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ARMADA FUNDS
PROSPECTUS
JUNE 25, 1997
(AS REVISED FEBRUARY 24, 1998)
Equity Index Fund
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- - Shares of the Armada Funds are not bank deposits or obligations of, or
guaranteed or endorsed or otherwise supported by, National City Bank, 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 National Asset Management Corporation 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.
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Trust
or its Distributor. This Prospectus does not constitute an offering by the Trust
or by the Distributor in any jurisdiction in which such offering may not
lawfully be made.
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TABLE OF CONTENTS
PAGE
INTRODUCTION........................................................... 3
EXPENSE TABLE.......................................................... 4
INVESTMENT OBJECTIVE AND POLICIES...................................... 6
INVESTMENT LIMITATIONS................................................. 13
PERFORMANCE INFORMATION................................................ 15
PRICING OF SHARES...................................................... 17
HOW TO PURCHASE AND REDEEM SHARES...................................... 18
DISTRIBUTION AND SERVICING ARRANGEMENTS................................ 32
DIVIDENDS AND DISTRIBUTIONS............................................ 33
TAXES.................................................................. 33
MANAGEMENT OF THE TRUST................................................ 35
DESCRIPTION OF THE TRUST AND ITS SHARES................................ 38
CUSTODIAN AND TRANSFER AGENT........................................... 41
EXPENSES............................................................... 41
MISCELLANEOUS.......................................................... 42
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ARMADA FUNDS
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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).
This Prospectus describes the Equity Index Fund (the "Fund") of Armada
Funds (the "Trust"):
EQUITY INDEX FUND'S investment objective is to seek investment results
that, before Fund expenses, approximate the aggregate price and dividend
performance of the securities included in the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500") by investing in securities comprising the S&P
500.
The net asset value per share of the 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 Fund (the "adviser").
SEI Investments Distribution Co. (the "Distributor") serves as the
Trust's sponsor and distributor. The Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The
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Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference in its entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, ITS PARENT
COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL
AGENCY OR STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
June 25, 1997
(As revised February 24, 1998)
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INTRODUCTION
The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund consists of a pool of assets with investment objective and
policies as described below under "Investment Objective and Policies." The Fund
is classified as a diversified investment fund under the 1940 Act.
Shares of the Fund have been classified into two separate
classes -- Retail shares and Institutional shares. Retail shares and
Institutional shares represent equal pro rata interests in the Fund except that,
as described more fully below under "Shareholder Services Plan," the Trust has
implemented the Shareholder Services Plan ("Services Plan") with respect to
Retail shares of the Fund. Under the Services Plan, only the beneficial owners
of Retail shares bear the expenses of shareholder administrative services which
are provided by financial institutions for their benefit (not to exceed .25%
annually). See "Shareholder Services Plan," "Dividends and Distributions" and
"Description of the Trust and Its Shares" for a description of the impact that
the Services Plan may have on holders of Retail shares.
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EXPENSE TABLE
<TABLE>
<CAPTION>
EQUITY EQUITY
INDEX INDEX
RETAIL INSTITUTIONAL
SHARES(1),(2) SHARES(2)
------------- ---------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases(5) 3.75% None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees(3) (after
fee waivers) 0.00 0.00
---- ----
12b-1 Fees(4) (after fee
waivers) 0.06% 0.06%
---- ----
Other Expenses(3) (after fee
waivers) 0.52% 0.27%
---- ----
TOTAL FUND OPERATING
EXPENSES(3) (after fee
waivers) 0.58% 0.33%
==== ====
</TABLE>
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1. The Trust has implemented a Shareholder Services Plan (the "Services
Plan") with respect to Retail shares in the Fund. Pursuant to the Services
Plan, the Trust may enter into shareholder servicing agreements with
certain financial institutions under which they agree to provide
shareholder administrative services to their customers who beneficially
own Retail shares in consideration for the payment of up to .25% (on an
annualized basis) of the net asset value of Retail shares.
2. As of the date of this Prospectus, the Fund had not commenced investment
operations, and therefore, the other expenses for this Fund are estimates
only.
3. Without fee waivers during the current fiscal year by the adviser,
Management Fees and Total Fund Operating Expenses would be 0.35% and
0.93%, respectively, for the Retail shares and 0.35% and 0.68%,
respectively, for the Institutional shares of the Fund. Additionally, if
the maximum distribution fee permitted under the 12b-1 Plan were imposed,
Total Fund Operating Expenses would be 0.97% and 0.72% for the Retail and
Institutional shares, respectively.
4. The Fund has in effect a 12b-1 Plan pursuant to which it 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
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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.
5. A reduced sales charge may be available. A contingent deferred sales
charge of 1% may be assessed on certain redemptions of Retail shares
purchased without an initial sales charge as part of an investment of $1
million or more. See "How to Purchase and Redeem Shares - Reduced Sales
Charges Applicable to Purchases of Retail Shares."
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); (2) the redemption of your investment at the end of the
following time periods; and (3) the imposition of the maximum sales charge at
the beginning of the period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Retail Shares(1) $43 $55
Retail Shares(2) $16 $19
Institutional Shares $ 3 $11
</TABLE>
1 Assumes deduction at time of purchase of applicable front-end sales charge.
2 Assumes no front-end sales charge but the maximum contingent deferred sales
charge at 1 year.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Management of the Trust" and "Distribution Agreement" in this
Prospectus. Any fees that are charged by affiliates of the adviser or other
institutions directly to their customer accounts for services related to an
investment in Retail shares of the Fund are in addition to and not reflected in
the fees and expenses described above.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek investment
results that, before Fund expenses, approximate the aggregate price and dividend
performance of the securities included in the S&P 500 by investing in securities
comprising the S&P 500. The Fund's investment objective may be changed without a
vote of shareholders, although the Board of Trustees would only change a Fund's
objective upon 30 days' notice to shareholders. There can be no assurance that
the Fund will achieve its objective.
The S&P 500 is composed of approximately 500 common stocks,
most of which are listed on the New York Stock Exchange (the "NYSE"). Standard &
Poor's Ratings Group ("S&P") selects the stocks for the S&P 500 on a statistical
basis. As of March 31, 1997 the stocks in the S&P 500 had an average market
capitalization of $11.6 billion and accounted for approximately 69.4% of the
total market value of all U.S. common stocks. "Market capitalization" of a
company is the market price per share of stock multiplied by the number of
shares outstanding. 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.
