholders tendered to the Bank for the
C-19
<PAGE> 415
purchase of Shares, such checks are commonly
known as "third party checks."
6.2 At any time the Bank may apply to any officer of the
Fund for instructions, and may consult with legal
counsel with respect to any matter arising in
connection with the services to be performed by the
Bank tinder this Agreement, and the Bank and its
agents or subcontractors shall not be liable and
shall be indemnified by the Fund oil behalf of the
applicable Portfolio for any action taken or omitted
by it in reliance upon such instructions or upon the
opinion of such counsel (provided such counsel is
reasonably satisfactory to the Fund). The Bank, its
agents and subcontractors shall be protected and
indemnified in acting upon any paper or document,
reasonably believed to be genuine and to have been
signed by the proper person or persons, or upon any
instruction, information, data, records or documents
provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall
not be held to have notice of any change of authority
of any person, until receipt of written notice
thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and
indemnified in recognizing stock certificates which
are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and
the proper countersignature of any former transfer
agent or former registrar, or of a co-transfer agent
or co-registrar.
6.3 In the event either party is unable to perform its
obligations under the terms of this Agreement because
of acts of God, strikes, equipment or transmission
failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such
party shall not be liable for damages to the other
for any damages resulting from such failure to
perform or otherwise from such causes.
6.4 In order that the indemnification provisions
contained in this Section 6 shall apply, upon the
assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall
promptly notify the Fund of such assertion, and shall
keep the Fund advised with respect to all
developments concerning such claim. The Fund shall
have the option to participate with the Bank in
C-20
<PAGE> 416
the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The
Bank shall in no case confess any claim or make any
compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's
prior written consent.
Registrant has obtained from a major insurance carrier a
directors' and officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its trustees, officers,
employees or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith or gross negligence
in the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office or under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release No. 11330 under the Investment Company Act of 1940 in
connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of Registrant in
the successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections
of Investment Advisers
-------------------------------
(a) Investment Adviser: National City Bank
National City Bank performs investment advisory services for
Registrant and certain other investment advisory customers. National City Bank
has been in the business of managing the investments of fiduciary and other
accounts throughout Ohio since October 1919. In addition to its trust business,
National City Bank provides commercial banking services.
C-21
<PAGE> 417
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.
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
Duane E. Collins Director President and Manufacturer
Chief Executive of hydraulic and
Officer, Parker and automotive
Hannifin Corp. equipment
</TABLE>
C-22
<PAGE> 418
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ---- ------------- -------------- ---------------
<S> <C> <C> <C>
David A. Daberko Director Chairman and Bank holding
Chief Executive company
Officer, National
City Corporation
Director, Bank
National City
Bank of Columbus
Director, Bank
National City
Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director,
National City Bank
Bank of Indiana
Director, Bank
National City
Bank of Kentucky
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
Director,
Student Loan
Marketing
Association
Robert J. Farling Director Chairman, President Electric utility
and Chief Executive
Officer, Centerior
Energy Corporation
Russell R. Gifford Director Retired President, Natural gas
CNG Energy Services
Corporation
Henry J. Goodman Director Chairman and Furniture company
Chief Executive
Officer,
H. Goodman, Inc.
Gordon D. Harnett Director President, Manufacturer of
Chairman and engineered
Chief Executive material
Officer, Brush
Wellman, Inc.
</TABLE>
C-23
<PAGE> 419
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ----- ------------- ----------- ----------
<S> <C> <C> <C>
Leon J. Hendrix, Director Partner, Private
Jr. Clayton, Dubilier investment
& Rice, Inc. firm
J. Peter Kelly Director President and Manufacturer
Chief Operating of steel
Officer, LTV 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 Vice Chairman and Manufacturer
Chief Executive of machinery
Officer, Nordson
Corporation
H. Gene Nau Director President and Chief Travel agency
Executive Officer,
Travel One Midwest
William F. Patient Director Chairman, PVC manufacturer
President and Chief
Executive Officer,
The Geon Company
William R. Robertson Director
Shelley B. Roth Director President, Ice cream
Pierre's French
Ice Cream Company
Thomas C. Sullivan Director Chairman of the Manufacturer
Board and Chief of protective
Executive Officer, coatings, roofing
RPM, Inc. material and paint
Dr. Jerry S. Director President, Education
Thornton Cuyahoga
Community
College
Morry Weiss Director Chairman and Greeting cards
Chief Executive
Officer, American
Greetings
Corporation
</TABLE>
C-24
<PAGE> 420
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Bank Connections Business
- ----- ------------- ----------- ----------
<S> <C> <C> <C>
Theodore K. Zampetis Director President and Manufacturer of
Chief Operating rubber and plastic
Officer, The parts for automotive
Standard Products original equipment
Co. industry
W. Douglas Bannerman Executive Vice Senior Vice Bank holding
President, Cor- President, company
porate Banking National City
Corporation
Jeffrey M. Biggar Executive Vice Senior Vice Bank holding
President, President, company
Private Client National City
Group Corporation
Jane Grebenc Executive Vice None
President, Retail
Banking
Jeffrey D. Kelly Executive Vice Executive Vice Bank holding
President, President, company
Investments National City
Corporation
Bruce T. Muddell Executive Vice None
President, Credit
Administration
Harold B. Todd, Jr. Executive Vice Executive Vice Bank holding
President, President, company
Institutional National City
Trust and Asset Corporation
Management
</TABLE>
(b) Investment Adviser: National City Bank of Columbus
("National City") performs investment advisory services for Registrant and
certain other investment advisory customers. National City Bank of Columbus has
been in the business of managing the investments of fiduciary and other accounts
throughout Ohio since 1915. In addition to its trust business, National City
provides commercial banking services.
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
C-25
<PAGE> 421
officers of National City who are engaged in any other business, profession,
vocation or employment of a substantial nature.
<TABLE>
<CAPTION>
NATIONAL CITY BANK OF COLUMBUS
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Eric D. Chapman, III Director President and Health care
Chief Executive industry consulting
Officer, Chapman
Health International,
Inc.
David A. Daberko Director Chairman and Bank holding
Chief Executive company
Officer, National
City Corporation
Director, National Bank
City Bank, Northeast
Director, Bank
National City
Bank of Dayton
Director, Bank
National City
Bank, Northwest
Director, National Bank
City Bank of
Indiana
Director, National Bank
City Bank
Director, National Bank
City Bank of
Kentucky
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
Director, Student Loan
Marketing Association
Vincent A. DiGirolamo Director Vice Chairman, Bank holding
National City company
Corporation
Daniel E. Evans Director Chairman, Food proc-
Bob Evans Farms, essing
Inc. wholesale &
retail
</TABLE>
C-26
<PAGE> 422
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Director, National Bank
City Corporation holding company
Thomas J. Fitzpatrick Director Chairman and General
Chief Executive contractor
Officer, Elford,
Inc.
Gary A. Glaser Director, Executive Vice Bank holding
President President, company
and Chief National City
Executive Officer Corporation
Director, Bank
National City
Bank, Dayton
William G. Kelley Director Chairman and Retail
Chief Executive
Officer, Consoli-
dated Stores Corp.
J. Frederick Reid Director Retired Chairman, Insurance
Grange Insurance
Companies
Carol L. Scott Director Retired, Mid- Governmental
western Regional agency
Neighborhood
Reinvestment Corp.
Dr. K. Wayne Smith Director President and Computerized
Chief Executive library
Officer, OCLC
Online Computer
Library Center, Inc.
William W. Wilkins Director President and Chief Health care
Executive Officer,
U.S. Health
Corporation
James H. Gilmour Executive Officer Chairman, Credit card
National City Card company
Services
Dorothy M. Horvath Executive Vice None -
President,
Credit
Administration
</TABLE>
C-27
<PAGE> 423
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Columbus Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Kelly E. Law Senior Vice None -
President,
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, National City
Processing Company (one of the largest item processing companies in the world).