Under normal circumstances, the Fund will invest substantially
all of its total assets in the stocks that comprise the S&P 500 in approximately
the same percentages as the stocks represent in the index. The Fund may also
acquire derivative instruments designed to replicate the performance of the S&P
500, such as S&P 500 stock index futures contracts or Standard & Poor's
Depository Receipts. The Fund may invest in all the approximately 500 stocks
comprising the S&P 500, or it may use a statistical sampling technique by
selecting approximately 90% of the stocks listed in the index. The Fund will
only purchase a security that is included in the S&P 500 at the time of such
purchase. The Fund, may, however, temporarily continue to hold a security that
has been deleted from the S&P 500 pending the rebalancing of the Fund's
portfolio. The Fund is not required to buy or sell securities solely because the
percentage of its assets invested in index stocks changes when the market value
of its holdings increases or decreases. In addition, the Fund may omit or remove
an index stock from its portfolio if the adviser believes the stock to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions. With
respect to
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the remaining portion of its net assets, the Fund may hold temporary cash
balances which may be invested in U.S. government obligations and money market
investments. In extraordinary circumstances, the Fund may exclude a stock listed
on the index from its holdings or include a similar stock in its place if it
believes that doing so will help achieve its investment objective. The Fund also
may enter into repurchase agreements, reverse repurchase agreements, and lend
its portfolio securities.
While there can be no guarantee that the Fund's investment
results will precisely match the results of the S&P 500, the adviser believes
that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Fund and the S&P 500. The Fund
will attempt to achieve a correlation between the performance of its asset
portfolio and that of the S&P 500 of at least 95% before deduction of operating
expenses. A correlation of 100% would indicate perfect correlation, which would
be achieved when the Fund's net asset value, including the value of its dividend
and capital gains distributions, increases or decreases in exact proportion to
changes in the index. The Fund's ability to correlate its performance with the
S&P 500, however, may be affected by, among other things, changes in securities
markets, the manner in which S&P calculates its index, and the timing of
purchases and redemptions. The adviser monitors the correlation of the
performance of the Fund in relation to the index under the supervision of the
Board of Trustees. The Fund intends to actively rebalance its portfolio to
achieve high correlation of performance with the S&P 500. To reduce transaction
costs and minimize shareholders' current capital gains liability, the Fund's
investment portfolio will not be automatically rebalanced to reflect changes in
the S&P 500. In the unlikely event that a high correlation is not achieved, the
Board of Trustees will take appropriate steps based on the reasons for the lower
than expected correlation.
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THE INDEXING APPROACH
The Fund is not managed in a traditional sense, that is, by
making discretionary judgments based on analysis of economic, financial and
market conditions. Under ordinary circumstances, stocks will only be eliminated
from or added to the Fund to reflect additions to or deletions from the S&P 500
(including mergers or changes in the composition of the index), to raise cash to
meet withdrawals, or to invest cash contributions. Accordingly, sales may result
in losses that may not have been realized if the Fund were actively managed and
purchases may be made that would not have been made if the Fund were actively
managed. Adverse events, such as reported losses, dividend cuts or omissions,
legal proceedings and defaults will not normally result in the sale of a common
stock. The Fund will remain substantially fully invested in common stocks and
equity derivative instruments whether stock prices are rising or falling.
The adviser believes that the indexing approach should involve
less portfolio turnover, notwithstanding periodic additions to and deletions
from the S&P 500, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. The costs and other expenses incurred in
securities transactions, apart from any difference between the investment
results of the Fund and those of the S&P 500, may cause the return of the Fund
to be lower than the return of the index.
The inclusion of a security in the S&P 500 in no way implies
an opinion by S&P as to its attractiveness as an investment. S&P is not a
sponsor of, or in any way affiliated with, the Fund.
The common stock of National City Corporation, the parent
company of the adviser, is included in the S&P 500. Like the other stocks in the
S&P 500, the Fund will invest in the common stock of National City Corporation
in approximately the same proportion as the percentage National City Corporation
common stock represents in the S&P 500. As of March 27, 1997, National City
Corporation common stock represented .18% of the index.
OTHER INVESTMENT POLICIES
Investment methods described in this Prospectus are among
those which the Fund has the power to utilize. Some may be employed on a regular
basis; others may not be used at all.
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Accordingly, reference to any particular method or technique carries no
implication that it will be utilized or, if it is, that it will be successful.
Futures Contracts and Related Options
The Fund may invest in futures contracts and options on
futures contracts for hedging purposes or to maintain liquidity by holding stock
index futures in lieu of certain stocks actually listed.
Futures contracts obligate the Fund, at maturity, to take or
make delivery of the cash value of a securities index, specifically, the S&P
500. Futures contracts and options may be used for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for Fund
management purposes, to facilitate trading, to reduce transaction costs or to
seek higher investment returns when a futures contract or option is priced more
attractively than the underlying equity security or index.
The Fund may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When the Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price at any
time during the option period. When the Fund sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised.
The Fund intends to comply with the regulations of the
Commodity Futures Trading Commission ("CFTC") exempting it from registration as
a "commodity pool operator." The Fund's commodities transactions must constitute
bona fide hedging or other permissible transactions pursuant to such
regulations.
In addition, as more fully explained in the Statement of
Additional Information, the Fund may not engage in futures contracts and options
if the sum of the amount of certain types of initial margin deposits and
premiums paid for unexpired commodity options, other than for bona fide hedging
transactions, would exceed 5% of the liquidation value of its assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into; provided, however, that in the case of an option that has
reached or exceeded its strike price at the time of purchase, the amount by
which it has exceeded its strike price may be excluded in calculating the
percentage limitation. In connection with the Fund's position in
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<PAGE> 13
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:
(a) an imperfect correlation between the change in market
value of the securities held by the Fund and the price of the
futures contracts and options
(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
(d) the advisers' ability to predict correctly the direction
of securities prices, interest rates and other economic
factors
For further information, see "Investment Objectives and
Policies -- Futures Contracts and Options" and Appendix B in the Statement of
Additional Information.