The address of National City Kentucky and its affiliates is Box 36000,
Louisville, Kentucky 40233. On July 29, 1988, First Kentucky National
Corporation, which owned all of the stock of National City Kentucky, merged into
a wholly-owned subsidiary of National City Corporation.
To the knowledge of Registrant, none of the directors or
officers of National City Kentucky, except those set forth below, is or has been
at any time during the past two calendar years engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers of National City Kentucky also hold positions with
National City Corporation or its subsidiaries. Set forth below are the names and
principal business of the directors and certain of the senior executive officers
of National City Kentucky who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
C-28
<PAGE> 424
<TABLE>
<CAPTION>
NATIONAL CITY KENTUCKY
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
James R. Bell III Director, Executive Vice Bank holding
President and President, National company
Chief Executive City Corporation
Officer
Morton Boyd Director None
Timothy C. Brown Director Chairman, Manufacturer
President and of lighting and
Chief Executive compressor and
Officer, Thomas vacuum pumps
Industries, Inc.
Robert E. Champagne Director Chairman, Paint and
Courtaulds industrial
United States, Inc. coatings
manufacturer
David A. Daberko Director Chairman and Chief Bank holding
Executive Officer, company
National City
Corporation
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
Officer and Tractor sales
Director, Hudson
Tractor Sales,
Inc.
Director,
Student Loan
Marketing Association
</TABLE>
C-29
<PAGE> 425
<TABLE>
<CAPTION>
Position Other
with National Business Type of
Name City Kentucky Connections Business
- ---- ------------- ----------- --------
<S> <C> <C> <C>
Robert R. Dawson, Jr. Director Partner, R.R. Bridge
Dawson Bridge and road
Company construction
Margaret H. Greene Director Vice President Telecommunications
and General
Counsel, BellSouth
Telecommunications
Leonard V. Hardin Director and None
Chairman of
the Board
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>
C-30
<PAGE> 426
<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
Donna M. Paccioni Executive None
Vice President,
Retail Banking
Charles R. Stoess President, None
Crestwood Area
Lawrence A. Warner Executive None
Vice President,
Trust
</TABLE>
(d) 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
C-31
<PAGE> 427
below are the names and principal business of the directors and certain of the
senior executive officers of National Asset Management who are engaged in any
other business, profession, vocation, or employment of a substantial nature.
NATIONAL ASSET MANAGEMENT
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
James R. Bell, III Director Director, President Bank
and Chief
Executive Officer,
National City Bank of
Kentucky
Executive Vice Bank holding
President, company
National City
Corporation
William F. Director, None
Chandler, Jr. Managing Director
and Principal
Carl W. Hafele Director, None
Managing Director
and Principal
Leonard V. Hardin Director Director and Bank
Chairman of the
Board, National City
Bank of Kentucky
William R. Robertson Director Director, National Bank
City Bank
Robert Siefers Director Chief Financial Bank holding
Officer, National Company
City Corporation
Harold B. Todd, Jr. Director Executive Vice Presi- Bank holding
dent, National City company
Corporation
Executive Vice Presi- Bank
dent, Institutional
Trust and Asset Manage-
ment, National City Bank
Lawrence A. Warner Director Executive Vice Bank
President, National
City Bank of Kentucky
Michael C. Heyman Principal None
</TABLE>
C-32
<PAGE> 428
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
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
Brent A. Bell Investment None
Manager
Randall T. Zipfel Manager, None
Information Systems
</TABLE>
(e) Sub-Investment Adviser: Wellington Management Corporation,
LLP ("Wellington").
Wellington performs sub-investment advisory services for the
Registrant's Small Cap Growth Fund.
Wellington is an investment adviser registered under the
Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of the partners of
Wellington, together with information as to any business profession, vocation or
employment of substantial nature engaged in by such partners during the past two
years, is incorporated herein by references to Schedule A and D of Form ADV
filed by Wellington pursuant to the Advisers Act (SEC File No. 801-15908).
Item 29. Principal Underwriter
---------------------
(a) Furnish the name of each investment company
(other than the Registrant) for which each principal
underwriter currently distributing securities of the
Registrant also acts as a principal underwriter, distributor
or investment advisor.
Registrant's distributor, SEI Investments
Distribution Co. (formerly SEI Financial Services
Company) ("SIDC"), acts as distributor for:
C-33
<PAGE> 429
<TABLE>
<S> <C> <C>
SEI Daily Income Trust July 14, 1982
SEI Liquid Asset Trust November 29, 1982
SEI Tax Exempt Trust December 3, 1982
SEI Index Funds July 10, 1985
SEI Institutional Managed Trust January 22, 1987
SEI International Trust August 30, 1988
Stepstone Funds January 30, 1991
The Pillar Funds February 28, 1992
CUFUND May 1, 1992
STI Classic Funds May 29, 1992
CoreFunds, Inc. October 30, 1992
First American Funds, Inc. November 1, 1992
First American Investment Funds, Inc. November 1, 1992
The Arbor Fund January 28, 1993
Boston 1784 Funds(R) June 1, 1993
The PBHG Funds, Inc. July 16, 1993
Marquis Funds(R) August 17, 1993
Morgan Grenfell Investment Trust January 3, 1994
The Achievement Funds Trust December 27, 1994
Bishop Street Funds January 27, 1995
CrestFunds, Inc. March 1, 1995
STI Classic Variable Trust August 18, 1995
ARK Funds November 1, 1995
Monitor Funds January 11, 1996
FMB Funds, Inc. March 1, 1996
SEI Asset Allocation Trust April 1, 1996
TIP Funds April 30, 1996
SEI Institutional Investments Trust June 14, 1996
First American Strategy Funds, Inc. October 1, 1996
High Mark Funds February 15, 1997
Expedition Funds June 9, 1997
</TABLE>
SIDC provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments.
These services include portfolio evaluation, performance
measurement and consulting services ("Funds Evaluation") and
automated execution, clearing and settlement of securities
transactions ("MarketLink").
(b) Furnish the information required by the following
table with respect to each director, officer or partner of
each principal underwriter named in the answer to Item 21 of
Part B. Unless otherwise noted, the principal business address
of each director or officer is Oaks, PA 19456.
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & --
Chief Executive Officer
Henry H. Greer Director, President & --
Chief Operating Officer
Carmen V. Romeo Director, Executive --
Vice President &
President-Investment
Advisory Group
</TABLE>
C-34
<PAGE> 430
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Gilbert L. Beebower Executive Vice --
President
Richard B. Lieb Executive Vice --
President, President-
Investment Services
Division
Dennis J. McGonigle Executive Vice --
President
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchison Senior Vice President --
David G. Lee Senior Vice President --
Jack May Senior Vice President --
A. Keith McDowell Senior Vice President --
Hartland J. McKeon Senior Vice President --
Barbara J. Moore Senior Vice President --
Kevin P. Robins Senior Vice President, --
General Counsel &
Secretary
Robert Wagner Senior Vice President --
Patrick K. Walsh Senior Vice President --
Robert Aller Vice President --
Marc H. Cahn Vice President & --
Assistant Secretary
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & --
Assistant Secretary
Robert Crudup Vice President & --
Managing Director
Barbara Doyne Vice President --
Jeff Drennen Vice President --
Vic Galef Vice President & --
Managing Director
Kathy Heillig Vice President & --
Treasurer
Michael Kantor Vice President --
Samuel King Vice President --
Kim Kirk Vice President & --
Managing Director
Cynthia M. Parrish Vice President & --
- ------------------
Assistant Secretary
John Krzeminski Vice President & --
Managing Director
Carolyn McLaurin Vice President & --
Managing Director
W. Kelso Morrill Vice President --
Barbara A. Nugent Vice President & --
Assistant Secretary
Sandra K. Orlow Vice President & --
Assistant Secretary
Donald Pepin Vice President & --
Managing Director
Kim Rainey Vice President --
Mark Samuels Vice President & --
Managing Director
</TABLE>
C-35
<PAGE> 431
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Steven Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & --
Assistant Secretary
Wayne M. Withrow Vice President & --
Managing Director
James Dougherty Director of Brokerage --
Services
</TABLE>
Item 30. Location of Accounts and Records
--------------------------------
(1) National City Bank, 1900 East Ninth Street, Cleveland,
Ohio, 44114-3484, and National City Bank, Trust Operations,
4100 West 150th Street, Cleveland, Ohio 44135, (records
relating to their functions as investment advisers and
custodian); and National Asset Management Corporation, 101
South Fifth Street, Louisville, KY 40202.