Short Term Obligations
During temporary defensive periods, the Fund may invest up to
100% of its assets in short term obligations (with maturities of 18 months or
less) such as domestic commercial paper, bankers' acceptances, certificates of
deposit and demand and time deposits of domestic and foreign branches of U.S.
banks, U.S. government securities, repurchase agreements and reverse repurchase
agreements.
In the case of repurchase agreements, in which the Fund
purchases securities subject to the seller's agreement to repurchase them at an
agreed upon time and price, 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.
10
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Reverse repurchase agreements, in which the Fund sells
securities subject to its agreement to repurchase them, and which is considered
under the 1940 Act to be a Fund borrowing, involve the risk that the market
value of the securities held by a Fund may decline below the price of the
securities it is obligated to repurchase.
For further information, see "Investment Objectives and
Policies" in the Statement of Additional Information.
Lending Portfolio Securities
In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers. The Fund must receive 100% collateral in the form of
cash or U.S. government securities. This collateral must be valued daily by the
Fund's adviser and the borrower will be required to provide additional
collateral should the market value of the loaned securities increase. During the
time portfolio securities are on loan, the borrower pays the Fund any dividends
or interest paid on such securities. Loans are subject to termination by the
Fund or the borrower at any time. While the Fund does not have the right to vote
securities on loan, it intends to terminate the loan and regain the right to
vote if this is considered important with respect to the investment. The Fund
will only enter into loan arrangements with broker-dealers, banks or other
institutions which its adviser has determined are creditworthy under guidelines
established by the Trust's Board of Trustees.
11
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Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies including other investment companies advised by the adviser which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders. For
further information, see "Investment Objective and Policies" in the Statement of
Additional Information.
Illiquid Securities
The Fund will not invest more than 15% of its net assets in
securities that are illiquid. Illiquid securities would generally include
repurchase agreements and GICs with notice/termination dates in excess of seven
days and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933, as amended (the "1933
Act").
The Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Fund's adviser, acting under guidelines approved and monitored by the Board,
that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop.
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Special Risk Factors Associated with Derivative Instruments
The Fund may purchase certain "derivative" instruments.
Derivative instruments are instruments that derive value from the performance of
underlying securities, interest or currency exchange rates, or indices, and
include (but are not limited to) futures contracts.
Like all investments, derivative instruments involve several
basic types of risks which must be managed in order to meet investment
objectives. The specific risks presented by derivatives include, to varying
degrees, market risk in the form of underperformance of the underlying
securities, exchange rates or indices; credit risk that the dealer or other
counterparty to the transaction will fail to pay its obligations; volatility and
leveraging risk that, if interest or exchange rates change adversely, the value
of the derivative instrument will decline more than the securities, rates or
indices on which it is based; liquidity risk that the Fund will be unable to
sell a derivative instrument when 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 regarding
their actual performance over complete market cycles.
The risk to the 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 adviser will evaluate the risks presented by the
derivative instruments purchased by the Fund, and will determine, in connection
with their day-to-day management of the Fund, how they will be used in
furtherance of the Fund's investment objectives.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed without the affirmative vote of the Fund's outstanding shares (as
defined under "Miscellaneous"). (Other fundamental investment limitations as
well as non-fundamental investment limitations are contained in
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the Statement of Additional Information under "Investment Objectives and
Policies.")
The Fund may not:
1. 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 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, any state, territory or
possession of the United States, the District of Columbia or
any of their authorities, agencies, instrumentalities or
political subdivisions), 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 divided 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 businesses will be
considered separate industries.
2. Purchase securities of any one issuer, other than
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of the outstanding voting securities of the issuer, except that up to 25% of
the value of the Fund's total assets may be invested without regard to such
limitations.
3. Make loans, except that the Fund 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.
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<PAGE> 18
4. Borrow money, issue senior securities or mortgage, pledge
or hypothecate its assets except to the extent permitted under the 1940 Act.
For purposes of the above investment limitations, the Fund
treats all supranational organizations as a single industry and each foreign
government (and all of its agencies) as a separate industry. In addition, for
purposes of investment limitation No. 1, 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 the value of the Fund's portfolio securities will not constitute a
violation of such limitation for purposes of the 1940 Act.
PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in
reports to shareholders the Fund's total return data for its Retail shares and
Institutional shares. The Fund calculates the 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 return of a class for any one year in the period might have been
greater or less than the average for the entire period. The Fund may also
advertise, from time to time, the total returns of one or more classes of shares
on a year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules.
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Investors may compare the performance of each class of shares
of the Fund to the performance of other mutual funds with comparable investment
objectives, to various mutual fund or market indices, such as the 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 Fund is based
on historical earnings and will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in net asset value of a class should
be considered in ascertaining the total return to shareholders for a given
period. Total return data should also be considered in light of the risks
associated with the 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
the Fund.
Shareholders should note that the total returns of Retail
shares will be lower than those of the Institutional shares of the Fund because
of the different distribution and/or servicing fees. See "Distribution and
Servicing Arrangements."
Further information about the performance of the Fund is
available in the annual and semi-annual reports to shareholders. Shareholders
may obtain these materials from the Trust free of charge by calling
1-800-622-FUND(3863).
The Fund is a successor to a collective investment fund,
previously managed by National City Bank. Substantially all of the assets of the
collective investment fund in question will be transferred to the Fund (as
indicated below) on July 10, 1998. Set forth below are certain performance data
for the predecessor collective investment fund of the Fund. This performance
information is deemed relevant because the collective investment fund was
managed using the same investment objective,
16
<PAGE> 20
policies and restrictions, and portfolio manager as those being used by the
Fund. However, this performance data is not necessarily indicative of the future
performance of the Fund.