(2) SEI Investments Distribution Co., 1 Freedom
Valley Road, Oaks, Pennsylvania 19456 (records relating to its
function as distributor).
(3) 440 Financial Distributors, Inc., 290 Donald Lynch
Boulevard, Marlboro, Massachusetts 01752 (records relating to
its former functions as distributor).
(4) Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653 (records relating to its former
functions as distributor).
(5) Drinker Biddle & Reath LLP, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496 (Registrant's
Declaration of Trust, Code of Regulations, and Minute
Books).
(6) PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 (records relating to its
former functions as custodian).
(7) PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809 (records relating to its functions as accounting agent
and administrator).
(8) State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 (records relating
to its function as transfer agent).
C-36
<PAGE> 432
(9) First Data Investor Services Group, Inc., 4400 Computer
Drive, Westboro, Massachusetts 02109 (records relating to its
former functions as transfer agent).
(10) 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).
(11) Weiss, Peck & Greer, LLC, One New York Plaza, New York,
New York 10004 (records relating its former functions as
sub-adviser).
(12) Wellington Management Company, LLP, 75 State Street,
Boston, Massachusetts 02109 (records relating to its functions
as sub-adviser).
Item 31. Management Services
--------------------
Inapplicable.
Item 32. Undertakings
------------
(a) Registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's most recent annual report to
shareholders, upon request and without charge.
C-37
<PAGE> 433
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania, on the 30th day of September, 1997.
ARMADA FUNDS
Registrant
/s/ Herbert R. Martens, Jr.
-----------------------------
President
Herbert R. Martens, Jr.
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 36 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>
/s/Neal J. Andrews Chief Financial Officer September 30, 1997
- ------------------------
Neal J. Andrews
/s/Leigh Carter Trustee September 30, 1997
- ------------------------
Leigh Carter
/s/John F. Durkott Trustee September 30, 1997
- --------------------------
John F. Durkott
/s/Richard W. Furst Trustee September 30, 1997
- --------------------------
Richard W. Furst
/s/Gerald Gherlein Trustee September 30, 1997
- --------------------------
Gerald Gherlein
/s/Herbert Martens President September 30, 1997
- --------------------------
Herbert Martens
/s/Robert D. Neary Trustee and Chairman September 30, 1997
- -------------------------
Robert D. Neary of the Board
/s/J. William Pullen Trustee September 30, 1997
- -------------------------
J. William Pullen
</TABLE>
C-38
<PAGE> 434
*Richard B. Tullis Trustee September 30, 1997
- ---------------------
Richard B. Tullis
C-39
<PAGE> 435
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(5) (i) Investment Advisory Agreement for the Core Equity Fund
between Registrant and National Asset Management
Corporation dated July 31, 1997.
(j) Investment Advisory Agreement for the Small Cap Growth,
Equity Index, Real Return Advantage and International
Equity Funds between Registrant and National City Bank
dated July 31, 1997.
(k) Sub-Advisory Agreement between National City Bank and
Wellington Management Company, LLP with respect to the Small
Cap Growth Fund dated July 31, 1997.
(8) (c) Exhibit A to the Custodian Services Agreement between
Registrant and National City Bank.
(9) (b) Exhibit A to the Administration and Accounting Services
Agreement dated March 1, 1993 between Registrant and PFPC
Inc.
(11) (a) Consent of Drinker Biddle & Reath LLP.
(b) Consent of Ernst & Young LLP.
(c) Consent of Coopers & Lybrand L.L.P.
(d) Consent and Opinion of Squires, Sanders & Dempsey.
(13) (n) Purchase Agreement between Registrant and SEI Investments
Distribution Co., ("SIDC") with respect to the Core Equity
Fund.
(o) Purchase Agreement between Registrant and SIDC with
respect to the International Equity Fund.
(r) Purchase Agreement between Registrant and SEI with respect to
the Small Cap Growth Fund.
(17) (a) Financial Data Schedule as of May 31, 1997 for the
Money Market Fund (Institutional Class).
(b) Financial Data Schedule as of May 31, 1997 for the
Money Market Fund (Retail Class).
(c) Financial Data Schedule as of May 31, 1997 for the
</TABLE>
<PAGE> 436
<TABLE>
<S> <C>
Government Fund (Institutional Class).
(d) Financial Data Schedule as of May 31, 1997 for the
Government Fund (Retail Class).
(e) Financial Data Schedule as of May 31, 1997 for the
Treasury Fund (Institutional Class).
(f) Financial Data Schedule as of May 31, 1997 for the
Treasury Fund (Retail Class).
(g) Financial Data Schedule as of May 31, 1997 for the Tax
Exempt Fund (Institutional Class).
(h) Financial Data Schedule as of May 31, 1997 for the Tax
Exempt Fund (Retail Class).
(i) Financial Data Schedule as of May 31, 1997 for the
Equity Growth Fund (Institutional Class).
(j) Financial Data Schedule as of May 31, 1997 for the
Equity Growth Fund (Retail Class).
(k) Financial Data Schedule as of May 31, 1997 for the
Fixed Income Fund (Institutional Class).
(l) Financial Data Schedule as of May 31, 1997 for the
Fixed Income Fund (Retail Class).
(m) Financial Data Schedule as of May 31, 1997 for the
Equity Income Fund (Institutional Class).
(n) Financial Data Schedule as of May 31, 1997 for the
Equity Income Fund (Retail Class).
(o) Financial Data Schedule as of May 31, 1997 for the Mid
Cap Regional Fund (Institutional Class).
(p) Financial Data Schedule as of May 31, 1997 for the Mid
Cap Regional Fund (Retail Class).
(q) Financial Data Schedule as of May 31, 1997 for the
Enhanced Income Fund (Institutional Class).
(r) Financial Data Schedule as of May 31, 1997 for the
Enhanced Income Fund (Retail Class).
(s) Financial Data Schedule as of May 31, 1997 for the
Total Return Advantage Fund (Institutional Class).
(t) Financial Data Schedule as of May 31, 1997 for the
Total Return Advantage Fund (Retail Class).
</TABLE>
<PAGE> 437
<TABLE>
<S> <C>
(u) Financial Data Schedule as of May 31, 1997 for the Ohio
Tax Exempt Fund (Institutional Class).
(v) Financial Data Schedule as of May 31, 1997 for the Ohio
Tax Exempt Fund (Retail Class).
(w) Financial Data Schedule as of May 31, 1997, for the
GNMA Fund (Institutional Class).
(x) Financial Data Schedule as of May 31, 1997, for the
GNMA Fund (Retail Class).
(y) Financial Data Schedule as of May 31, 1997, for the
Intermediate Government Fund (Institutional Class).
(z) Financial Data Schedule as of May 31, 1997, for the
Intermediate Government Fund (Retail Class).
(aa) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Tax Exempt Fund (Institutional Class).
(bb) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Tax Exempt Fund (Retail Class).
(cc) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Municipal Fund (Institutional Class).
(dd) Financial Data Schedule as of May 31, 1997 for the
Pennsylvania Municipal Fund (Retail Class).