EQUITY INDEX FUND
PREDECESSOR
COLLECTIVE INVESTMENT FUND
AVERAGE TOTAL RETURNS FOR
VARIOUS PERIODS ENDED JANUARY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR TO THE PREDECESSOR TO THE
EQUITY INDEX FUND EQUITY INDEX FUND
RETAIL SHARES RETAIL SHARES PREDECESSOR TO THE EQUITY
(ASSUMING NO SALES (ASSUMING SALES INDEX FUND INSTITUTIONAL
CHARGES)(1) CHARGES)(2) SHARES (3)
<S> <C> <C> <C>
PERIOD ENDED _________
Six Months....... 3.67% (.21)% 3.67%
PERIODS ENDED ________
One Year......... 26.90% 22.14% 26.90%
Three Years...... 30.00% 28.36% 30.00%
(Annualized)
</TABLE>
1 The predecessor collective investment fund is the Retirement Index Fund
of National City Bank. The above information is the average total
return for the periods indicated assuming reinvestment of all net
investment income and assuming full waiver of the maximum front-end
sales charge.
2 The predecessor collective investment fund is the Retirement Index Fund
of National City Bank. The above information is the average total
return for the periods indicated assuming reinvestment of all net
investment income and assuming the maximum front-end sales charge of
3.75%.
3 The predecessor collective investment fund is the Retirement Index Fund
of National City Bank. The above information is the average total
return for the periods indicated assuming reinvestment of all net
investment income. Institutional shares are sold without a sales
charge.
PRICING OF SHARES
For processing purchase and redemption orders, the net asset
value per share of the 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 on each business day,
except those holidays which the Exchange observes (currently New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day) ("Business
Day").
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.
17
<PAGE> 21
With respect to the Fund, investments in securities traded on
an exchange are valued at the last quoted sale price for a given day, or if a
sale is not reported for that day, at the mean between the most recent quoted
bid and asked prices. Unlisted securities and securities traded on a national
securities market for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities and other
assets for which no quotations are readily available are valued at their fair
value under procedures approved by the Board of Trustees. Absent unusual
circumstances, short-term investments having maturities of 60 days or less are
valued on the basis of amortized cost unless the Trust's Board of Trustees
determines that this does not represent fair value. The net asset value per
share of each class of shares of the Fund will fluctuate as the value of its
portfolio changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the
Trust's sponsor and distributor. The Distributor is a registered broker/dealer
with principal offices located in Oaks, Pennsylvania 19456.
The Distributor, adviser and/or their affiliates, at their own
expense, may provide compensation to dealers in connection with the sale and/or
servicing of shares of the Fund of the Trust. Compensation may include financial
assistance to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public, advertising campaigns regarding
one or more Funds of the Trust, and/or other dealer-sponsored special events. In
some instances, this compensation may be made available only to certain dealers
whose representatives have sold or are expected to sell a significant amount of
such shares. Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to exotic locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation may also include the following types of non-cash items offered
through sales contests: (1)
18
<PAGE> 22
vacation trips, including travel arrangements and lodging at resorts; (2)
tickets for entertainment events (such as concerts, cruises and sporting
events); and (3) merchandise (such as clothing, trophies, clocks and pens). The
Distributor, at its expense, currently conducts sales contests for dealers in
connection with their sales of shares of the Fund. Dealers may not use sales of
the Fund's shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
PURCHASE OF RETAIL SHARES
Retail shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees
depending on the type of account the Investor has established with the
institution. Investors may be charged a fee if they effect transactions in fund
shares through a broker or agent. (For information on such fees, the Investor
should review his agreement with the institution or contact it directly.) 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 the Fund. All subsequent investments for Retail shares are
subject to a minimum investment of $250. All purchases made by check should be
in U.S. dollars. Please make the check payable to Armada Funds (fund name), or,
in the case of a retirement account, the custodian or trustee for the account.
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<PAGE> 23
We will not accept third-party checks under any circumstance. 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 under "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 Retail
shares of the Fund, in a consistent manner each month, with a minimum amount of
$50. Monies may be automatically withdrawn from a shareholder's checking or
savings account available through 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
Fund, 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 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:
20
<PAGE> 24
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
PRICE PER ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000.................. 3.75 3.90 3.50
$100,000 but less
than $250,000..................... 2.75 2.83 2.50
$250,000 but less
than $500,000..................... 2.00 2.04 1.75
$500,000 but less
than $1,000,000................... 1.25 1.27 1.00
$1,000,000 or more.................. 0.00 0.00 0.00
</TABLE>
With respect to purchases of $1,000,000 or more of the Fund, the adviser may pay
from its own funds a fee of 1% of the amount invested to the financial
institution placing the purchase order. With respect to the Fund, a 1% sales
charge will be assessed against a shareholder's fund account if its value falls
below $1,000,000 due to a redemption by the shareholder within the first year
following the initial investment of $1,000,000 or more.
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;
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<PAGE> 25
(c) the spouses, children, grandchildren, and parents of
individuals referred to in clauses (a) and (b) above;
(d) individuals investing in the Fund by way of a direct
transfer or a rollover from a qualified plan distribution where affiliates of
National City Corporation are serving as a trustee or agent, or certain
institutions having relationships with affiliates of National City Corporation;
(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; and
(g) investors purchasing fund shares through "one-stop" mutual
fund networks.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of
Retail shares of the Fund made under the Right of Accumulation or Letter of
Intent, as described below. To qualify for a reduced sales charge, Investors
must so notify their financial institutions 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
22
<PAGE> 26
(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 Fund with an aggregate current value of $90,000 and subsequently
purchases Retail shares of the Fund having a current value of $10,000, the sales
charge applicable to the subsequent purchase would be reduced to 2.75% of the
Public Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately
upon signing a nonbinding Letter of Intent stating the Investor's intention to
invest during the next 13 months a specified amount which, if made at one time,
would qualify for a reduced sales charge. 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.
23
<PAGE> 27
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to banks and trust
companies which are affiliated with National City Corporation (the "Banks"),
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 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 the 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 or
RIAs. Confirmations of share purchases and redemptions will be sent to the Banks
and RIAs. Beneficial ownership of Institutional shares will be recorded by the
Banks or RIAs and reflected in the account statements provided by them to their
Customers.
The Trust reserves the right to reject any purchase order.
24
<PAGE> 28
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by
the Transfer Agent prior to 4:00 p.m. (Eastern Time) on any business day are
priced according to the net asset value per share 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 are effected at the Fund's net asset value
per share next determined after receipt of the order by the Fund. 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.