</TABLE>
<PAGE> 1
Exhibit 5(i)
ARMADA FUNDS
CORE EQUITY FUND
ADVISORY AGREEMENT
AGREEMENT made as of July 31, 1997 between ARMADA FUNDS, a
Massachusetts business trust, located in Oaks, Pennsylvania (the "Trust") and
NATIONAL ASSET MANAGEMENT CORPORATION located in Louisville, Kentucky (the
"Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser
to the Core Equity Fund (the "Fund");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. DELIVERY OF DOCUMENTS. The Adviser acknowledges that
it has received copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the
State Secretary of the Commonwealth of Massachusetts
on January 29, 1986 and all amendments thereto (such
Declaration of Trust, as presently in effect and as
it shall from time to time be amended, is herein
called the "Declaration of Trust");
(b) The Trust's Code of Regulations, and amendments
thereto (such Code of Regulations, as presently in
effect and as it shall from time to time be amended,
is herein called the "Code of Regulations");
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser and
approving this Agreement;
(d) The Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") on September 26, 1985 and
all amendments thereto;
(e) The Trust's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended
1
<PAGE> 2
("1933 Act") (File No. 33-488) and under the 1940
Act as filed with the SEC on September 26, 1985
and all amendments thereto; and
(f) The Trust's most recent prospectuses and statements
of additional information with respect to the Fund
(such prospectuses and statements of additional
information, as presently in effect and all
amendments and supplements thereto are herein called
individually, a "Prospectus", and collectively, the
"Prospectuses").
The Trust will furnish the Adviser from time to time with
execution copies of all amendments of or supplements to the foregoing.
2. SERVICES. The Trust hereby appoints the Adviser to act
as investment adviser to the Fund for the period and on the
terms set forth in this Agreement. Intending to be legally
bound, the Adviser accepts such appointment and agrees to
furnish the services required herein to the Fund for the
compensation hereinafter provided.
Subject to the supervision of the Trust's Board of Trustees,
the Adviser will provide a continuous investment program for each Fund,
including investment research and management with respect to all
securities and investments and cash equivalents in each Fund. The
Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by each Fund. The
Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of
Trustees applicable to such Fund.
3. SUBCONTRACTORS. It is understood that the Adviser may from
time to time employ or associate with itself such person or persons as
the Adviser may believe to be particularly fitted to assist in the
performance of this Agreement; provided, however, that the compensation
of such person or persons shall be paid by the Adviser and that the
Adviser shall be as fully responsible to the Trust for the acts and
omissions of any subcontractor as it is for its own acts and omissions.
Without limiting the generality or the foregoing, it is agreed that
investment advisory service to any Fund may be provided by a
subcontractor agreeable to the Adviser and approved in accordance with
the provision of the 1940 Act. Any such sub-advisers are hereinafter
referred to as the "Sub-Advisers." In the event that any Sub-Adviser
appointed hereunder is terminated, the Adviser may provide
-2-
<PAGE> 3
investment advisory services pursuant to this Agreement to the Fund
without further shareholder approval. Notwithstanding the employment of
any Sub-Adviser, the Adviser shall in all events: (a) establish and
monitor general investment criteria and policies for the fund; (b)
review investments in each fund on a periodic basis for compliance with
its fund's investment objective, policies and restrictions as stated in
the Prospectus; (c) review periodically any Sub-Adviser's policies with
respect to the placement of orders for the purchase and sale of
portfolio securities; (d) review, monitor, analyze and report to the
Board of Trustees on the performance of any Sub-Adviser; (e) furnish to
the Board of Trustees or any Sub-Adviser, reports, statistics and
economic information as may be reasonably requested; and (f) recommend,
either in its sole discretion or in conjunction with any Sub-Adviser,
potential changes in investment policy. Pursuant to this paragraph, on
the date hereof, the Adviser has entered into a Sub-Advisory Agreement
with Wellington Management Company, LLP with respect to the Small Cap
Growth Fund.
4. COVENANTS BY ADVISER. The Adviser agrees with respect
to the services provided to each Fund that it:
(a) will comply with all applicable Rules and Regulations
of the SEC and will in addition conduct its
activities under this Agreement in accordance with
other applicable law;
(b) will use the same skill and care in providing such
services as it uses in providing services to
similar fiduciary accounts for which it has
investment responsibilities;
(c) will not make loans to any person to purchase or
carry shares in the Fund, or make interest-bearing
loans to the Trust or the Fund;
(d) will maintain a policy and practice of conducting
its investment management activities independently
of the Commercial Departments of all banking
affiliates. In making investment recommendations
for the Fund, personnel will not inquire or take
into consideration whether the issuers (or related
supporting institutions) of securities proposed
for purchase or sale for the Fund's accounts 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 Fund;
-3-
<PAGE> 4
(e) will place orders pursuant to its investment
determinations for the Fund either directly with
the issuer or with any broker or dealer. In
executing portfolio transactions and selecting
brokers or dealers, the Adviser will use its best
efforts to seek on behalf of the Trust and each
Fund the best overall terms available. In
assessing the best overall terms available for any
transaction the Adviser shall consider all factors
it deems relevant, including the breadth of the
market in the security, the price of the security,
the financial condition and execution capability
of the broker or dealer, and the reasonableness of
the commission, if any, both for the specific
transaction and on a continuing basis. In
evaluating the best overall terms available, and
in selecting the broker or dealer to execute a
particular transaction, the Adviser may also
consider the brokerage and research services (as
those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended)
provided to any Fund and/or other accounts over
which the Adviser or any affiliate of the Adviser
exercises investment discretion. The Adviser is
authorized, subject to the prior approval of the
Board, to negotiate and pay to a broker or dealer
who provides such brokerage and research services
a commission for executing a portfolio transaction
for any Fund which is in excess of the amount of
commission another broker or dealer would have
charged for effecting that transaction if, but
only if, the Adviser determines in good faith that
such commission was reasonable in relation to the
value of the brokerage and research services
provided by such broker or dealer viewed in terms
of that particular transaction or in terms of the
overall responsibilities of the Adviser to the
particular Fund and to the Trust. In no instance
will fund securities be purchased from or sold to
the Adviser, any Sub-Adviser, SEI Investments
Distribution Co. ("SEI") (or any other principal
underwriter to the Trust) or an affiliated person
of either the Trust, the Adviser, Sub-Adviser, or
SEI (or such other principal underwriter) unless
permitted by an order of the SEC or applicable
rules. In executing portfolio transactions for
any Fund, the Adviser may, but shall not be
obligated to, to the extent permitted by
applicable laws and regulations, aggregate the
securities to be sold or purchased with those of
-4-
<PAGE> 5
other Funds and its other clients where such
aggregation is not inconsistent with the policies set
forth in the Trust's registration statement. In such
event, the Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in the manner it considers to be the
most equitable and consistent with its fiduciary
obligations to the Fund and such other clients;
(f) will maintain all books and records with respect to
the securities transactions for the Fund and furnish
the Trust's Board of Trustees such periodic and
special reports as the Board may request; and
(g) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Fund and prior,
present or potential shareholders, and will not
use such records and information for any purpose
other than performance of its responsibilities and
duties hereunder (except after prior notification
to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and
may not be withheld and will be deemed granted
where the Adviser may be exposed to civil or
criminal contempt proceedings for failure to
comply, when requested to divulge such information
by duly constituted authorities, or when so
requested by the Trust).
5. SERVICES NOT EXCLUSIVE. The services furnished by the
Adviser hereunder are deemed not to be exclusive, and the
Adviser shall be free to furnish similar services to others
so long as its services under this Agreement are not
impaired thereby.
6. BOOKS AND RECORDS. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Adviser hereby agrees that all records
which it maintains for the Trust are the property of the Trust and
further agrees to surrender promptly to the Trust any of such records
upon the Trust's request. The Adviser further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
7. EXPENSES. During the term of this Agreement, the Adviser
will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost
-5-
<PAGE> 6
of securities (including brokerage commissions, if any) purchased for
the Fund.
8. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, the Trust will
pay the Adviser from the assets belonging to the Fund and
the Adviser will accept as full compensation therefor fees,
computed daily and paid monthly, at the following annual
rates: .75% of the average daily net assets of the Fund.
The fee attributable to each Fund shall be the several (and
not joint or joint and several) obligation of each Fund.
If in any fiscal year the aggregate expenses of a Fund (as
defined under the securities regulations of any state having
jurisdiction over the Fund) exceed the expense limitations of any such
state, the Adviser will reimburse the Trust for such excess expenses to
the extent described in any written undertaking provided by the Adviser
to such state.
9. LIMITATION OF LIABILITY. The Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser
in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement.
10. DURATION AND TERMINATION. This Agreement will become effective
with respect to each Fund upon approval of this Agreement by vote of a
majority of the outstanding voting securities of each such Fund, and,
unless sooner terminated as provided herein, shall continue in effect
until September 30, 1998. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to a particular Fund for
successive twelve month periods ending on September 30, PROVIDED such
continuance is specifically approved at least annually (a) by the vote
of a majority of those members of the Trust's Board of Trustees who are
not interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b)
by the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund. Notwithstanding the
foregoing, this Agreement may be terminated as to any Fund at any time,
without the payment of any penalty, by the Trust (by the Trust's Board
of
-6-
<PAGE> 7
Trustees or by vote of a majority of the outstanding voting securities
of the particular Fund), or by the Adviser on 60 days' written notice.
This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment"
shall have the same meaning of such terms in the 1940 Act.)
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought. No amendment of
this Agreement shall be effective with respect to a Fund until approved
by vote of a majority of the outstanding voting securities of that
Fund.
12. MISCELLANEOUS. The Adviser expressly agrees that
notwithstanding the termination of or failure to continue this
Agreement with respect to a particular Fund, the Adviser shall continue
to be legally bound to provide the services required herein for the
other Funds for the period and on the terms set forth in this
Agreement. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and shall be governed by Delaware law.
13. NAMES. The names "ARMADA FUNDS" and "Trustees of ARMADA FUNDS"
refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
the Commonwealth of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the Trustees, shareholders, or representatives of the Trust
personally, but bind only the Trust property, and all persons dealing
with any class of shares of the Trust must look solely to the Trust
property belonging to such class for the enforcement of any claims
against the Trust.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
ARMADA FUNDS
By:
-------------------------------------
Title: PRESIDENT
----------------------------------
NATIONAL CITY BANK
By:
-------------------------------------
Title: VICE PRESIDENT
----------------------------------
-8-
<PAGE> 1
Exhibit 5(j)
ARMADA FUNDS
SMALL CAP GROWTH FUND
REAL RETURN ADVANTAGE FUND
EQUITY INDEX FUND
INTERNATIONAL EQUITY FUND
ADVISORY AGREEMENT
AGREEMENT made as of July 31, 1997 between ARMADA FUNDS, a
Massachusetts business trust, located in Oaks, Pennsylvania (the "Trust") and
NATIONAL CITY BANK, located in Cleveland, Ohio (the "Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser
to the Small Cap Growth, Real Return Advantage, Equity Index and International
Equity Funds (individually, a "Fund" and collectively, the "Funds");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. DELIVERY OF DOCUMENTS. The Adviser acknowledges that
it has received copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the
State Secretary of the Commonwealth of Massachusetts
on January 29, 1986, and all amendments thereto (such
Declaration of Trust, as presently in effect and as
it shall from time to time be amended, is herein
called the "Declaration of Trust");
(b) The Trust's Code of Regulations and amendments
thereto (such Code of Regulations, as presently in
effect and as it shall from time to time be amended,
is herein called the "Code of Regulations");
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser and
approving this Agreement;
(d) The Trust's Notification of Registration on Form
N-8A under the 1940 Act as filed with the
Securities and Exchange Commission ("SEC") on
<PAGE> 2
September 26, 1985 and all amendments thereto;
(e) The Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended ("1933 Act")
(File No. 33-488) and under the 1940 Act, as filed
with the SEC on September 26, 1985 and all amendments
thereto; and
(f) The Trust's most recent prospectuses and statements
of additional information with respect to the Funds
(such prospectuses and statements of additional
information, as presently in effect, and all
amendments and supplements thereto, are herein called
individually, a "Prospectus", and collectively, the
"Prospectuses").
The Trust will furnish the Adviser from time to time with
execution copies of all amendments of or supplements to the foregoing.
2. SERVICES. The Trust hereby appoints the Adviser to act
as investment adviser to the Funds for the period and on the
terms set forth in this Agreement. Intending to be legally
bound, the Adviser accepts such appointment and agrees to
furnish the services required herein to the Funds for the
compensation hereinafter provided.
Subject to the supervision of the Trust's Board of Trustees,
the Adviser will provide a continuous investment program for each Fund,
including investment research and management with respect to all
securities and investments and cash equivalents in each Fund. The
Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by each Fund. The
Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of
Trustees applicable to such Fund.
3. COVENANTS BY ADVISER. The Adviser agrees with respect
to the services provided to each Fund that it:
(a) will comply with all applicable Rules and Regulations
of the SEC and will in addition conduct its
activities under this Agreement in accordance with
other applicable law;
(b) will use the same skill and care in providing such
services as it uses in providing services to
similar fiduciary accounts for which it has
investment responsibilities;
-2-
<PAGE> 3
(c) will not make loans to any person to purchase or
carry shares in the Funds, or make interest-
bearing loans to the Trust or the Funds;
(d) will maintain a policy and practice of conducting
its investment management activities independently
of the Commercial Departments of all banking
affiliates. In making investment recommendations
for the Funds, personnel will not inquire or take
into consideration whether the issuers (or related
supporting institutions) of securities proposed
for purchase or sale for the Funds' accounts 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 Funds;
(e) will place orders pursuant to its investment
determinations for the Funds either directly with
the issuer or with any broker or dealer. In
placing orders with brokers and dealers the
Adviser will attempt to obtain the best net price
and the most favorable execution of its orders.
Consistent with this obligation, when the
execution and price offered by two or more brokers
or dealers are comparable, the Adviser may, in its
discretion, purchase and sell fund securities from
and to brokers and dealers who provide the Trust
with research advice and other services. In no
instance will fund securities be purchased from or
sold to the Adviser, SEI Financial Services
Company ("SEI") or an affiliated person of either
the Trust, the Adviser, or SEI unless permitted by
an order of the SEC or applicable rules;
(f) will maintain all books and records with respect to
the securities transactions for the Funds and furnish
the Trust's Board of Trustees such periodic and
special reports as the Board may request; and
(g) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Funds and prior,
present or potential shareholders, and will not
use such records and information for any purpose
other than performance of its responsibilities and
duties hereunder (except after prior notification
to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and
-3-
<PAGE> 4
may not be withheld and will be deemed granted where
the Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by the
Trust).
4. SERVICES NOT EXCLUSIVE. The services furnished by the
Adviser hereunder are deemed not to be exclusive, and the Adviser shall
be free to furnish similar services to others so long as its services
under this Agreement are not impaired thereby.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Adviser hereby agrees that all records
which it maintains for the Trust are the property of the Trust and
further agrees to surrender promptly to the Trust any of such records
upon the Trust's request. The Adviser further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
6. EXPENSES. During the term of this Agreement, the
Adviser will pay all expenses incurred by it in connection
with its activities under this Agreement, other than the
cost of securities (including brokerage commissions, if any)
purchased for the Funds.
7. COMPENSATION. For the services provided and the expenses
assumed pursuant to this Agreement, the Trust will pay the Adviser from
the assets belonging to the Funds and the Adviser will accept as full
compensation therefor fees, computed daily and paid monthly, at the
following annual rates: .75% of the average daily net assets of the
Small Cap Growth Fund; .35% of the average daily net assets of the Real
Return Advantage Fund; .35 of the average daily net assets of the
Equity Index Fund; and .75 of the average daily net assets of the
International Equity Fund.