25
<PAGE> 29
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 or RIAs. It is the responsibility of the Banks 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 or RIAs may charge their Customers' accounts for
services. Information relating to such services and charges, if any, is
available from the Banks 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.
26
<PAGE> 30
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.
27
<PAGE> 31
During periods of unusual economic or market changes,
telephone redemptions may be difficult to implement. In such event, shareholders
should mail their redemption requests to their financial institutions or Armada
Funds at the address shown above. Neither the Trust nor its Transfer Agent will
be responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming Retail shares by telephone may be modified or terminated at any time
by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the
"Plan") for a shareholder who owns shares of the 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).
28
<PAGE> 32
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.
29
<PAGE> 33
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES
The Trust offers an exchange program whereby Investors who
have paid a sales charge to purchase Retail shares of the Fund (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.
No exchange fee is imposed by the Trust. 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
30
<PAGE> 34
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 the 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 Fund 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 Fund. 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 indicating an intent
to purchase Retail shares 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).
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<PAGE> 35
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement, as amended,
and Rule 12b-1 under the 1940 Act, the Trust adopted a Service and Distribution
Plan relating to the Institutional and Retail classes of shares ("Institutional
and Retail Plan"). Under the Institutional and Retail Plan, 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 Institutional and Retail classes of the Trust's
investment funds with respect to which the Distributor is distributing shares.
In the case of the Fund, such compensation shall not exceed .10% per annum of
the average aggregate net assets of its Institutional and Retail classes.
Under the Shareholder Services Plan relating to the Fund's
Retail shares, the Trust enters into shareholder servicing agreements with
certain financial institutions. Pursuant to these agreements, the institutions
agree to render shareholder administrative services to their customers who are
the beneficial owners of Retail shares in consideration for the payment of up to
.25% (on an annualized basis) of the average daily net asset value of such
shares. Persons entitled to receive compensation for servicing Retail shares may
receive different compensation with respect to those shares than with respect to
Institutional shares in the same Fund. Shareholder administrative services may
include aggregating and processing purchase and redemption orders, processing
dividend payments from the Fund on behalf of customers, providing information
periodically to customers showing their position in Retail shares, and providing
sub-transfer agent services or the information necessary for sub-transfer agent
services, with respect to Retail shares beneficially owned by customers. Since
financial institutions may charge their customers fees depending on the type of
customer account the Investor has established, beneficial owners of Retail
shares should read this Prospectus in light of the terms and fees governing
their accounts with financial institutions.
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<PAGE> 36
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are
declared and paid quarterly. 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 Fund's net asset
value per share by the per share amount thereof.
Shareholders of the Fund 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.
TAXES
The Fund intends to qualify as a separate "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification generally relieves the Fund of liability for federal
income taxes to the extent its earnings are distributed in accordance with the
Code.
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. 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. The Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by the Fund will be taxable as ordinary income to 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
33
<PAGE> 37
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 the Fund's net realized long-term capital
gains, if any, will be distributed at least annually to Fund shareholders. The
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 the Fund
on December 31 of such year in the event such dividends are actually paid during
January of the following year.
Prior to purchasing Fund shares, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution 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
34
<PAGE> 38
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 Fund will be advised at least annually as
to the federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations
which were in effect as of the date of this Prospectus; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors should consult their tax
advisers with specific reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the
direction of the Trust's Board of Trustees. The trustees of the Trust, their
addresses, principal occupations during the past five years, 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.
35
<PAGE> 39
INVESTMENT ADVISER
National City serves as the investment adviser to the Fund.
National City provides trust and banking services to individuals, corporations,
and institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. National City is a member bank
of the Federal Reserve System and the Federal Deposit Insurance Corporation.
On December 31, 1997, the Trust Department of National City
had approximately $11.5 billion in assets under management, and approximately
$23.3 billion in total trust assets. The principal office of the investment
adviser is as follows:
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
Subject to the general supervision of the Trust's Board of
Trustees and in accordance with the Fund's investment policies, the adviser has
agreed to manage the Fund, make decisions with respect to and place orders for
all purchases and sales of the Fund's securities, and maintain the Fund's
records relating to such purchases and sales.
- The Equity Index Fund is managed by Mary Jane Matts, a
Chartered Financial Analyst and a Vice President at National
City. She has 10 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.
For the services provided and expenses assumed pursuant to the
Advisory Agreement relating to the Fund, the adviser is entitled to receive an
advisory fee, computed daily and payable monthly, at the annual rate of .35% of
the average net assets of Fund. Shareholders should note that these fees are
higher than
36
<PAGE> 40
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 adviser may from time to time
waive all or a portion of its advisory fees to increase the net income of the
Fund available for distribution as dividends.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the administrator to the 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 Fund: statistical data, data processing services and accounting and
bookkeeping services; prepare tax returns and certain reports filed with the
SEC; assist in the preparation of reports to shareholders and the preparation of
the Trust's registration statement; maintain the required fidelity bond
coverage; calculate the Fund's net asset value per share, net income, and
realized capital gains (losses); and generally assist the Fund with respect to
all aspects of its administration and operation. PFPC is entitled to receive
with respect to the Fund an administrative fee, computed daily and paid monthly,
at the annual rate of .10% of the first $200,000,000 of its net assets, .075% of
the next $200,000,000 of its net assets, .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 the Fund.