The fee attributable to each Fund shall be the several (and
not joint or joint and several) obligation of each Fund.
If in any fiscal year the aggregate expenses of a Fund (as
defined under the securities regulations of any state having
jurisdiction over the Fund) exceed the expense limitations of any such
state, the Adviser will reimburse the Trust for such excess expenses to
the extent described in any written undertaking provided by the Adviser
to such state.
-4-
<PAGE> 5
8. LIMITATION OF LIABILITY. The Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser
in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement.
9. DURATION AND TERMINATION. This Agreement will become effective
with respect to each Fund upon approval of this Agreement by vote of a
majority of the outstanding voting securities of such Fund, and, unless
sooner terminated as provided herein, shall continue in effect until
September 30, 1998. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to a particular Fund for successive
twelve month periods ending on September 30, PROVIDED such continuance
is specifically approved at least annually (a) by the vote of a
majority of those members of the Trust's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by
the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund. Notwithstanding the
foregoing, this Agreement may be terminated as to any Fund at any time,
without the payment of any penalty, by the Trust (by the Trust's Board
of Trustees or by vote of a majority of the outstanding voting
securities of the particular Fund), or by the Adviser on 60 days'
written notice. This Agreement will immediately terminate in the event
of its assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested persons" and
"assignment" shall have the same meaning of such terms in the 1940
Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought. No amendment of
this Agreement shall be effective with respect to a Fund until approved
by vote of a majority of the outstanding voting securities of that
Fund.
11. MISCELLANEOUS. The Adviser expressly agrees that
notwithstanding the termination of or failure to continue this
Agreement with respect to a particular Fund, the Adviser shall continue
to be legally bound to provide the services required herein for the
other Fund for the period and on the terms set forth in this Agreement.
The captions
-5-
<PAGE> 6
in this Agreement are included for convenience of reference only and in
no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. If any provision of this Agreement
shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall
be governed by Delaware law.
12. NAMES. The names "ARMADA FUNDS" and "Trustees of ARMADA FUNDS"
refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
the Commonwealth of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the Trustees, shareholders, or representatives of the Trust
personally, but bind only the Trust property, and all persons dealing
with any class of shares of the Trust must look solely to the Trust
property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
ARMADA FUNDS
By:____________________________
Title:
NATIONAL CITY BANK
By:____________________________
Title:
-6-
<PAGE> 1
Exhibit 5(k)
ARMADA FUNDS
SMALL CAP GROWTH FUND
WELLINGTON MANAGEMENT COMPANY, LLP
SUB-ADVISORY AGREEMENT
AGREEMENT made as of July 31, 1997 between NATIONAL CITY BANK (the
"Adviser"), and WELLINGTON MANAGEMENT COMPANY, LLP (the "Sub-Adviser").
WHEREAS, ARMADA FUNDS, a Massachusetts business trust (the "Trust"), is
registered as an open-end, management investment company under the Investment
Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, pursuant to an Advisory Agreement dated July 31, 1997 (the
"Advisory Agreement") by and between the Trust and the Adviser, the Trust has
appointed the Adviser to furnish the investment advisory and other services to
the Trust for its Small Cap Growth Fund and the Adviser has agreed thereto; and
WHEREAS, the Advisory Agreement authorizes the Adviser to subcontract
investment advisory services with respect to the Funds to the Sub-Adviser; and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment advisory services to the Trust with respect to the Small Cap Growth
Fund (the "Fund") and the Sub-Adviser is willing to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT AND DELIVERY OF DOCUMENTS.
(a) Intending to be legally bound, the Adviser, with
the approval of the Trust, hereby appoints the
Sub-Adviser to act as investment adviser to the
Fund for the period and on the terms set forth in
this Agreement. Intending to be legally bound,
the Sub-Adviser accepts such appointment and
agrees to furnish the services herein set forth
for the compensation herein provided.
(b) The Sub-Adviser acknowledges that it has received
copies of the Trust's most recent prospectuses and
<PAGE> 2
statements of additional information with respect
to the Fund.
2. SERVICES OF SUB-ADVISER. The Sub-Adviser agrees that
with respect to each Fund it shall:
(a) Subject to the supervision of the Trust's Board of
Trustees, assist the Adviser in providing a
continuous investment program for each such Fund,
including investment research and management with
respect to all securities, investments, cash and
cash equivalents in the Fund. The Sub-Adviser
will assist the Adviser in determining from time
to time what securities and other investments will
be purchased, retained or sold by such Fund. The
Sub-Adviser will provide the services rendered by
it under this Agreement in accordance with the
Fund's investment objective, policies, and
restrictions as stated in the Trust's respective
Prospectuses and Statements of Additional
Information for the Fund and resolutions of the
Trust's Board of Trustees;
(b) Transmit trades to the Trust's custodian for proper
settlement;
(c) Prepare a quarterly broker security transaction
summary and monthly security transaction listing
for the Fund;
(d) Maintain all books and records with respect to the
Fund's securities transactions effected by it as
required by subparagraphs (b)(5), (6), (7), (9), (10)
and (11) and paragraph (f) of Rule 31a-1 under the
1940 Act; and
(e) Supply the Trust and its Board of Trustees with
reports and statistical data as reasonably
requested.
3. OTHER COVENANTS. The Sub-Adviser agrees that it:
(a) will comply with all applicable Rules and Regulations
of the Securities and Exchange Commission and will in
addition conduct its activities under this Agreement
in accordance with other applicable law;
(b) will use the same skill and care in providing such
services as it uses in providing services to
similar fiduciary accounts for which it has
-2-
<PAGE> 3
investment responsibilities;
(c) will not make loans to any person to purchase or
carry shares in the Fund or make interest-bearing
loans to the Trust or the Fund;
(d) will maintain a policy and practice of conducting
its investment advisory services hereunder
independently of the commercial banking operations
of any affiliated person of the Adviser. In
making investment recommendations for the Fund,
the Sub-Adviser's personnel will not inquire or
take into consideration whether the issuers (or
related supporting institutions) of securities
proposed for purchase or sale for such Fund's
account are customers of the commercial department
of any affiliated person of the Adviser;
(e) in connection with its duties under paragraph 2 of
this Agreement, will place orders pursuant to its
investment determinations for the Fund either
directly with the issuer or with any broker or
dealer. In executing portfolio transactions and
selecting brokers or dealers, the Sub-Adviser will
use its best efforts to seek on behalf of the Fund
the best overall terms available. In assessing
the best overall terms available for any
transaction the Sub-Adviser shall consider all
factors it deems relevant, including the breadth
of the market in the security, the price of the
security, the financial condition and execution
capability of the broker or dealer, and the
reasonableness of the commission, if any, both for
the specific transaction and on a continuing
basis. In evaluating the best overall terms
available, and in selecting the broker or dealer
to execute a particular transaction, the Sub-
Adviser may also consider the brokerage and
research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of
1934, as amended) with respect to any Fund and/or
other accounts over which the Sub-Adviser or any
affiliate of the Sub-Adviser exercises investment
discretion. The Sub-Adviser is authorized,
subject to the prior approval of the Board, to
negotiate and pay to a broker or dealer who
provides such brokerage and research services a
commission for executing a portfolio transaction
for the Fund which is in excess of the amount of
commission another broker or dealer would have
charged for effecting that transaction if, but
only if, the Sub-Adviser determines in good faith
-3-
<PAGE> 4
that such commission was reasonable in relation to
the value of the brokerage and research services
provided by such broker or dealer viewed in terms of
that particular transaction or in terms of the
overall responsibilities of the Sub-Adviser to the
Fund and to the Trust. Notwithstanding the foregoing,
no prior approval by the Board shall be required so
long as the broker or dealer selected by the
Sub-Adviser provides best price and execution on a
particular transaction. In no instance will Fund
securities be purchased from or sold to the Adviser,
any Sub-Adviser, SEI Investments Distribution Co.