37
<PAGE> 41
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 64 separate
classes or series of shares of beneficial interest ("shares"). Three of these
classes or series, which represent interests in the Equity Index Fund (Class V
and Class V - Special Series 1). Class V shares constitute the Institutional
class or series of shares and Class V - Special Series 1 shares constitute the
Retail class or series of shares. The other Funds of the Trust are:
Money Market Fund
(Class A, Class A - Special Series 1 and Class A -
Special Series 2)
Government Money Market Fund
(Class B and Class B - Special Series 1)
Treasury Money Market Fund
(Class C and Class C - Special Series 1)
Tax Exempt Money Market Fund
(Class D, Class D - Special Series 1 and Class D -
Special Series 2)
Intermediate Bond Fund
(Class I, Class I - Special Series 1 and Class I -
Special Series 2)
Ohio Tax Exempt Fund
(Class K, Class K - Special Series 1 and Class K -
Special Series 2)
National Tax Exempt Fund
(Class L, Class L - Special Series 1 and Class L -
Special Series 2)
Equity Growth Fund
(Class H, Class H - Special Series 1 and Class H -
Special Series 2)
38
<PAGE> 42
Equity Income Fund
(Class M, Class M - Special Series 1 and Class M -
Special Series 2)
Small Cap Value Fund
(Class N, Class N - Special Series 1 and Class N -
Special Series 2)
Enhanced Income Fund
(Class O, Class O - Special Series 1 and Class O -
Special Series 2)
Total Return Advantage Fund
(Class P, Class P - Special Series 1 and Class P
Special Series 2)
Pennsylvania Tax Exempt Money Market Fund (Class Q
and Class Q - Special Series 1)
Bond Fund
(Class R, Class R - Special Series 1 and Class R -
Special Series 2)
GNMA Fund
(Class S, Class S - Special Series 1 and Class S -
Special Series 2)
Pennsylvania Municipal Fund
(Class T, Class T - Special Series 1 and Class T -
Special Series 2)
International Equity Fund
(Class U, Class U - Special Series 1 and Class U -
Special Series 2)
Core Equity Fund
(Class W, Class W - Special Series 1 and Class W -
Special Series 2)
Small Cap Growth Fund
(Class X, Class X - Special Series 1 and Class X -
Special Series 2)
39
<PAGE> 43
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 Shareholder 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 plan. Voting rights are not cumulative,
and accordingly, the holders of more than 50% of the aggregate shares of the
Trust may elect all of the trustees irrespective of the vote of the other
shareholders.
As stated above, the Trust is organized as a trust under the
laws of Massachusetts. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
obligations of the trust. The Declaration of Trust of the Trust provides for
indemnification out of the trust property for any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason.
40
<PAGE> 44
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's Code of Regulations provides that special meetings of shareholders shall
be called at the written request of shareholders entitled to cast at least 10%
of the votes entitled to be cast at such meeting. Such meeting may be called by
shareholders to consider the removal of one or more trustees. Shareholders will
receive shareholder communication assistance with respect to such matter as
required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
National City 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 adviser bears all expenses in
connection with the performance of its services. The Fund 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 and
servicing plans; advisory fees; administration fees and expenses; charges of the
custodian and Transfer Agent; certain insurance premiums; outside auditing and
legal expenses; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions in
connection with the purchase of its portfolio securities.
41
<PAGE> 45
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and
annual financial statements audited by independent accountants.
Pursuant to Rule 17f-2, as National City Bank serves the Trust
as both the custodian and an investment adviser, a procedure has been
established requiring three annual verifications, two of which are to be
unannounced, of all investments held pursuant to the Custodian Services
Agreement, to be conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a
majority of the outstanding shares" of the Trust or a particular investment fund
means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
the Trust or such fund or (b) 67% or more of the shares of the Trust or such
fund present at a meeting if more than 50% of the outstanding shares of the
Trust or such fund are represented at the meeting in person or by proxy.
The portfolio manager of the Fund 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).
42
<PAGE> 46
Armada Funds
BOARD OF TRUSTEES
ROBERT D. NEARY ROBERT J. FARLING
Chairman Retired Chairman, President and
Retired Co-Chairman, Ernst & Executive Officer, Centerior
Young Energy
Director: Director:
Cold Metal Products, Inc. Republic Engineered Steels
Zurn Industries, Inc.
HERBERT R. MARTENS, JR. RICHARD W. FURST, DEAN
President Professor of Finance and Dean
Executive Vice President, Carol Martin Gatton College of
National City Corporation Business and Economics,
Chairman, President and University of Kentucky
Chief Executive Officer, Director:
NatCity Investments, Inc. Foam Design, Inc.
The Seed Corporation
LEIGH CARTER GERALD L. GHERLEIN
Retired President and Executive Vice President and
Chief Operating Officer, General Counsel, Eaton
B.F. Goodrich Company Corporation
Director: Trustee:
Acromed Corporation Meridia Health System
Kirtland Capital Corporation WVIZ Educational Television
Morrison Products
JOHN F. DURKOTT J. WILLIAM PULLEN
President and Chief Operating President and Chief Executive
Officer, Kittle's Home Furnishing's Officer, Whayne Supply Company
Center, Inc.
<PAGE> 47
INVESTMENT ADVISER
AFFILIATE OF NATIONAL
CITY CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 48
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
JUNE 25, 1997
(AS REVISED FEBRUARY 24, 1998)
EQUITY INDEX FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Fund of Armada Funds
(the "Trust"), dated June 25, 1997 (as revised February 24, 1998) (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> 49
TABLE OF CONTENTS
Page
----
STATEMENT OF ADDITIONAL INFORMATION...................................... 1
INVESTMENT OBJECTIVES AND POLICIES....................................... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 6
DESCRIPTION OF SHARES.................................................... 7
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 9
TRUSTEES AND OFFICERS.................................................... 12
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS......................... 17
SHAREHOLDER SERVICES PLAN................................................ 21
PORTFOLIO TRANSACTIONS................................................... 21
AUDITORS................................................................. 23
COUNSEL.................................................................. 23
PERFORMANCE INFORMATION.................................................. 23
MISCELLANEOUS............................................................ 25
APPENDIX A............................................................. A-1
APPENDIX B............................................................. B-1
-i-
<PAGE> 50
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in conjunction
with the Prospectus of Armada Funds (the "Trust") that describes the Equity
Index Fund. The information contained in this Statement of Additional
Information expands upon matters discussed in the Prospectus. No investment in
shares of the Fund should be made without first reading the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the adviser's investment management strategies,
techniques, policies and related matters may be included from time to time in
advertisements, sales literature, communications to shareholders and other
materials. See also, "Performance Information" below.
Attached to this Statement of Additional Information is Appendix A
which contains descriptions of the rating symbols used by S&P, Fitch, Duff, IBCA
and Moody's for securities which may be held by the Fund.
SHORT-TERM OBLIGATIONS
- ----------------------
The 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).
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. Investment in bank obligations is
limited to the obligations of financial institutions having more than $1 billion
in total assets at the
-1-
<PAGE> 51
time of purchase. The 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.
FUTURES CONTACTS AND RELATED OPTIONS
- ------------------------------------
The Fund may purchase and sell futures contracts and may purchase and
sell call and put options on futures contracts. For a detailed description of
futures contracts and related options, see Appendix B to this Statement of
Additional Information.
-2-
<PAGE> 52
REPURCHASE AGREEMENTS
- ---------------------
Securities held by the Fund may be subject to repurchase agreements.
Under the terms of a repurchase agreement, the Fund purchases securities from
financial institutions such as banks and broker-dealers which the Fund's adviser
deems creditworthy under guidelines approved by the Board of Trustees, subject
to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price generally equals the price paid
by the Fund plus interest negotiated on the basis of current short term rates,
which may be more or less than the rate on the underlying 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.
-3-
<PAGE> 53
REVERSE REPURCHASE AGREEMENTS
- -----------------------------
The Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with its investment restrictions.
Pursuant to such agreements, the 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. The Fund intends to enter into
reverse repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time the Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account liquid securities 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 the 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 1940 Act.
-4-
<PAGE> 54
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
The Fund may lend securities pursuant to agreements requiring that the
loans be continuously secured by cash, securities of the U.S. government or its
agencies, or any combination of cash and such securities, as collateral equal to
100% of the market value at all times of the securities lent. Such loans will
not be made if, as a result, the aggregate amount of all outstanding securities
loans for the Fund exceed one-third of the value of its total assets taken at
fair market value. The Fund will continue to receive interest on the securities
lent while simultaneously earning interest on the investment of the cash
collateral in U.S. government securities. However, the Fund will normally pay
lending fees to such broker-dealers and related expenses from the interest
earned on invested collateral. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by the adviser to
be of good standing and when, in the judgment of the adviser, the consideration
which can be earned currently from such securities loans justifies the attendant
risk. Any loan may be terminated by either party upon reasonable notice to the
other party.
-5-
<PAGE> 55
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
The Fund may purchase obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Some of these obligations are
supported by the full faith and credit of the U.S. Treasury, such as obligations
issued by the Government National Mortgage Association. Others, such as those of
the Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the agency or instrumentality issuing the obligation. No assurance can
be given that the U.S. government would provide financial support to U.S.
government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when the adviser believes that the credit risk with
respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The Fund currently intends to limit its investments in securities
issued by other investment companies so that, as determined immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
-6-
<PAGE> 56
PORTFOLIO TURNOVER
- ------------------
Unlike managed portfolios, the turnover of securities in an index
portfolio is meant to correlate with the turnover of specific securities listed
in the corresponding index. Therefore, the volume of transactions will normally
correspond to the rate of turnover of securities in the index. Portfolio
turnover may also be affected by cash requirements for redemptions of shares and
by requirements which enable the Fund to receive certain favorable tax
treatment. The Fund's annual portfolio turnover is not expected to exceed 10%
under normal market conditions. Portfolio turnover, however, is a function of
the number of changes the S&P 500 will make over which the adviser has no
control. The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the portfolio securities. The calculation excludes U.S.
government securities and all securities whose maturities at the time of
acquisition were one year or less.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Fund is subject to the following investment limitations which may be changed
only by a vote of the holders of a majority of the Fund's outstanding shares (as
defined under "Description of Shares" below).
The Fund may not:
1. Purchase or sell real estate, except that the 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 the 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.
-7-
<PAGE> 57
3. 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 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.
In addition, the Fund is subject to the following non-fundamental
limitations, which may be changed without the vote of shareholders:
The Fund 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, as consistent with the Fund's investment
objective and policies, (a) this investment limitation shall not apply to the
Fund's transactions in futures contracts and related options, options on
securities or indices of securities and similar instruments, and (b) the Fund
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.
-8-
<PAGE> 58
The Fund does not intend to purchase securities while its outstanding
borrowings (including reverse repurchase agreements) are in excess of 5% of its
assets. Securities held in escrow or in separate accounts in connection with the
Fund's investment practices are not deemed to be pledged for purposes of this
limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by SEI Investments
Distribution Co. (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 New York Stock Exchange is restricted by applicable rules and regulations
of the Securities and Exchange Commission ("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.
Automatic investment programs such as the monthly savings program
("Program") described in the Prospectus offered by the Fund permit an investor
to use "dollar cost averaging" in
-9-
<PAGE> 59
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.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
An illustration of the computation of the offering price per Retail
share of the Fund, based upon the estimated value of its net assets and number
of shares outstanding on its commencement date, is as follows:
TABLE
<TABLE>
<S> <C>
Net Assets of Retail Shares.........................................$10,000,000
Outstanding Retail Shares.............................................1,000,000
Net Asset Value Per Share...........................................$ 10.00
($10,000,000 / 1,000,000)
Sales Charge, 3.75% of offering price (3.90% of net
asset value per share).....................................$ .39
Offering to Public..................................................$ 10.39
</TABLE>
*Amounts are estimated as the Fund has not commenced operations.
-10-
<PAGE> 60
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail shares as described
in the Prospectus. Upon the exchange of Retail shares of one Fund for Retail
shares of another Fund, any rights an Investor may have had for a reduced or
eliminated sales load in connection with the purchase of Retail shares of the
first Fund shall apply as well to Retail shares of the other Fund. 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. Two of these classes or series, which represent interests in
the Equity Index Fund (Class V and Class V - 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-
-11-
<PAGE> 61
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 that 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
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<PAGE> 62
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
-13-
<PAGE> 63
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust.
Some investments held by a Fund may be subject to special rules which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar financial instrument. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. The Treasury Department has issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" are not subject to the mark-to-market or loss deferral
rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by a Fund which are not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
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<PAGE> 64
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".
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<PAGE> 65
TRUSTEES AND OFFICERS
---------------------
The Trustees and 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 and Trustee Retired Co-Chairman of Ernst & Young,
32980 Creekside Drive April 1984-September 1993; Director,
Pepper Pike, OH 44124 Cold Metal Products, Inc., since March
Age 64 1994; Director, Zurn Industries, Inc.
(building products and construction
services), since June 1995.