("SEI") (or any other principal underwriter to the
Trust) or an affiliated person of either the Trust,
the Adviser, Sub-Adviser, or SEI (or such other
principal underwriter) unless permitted by an order
of the SEC or applicable rules. In executing
portfolio transactions for the Fund, the Sub-Adviser
may, but shall not be obligated to, to the extent
permitted by applicable laws and regulations,
aggregate the securities to be sold or purchased with
those of other Funds and its other clients where such
aggregation is not inconsistent with the policies set
forth in the Trust's registration statement. In such
event, the Sub-Adviser will allocate the securities
so purchased or sold, and the expenses incurred in
the transaction, in the manner it considers to be the
most equitable and consistent with its fiduciary
obligations to the Fund and such other clients; and
(f) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Fund and prior,
present or potential shareholders, and will not
use such records and information for any purpose
other than performance of its responsibilities and
duties hereunder (except after prior notification
to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and
may not be withheld and will be deemed granted
where the Sub-Adviser may be exposed to civil or
criminal intent proceedings for failure to comply,
when requested to divulge such information by duly
constituted authorities or when so requested by
the Trust).
4. SERVICES NOT EXCLUSIVE. The services furnished by the
Sub-Adviser hereunder are deemed not to be exclusive, and
the Sub-Adviser shall be free to furnish similar services to
-4-
<PAGE> 5
others so long as its services under this Agreement are not impaired
thereby. The Adviser acknowledges that the Sub-Adviser may give advice
and take action in the performance of its duties with respect to any of
its other clients which may differ from advice given, or the time or
nature of action taken, with respect to the Fund.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all
records which it maintains for the Fund are the property of the Trust
and further agrees to surrender promptly to the Trust any of such
records upon the Trust's written request; provided, however, that the
Sub-Adviser may retain a copy of such records. The Sub-Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records required to be maintained by it pursuant to
paragraph 2(d) of this Agreement.
6. EXPENSES. During the term of this Agreement, the Sub-Adviser
will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities, commodities and
other investments (including brokerage commissions and other
transaction costs, if any) purchased or sold for any Fund.
7. COMPENSATION. For the services provided and the expenses
assumed pursuant to this Agreement, the Adviser will pay the
Sub-Adviser and the Sub-Adviser will accept as full compensation
therefor a fee, computed daily and payable monthly, based upon the
following annual rates and calculated based upon the average daily net
assets of the Fund:
<TABLE>
<CAPTION>
Assets Annual Fee
------ ----------
<S> <C>
On First $25 million .75%
On Next $25 million .65%
On Next $50 million .55%
Over $100 million .45%
</TABLE>
8. LIMITATION OF LIABILITY. The Sub-Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of this 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
Sub-Adviser in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement.
-5-
<PAGE> 6
9. DURATION AND TERMINATION. This Agreement will become effective
as of the date hereof and, unless sooner terminated as provided herein,
shall continue in effect until September 30, 1998. Thereafter, if not
terminated, this Agreement shall automatically continue in effect as to
a particular Fund for successive annual periods, provided such
continuance is specifically approved at least annually (a) by the vote
of a majority of those members of the Trust's Board of Trustees who are
not interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b)
by the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of such Fund. Notwithstanding the
foregoing, this Agreement may be terminated as to any Fund at any time,
without the payment of any penalty, by the Adviser or by the Trust (by
vote of the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of such Fund) on sixty days' written
notice to the Sub-Adviser, or by the Sub-Adviser, on sixty days'
written notice to the Trust, provided that in each such case, notice
shall be given simultaneously to the Adviser. In addition,
notwithstanding anything herein to the contrary, in the event of the
termination of the Advisory Agreement with respect to a particular Fund
for any reason (whether by the Trust, by the Adviser or by operation of
law) this Agreement shall terminate with respect to the same Fund upon
the effective date of such termination of the Advisory Agreement. This
Agreement will immediately terminate in the event of its assignment.
(As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested persons" and "assignment" shall have
the same meaning as such terms have in the 1940 Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought. No amendment of
this Agreement shall be effective as to a particular Fund until
approved by vote of a majority of the outstanding voting securities of
such Fund.
11. MISCELLANEOUS. The Sub-Adviser expressly agrees that
notwithstanding the termination of or failure to continue this
Agreement with respect to a particular Fund, Sub-Adviser shall continue
to be legally bound to provide the services required herein for any
other Funds to which it is Sub-Adviser pursuant to this Agreement for
the period and on the terms set forth in this Agreement.
During the term of this Agreement, the Adviser agrees
-6-
<PAGE> 7
to furnish the Sub-Adviser at its principal office all Prospectus,
proxy statements, reports to shareholders, sales literature or other
materials prepared for distribution to stockholders of the Fund, the
Adviser, broker-dealers or the public that refer to the Sub-Adviser.
Sub-Adviser shall consent to such materials unless it reasonably
objects in writing within five business days (or such other period as
may be mutually agreed) after receipt thereof. The Sub-Adviser's right
to object to such materials is limited to the portions of the materials
that expressly relate to the Sub-Adviser, its services and its clients.
The Adviser agrees to use its reasonable best efforts to ensure that
materials prepared by its employees or agents or affiliates that refer
to the Sub-Adviser or its clients in any way are consistent with those
materials previously approved by the Sub-Adviser.
The captions in the Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and shall be governed by Delaware law.
12. NAMES. The names "ARMADA FUNDS" and "Trustees of ARMADA FUNDS"
refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under an
Declaration of Trust dated January 28, 1986 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
the Commonwealth of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the Trustees, shareholders or representatives of the Trust
personally, but bind only the Trust Property, and all persons dealing
with any class of shares of the Trust must look solely to the Trust
Property belonging to such class for the enforcement of any claims
against the Trust.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
WELLINGTON MANAGEMENT COMPANY, LLP
BY: _____________________________________
TITLE: __________________________________
NATIONAL CITY BANK
BY: _____________________________________
TITLE: __________________________________
-8-
<PAGE> 1
Exhibit 8(c)
Armada Funds
------------
This EXHIBIT A, dated , 1997, is that certain Exhibit A to a Custodian Services
Agreement dated as of November 7, 1994 between the undersigned parties. This
Exhibit A supersedes all previously dated Exhibits A.
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Equity Fund
Fixed Income Fund
Ohio Tax Exempt Fund
National Tax Exempt Fund
Equity Income Fund
Mid Cap Regional Fund
Enhanced Income Fund
Total Return Advantage Fund
Pennsylvania Tax Exempt Fund
Intermediate Government Fund
GNMA Fund
Pennsylvania Municipal Fund
International Equity Fund
Core Equity Fund
Small Cap Growth Fund
NATIONAL CITY BANK
By:
-----------------------
Title:
--------------------
ARMADA FUNDS
By:
-----------------------
Title: Chairman
--------------------
<PAGE> 2
AUTHORIZED PERSONS
APPENDIX
This Appendix, dated , 1997, is that certain Appendix to a
Custodian Services Agreement dated as of November 7, 1994 between Armada Funds
and National City Bank.
<TABLE>
<CAPTION>
Names Signatures
----- ----------
<S> <C>
______________________________________ ___________________________________
______________________________________ ___________________________________
______________________________________ ___________________________________
______________________________________ ___________________________________
______________________________________ ___________________________________
______________________________________ ___________________________________
______________________________________ ___________________________________
______________________________________ ___________________________________
</TABLE>
<PAGE> 1
Exhibit 9(b)
Armada Funds
------------
This Exhibit A, dated , 1997, is that certain Exhibit A to an
Administration and Accounting Services Agreement dated as of March 1, 1993
between the undersigned parties. This Exhibit A supersedes all previous forms of
Exhibit A.
Money Market Fund
Government Fund
Treasury Fund
Tax Exempt Fund
Equity Fund
Fixed Income Fund
Ohio Tax Exempt Fund
National Tax Exempt Fund
Equity Income Fund
Mid Cap Regional Fund
Enhanced Income Fund
Total Return Advantage Fund
Pennsylvania Tax Exempt Fund
Intermediate Government Fund
GNMA Fund
Pennsylvania Municipal Fund
International Equity Fund
Core Equity Fund
Small Cap Growth Fund
PFPC INC.
By:
-------------------------
Title:
----------------------
Accepted:
ARMADA FUNDS
By:
-------------------------
Title: Chairman
----------------------
<PAGE> 1
Exhibit 11(a)
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference
to our Firm under the caption "Counsel" in the Statement of Additional
Information that is included in Post-Effective Amendment No. 36 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 LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
September 30, 1997
<PAGE> 1
Exhibit 11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and "Auditors" in the Statements of Additional
Information and to the incorporation by reference in Post-Effective Amendment
Number 36 to the Registration Statement (Form N-1A No. 33-488/811-4416) of
Armada Funds of our reports dated July 3, 1997, included in the May 31, 1997
Annual Reports to Shareholders of the Armada Funds Tax Exempt Series, the Armada
Funds Money Market Series, the Armada Funds Income Series, and the Armada Funds
Equity Series of the Armada Funds.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 29, 1997
<PAGE> 1
Exhibit 11(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 36
to the Registration Statement of Armada Funds on Form N-1A (File No. 33-488) of
our report dated July 26, 1996, on our audits of the financial statements and
financial highlights of the Inventor Funds, Inc., comprising respectively,
Intermediate Government Securities, GNMA Securities, Pennsylvania Municipal Bond
and Pennsylvania Tax-Exempt Money Market Funds (collectively the "Predecessor
Funds"), which report is included in the Annual Report to Shareholders for the
year ended April 30, 1996 and the period ended May 31, 1996 which is
incorporated by reference in the Post-Effective Amendment to the Registration
Statement. We also consent to the reference to our Firm under the caption
"Financial Highlights" in the Prospectuses and "Auditors" in the Statements of
Additional Information.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
September 30, 1997
<PAGE> 1
Exhibit 11(d)
September 30, 1997
Armada Trusts
4400 Computer Drive
Westborough, MA 01581
Re: Armada Trusts (Ohio Tax Exempt Fund)
Post-Effective Amendment No. 36 -- Consent of Counsel
-----------------------------------------------------
We hereby consent to use of our name and to the reference to our Firm
under caption "Counsel" in the Statement of Additional Information included in
Post-Effective Amendment No. 36 to the Registration Statement (No. 33-488) on
Form N-IA under the Securities Act of 1933, as amended, of Armada Trusts.
/s/ Squire, Sanders & Dempsey L.L.P.
------------------------------------
Squire, Sanders & Dempsey L.L.P.
<PAGE> 1
Exhibit 13(n)
PURCHASE AGREEMENT
------------------
AGREEMENT dated this day of , 1997, by and between
Armada Funds (the "Trust"), a Massachusetts business trust, and SEI Investments
Distribution Co. ("SEI"), a Massachusetts corporation.
1. The Trust hereby offers SEI and SEI hereby purchases one Class W -
Special Series 1 share of beneficial interest (no par value per share)
representing interests in the Trust's Core Equity Fund at a price of $10 per
share (collectively known as "Shares").
2. SEI hereby acknowledges receipt of one Share. The Trust hereby
acknowledges receipt from SEI of funds in the amount of $10 for such Share.
3. SEI represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
4. The names "Armada Funds" and "Trustees of Armada Funds" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of January 28, 1986 which is hereby referred to and a copy of
which is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Trust. The obligations of
"Armada Funds" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the Trust Property, and
all persons dealing with any class of shares of the Trust must look solely to
the Trust Property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day of , 1997.
ARMADA FUNDS
Attest:
__________________________ By: ____________________________________
Robert D. Neary, Chairman
SEI INVESTMENTS DISTRIBUTION CO.
Attest:
__________________________ By: ____________________________________
Title:__________________________________
(Please Print or Type)
<PAGE> 1
Exhibit 13(o)
PURCHASE AGREEMENT
------------------
AGREEMENT dated this day of , 1997, by and between
Armada Funds (the "Trust"), a Massachusetts business trust, and SEI Investments
Distribution Co. ("SEI"), a Massachusetts corporation.
1. The Trust hereby offers SEI and SEI hereby purchases one Class U -
Special Series 1 share of beneficial interest (no par value per share)
representing interests in the Trust's International Equity Fund at a price of
$10 per share (collectively known as "Shares").
2. SEI hereby acknowledges receipt of one Share. The Trust hereby
acknowledges receipt from SEI of funds in the amount of $10 for such Share.
3. SEI represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
4. The names "Armada Funds" and "Trustees of Armada Funds" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of January 28, 1986 which is hereby referred to and a copy of
which is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Trust. The obligations of
"Armada Funds" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the Trust Property, and
all persons dealing with any class of shares of the Trust must look solely to
the Trust Property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day of , 1997.
ARMADA FUNDS
Attest:
__________________________ By: ____________________________________
Robert D. Neary, Chairman
SEI INVESTMENTS DISTRIBUTION CO.
Attest:
__________________________ By: ____________________________________
Title:__________________________________
(Please Print or Type)
<PAGE> 1
Exhibit 13(r)
PURCHASE AGREEMENT
------------------
AGREEMENT dated this day of , 1997, by and between
Armada Funds (the "Trust"), a Massachusetts business trust, and SEI Investments
Distribution Co. ("SEI"), a Massachusetts corporation.
1. The Trust hereby offers SEI and SEI hereby purchases one Class X -
Special Series 1 share of beneficial interest (no par value per share)
representing interests in the Trust's Small Cap Growth Fund at a price of $10
per share (collectively known as "Shares").
2. SEI hereby acknowledges receipt of one Share. The Trust hereby
acknowledges receipt from SEI of funds in the amount of $10 for such Share.
3. SEI represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
4. The names "Armada Funds" and "Trustees of Armada Funds" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of January 28, 1986 which is hereby referred to and a copy of
which is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Trust. The obligations of
"Armada Funds" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the Trust Property, and
all persons dealing with any class of shares of the Trust must look solely to
the Trust Property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day of , 1997.
ARMADA FUNDS
Attest:
__________________________ By: ____________________________________
Robert D. Neary, Chairman
SEI INVESTMENTS DISTRIBUTION CO.
Attest:
__________________________ By: ____________________________________
Title:__________________________________
(Please Print or Type)
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 011
<NAME> MONEY MARKET FUND - INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 2300458986
<INVESTMENTS-AT-VALUE> 2300458986
<RECEIVABLES> 558055
<ASSETS-OTHER> 50228
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2301067269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11875078
<TOTAL-LIABILITIES> 11875078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2289201684
<SHARES-COMMON-STOCK> 1943026036
<SHARES-COMMON-PRIOR> 1344418519
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9493)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1943020527
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 110280649
<OTHER-INCOME> 0
<EXPENSES-NET> 7767416
<NET-INVESTMENT-INCOME> 102513233
<REALIZED-GAINS-CURRENT> (1179)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 102512054
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 85505145
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5045819104
<NUMBER-OF-SHARES-REDEEMED> 4447235733
<SHARES-REINVESTED> 24147
<NET-CHANGE-IN-ASSETS> 601691583
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8314)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7094438
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9794398
<AVERAGE-NET-ASSETS> 1685419784
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000778202
<NAME> ARMADA FUNDS
<SERIES>
<NUMBER> 012
<NAME> MONEY MARKET FUND - RETAIL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 2300458986
<INVESTMENTS-AT-VALUE> 2300458986
<RECEIVABLES> 558055
<ASSETS-OTHER> 50228
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2301067269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11875078
<TOTAL-LIABILITIES> 11875078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2289201684
<SHARES-COMMON-STOCK> 346175648
<SHARES-COMMON-PRIOR> 343519357
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9493)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 346171664
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