Herbert R. Martens, Jr.* President and Trustee Executive Vice President, National City
c/o NatCity Investments, Inc. Corporation (bank holding company),
1965 East Sixth Street since July 1997; Chairman, President and
Cleveland, OH 44114 Chief Executive Officer, NatCity
Age 45 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.
</TABLE>
-16-
<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
Leigh Carter* Trustee Retired President and Chief Operating
13901 Shaker Blvd., #6B Officer, B.F. Goodrich Company, August
Cleveland, OH 44120 1986 to September 1990; Director, Adams
Age 72 Express Company (closed-end investment
company), April 1982 to December
1997; Director, Acromed Corporation;
(producer of spinal implants), since
June 1992; Director, Petroleum &
Resources Corp., April 1987 to
December 1997; 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 Officer,
8600 Allisonville Road Kittle's Home Furnishings Center, Inc.,
Indianapolis, IN 46250 since January 1982; partner, Kittles
Age 53 Bloomington Property Company, since
January 1981; partner, KK&D
(Affiliated Real Estate Companies of
Kittle's Home Furnishings Center),
since January 1989.
</TABLE>
-17-
<PAGE> 67
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
Robert J. Farling Trustee Retired Chairman, President and Chief
1608 Balmoral Way Executive Officer, Centerior Energy
Westlake, OH 44145 (electric utility), March 1992 to
Age 62 October 1997; Director, National City
Corporation (bank holding company) until
October 1997; Director, Republic
Engineered Steels, since October 1997.
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol
600 Autumn Lane Martin Gatton College of Business and
Lexington, KY 40502 Economics, University of Kentucky, since
Age 59 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 1991
Pepper Pike, OH 44124 (global manufacturing); Trustee, Meridia
Age 59 Health System (four hospital health
system); Trustee, WVIZ Educational
Television (public television).
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- --------- ----------------------
<S> <C> <C>
J. William Pullen Trustee President and Chief Executive Officer,
Whayne Supply Company Whayne Supply Co. (engine and heavy
1400 Cecil Avenue equipment distribution), since 1986;
P.O. Box 35900 President and Chief Executive Officer,
Louisville, KY 40232-5900 American Contractors Rentals & Sales
Age 58 (rental subsidiary of Whayne Supply
Co.), since 1988.
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., since
400 Bellevue Parkway 1992; prior thereto, Senior Auditor,
Wilmington, DE 19809 Price Waterhouse, LLP.
Age 32
</TABLE>
- --------------------
* Messrs. Carter and Martens are considered by the Trust to be
"interested persons" 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,
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<PAGE> 69
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.
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, $18,750 $0 $0 $18,750
Chairman, President and Trustee
Thomas R. Benua, Jr., Trustee* $17,500 $0 $0 $17,500
Leigh Carter, Trustee $17,500 $0 $0 $17,500
John F. Durkott, Trustee $17,500 $0 $0 $17,500
Robert J. Farling, Trustee ** ** ** **
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
Gerald L. Gherlein, Trustee ** ** ** **
Herbert R. Martens, Jr., ** ** ** **
President and Trustee
J. William Pullen, Trustee $17,500 $0 $0 $17,500
Richard B. Tullis, Trustee* $18,750 $0 $0 $18,750
</TABLE>
- ------------------------
* Mr. Benua resigned as Trustee as of July 17, 1997. Mr. Tullis resigned
as Trustee as of November 19, 1997.
** Messrs. Farling, Gherlein and Martens were not Trustees of the Trust
during the fiscal year ended May 31, 1997.
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<PAGE> 70
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder and
not because of his acts or omissions or some other reason. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust,
and shall satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no trustee, officer, or
agent of the Trust shall be personally liable for or on account of any contract,
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust estate or the conduct of any
business of the Trust; nor shall any trustee be personally liable to any person
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as trustee.
The Declaration of Trust also provides that all persons having any claim against
the trustees or the Trust shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a trustee is
entitled to be indemnified against all liabilities and expense, 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.
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<PAGE> 71
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
-------------------------------------------------
ADVISORY AGREEMENT
- ------------------
As described in the Prospectus, National City serves
investment adviser to the Equity Index Fund. The adviser is an affiliate 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 trust assets. From time to time, the adviser may voluntarily waive fees or
reimburse the Trust for expenses.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. In addition, the adviser has undertaken in the Advisory Agreement to
maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
The Advisory Agreement relating to the Fund was approved by
its sole shareholder prior to the Fund's commencement of investment operations.
Unless sooner terminated, the Advisory Agreement will continue in effect with
respect to the 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 the Fund (as defined in the Fund's
Prospectus) and a majority of the trustees who are not parties to the Agreement
or interested persons (as defined in the 1940 Act) of any party by votes cast in
person at a meeting called for such purpose. The Advisory Agreement may be
terminated by the Trust or the adviser on 60 days written notice, and will
terminate immediately in the event of its assignment.
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<PAGE> 72
AUTHORITY TO ACT AS INVESTMENT ADVISER
- --------------------------------------
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a bank holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company. The adviser believes that it
may perform the services for the Fund contemplated by its Advisory Agreement
with the Trust as described in such agreement without violation of applicable
banking laws or regulations. However, there are no controlling judicial
precedents and future changes in legal requirements relating to the permissible
activities of banks and their affiliates, as well as future interpretations of
present requirements, could prevent the adviser from continuing to perform
services for the Trust. If the adviser were prohibited from providing services
to the Fund, the Board of Trustees would consider selecting another qualified
firm. Any new investment advisory agreement would be subject to shareholder
approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Fund shares,
the adviser and its affiliated and correspondent banks might be required to
alter materially or discontinue the services offered 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 adviser, or an affiliate of the adviser,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to
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<PAGE> 73
predict whether or in what form such legislation might be enacted or the terms
upon which the adviser, or such an affiliate, might offer to provide such
services.
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.
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Fund's shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Distribution Plan (the "Plan") which permits the Trust to bear certain
expenses in connection with the distribution of its shares. As required by Rule
12b-1, the Trust's 12b-1 Plan and related distribution agreement have been
approved, and are subject to annual approval by, a majority of the Trust's Board
of Trustees, and by a majority of the trustees who are not interested persons of
the Trust and have no direct or indirect interest in the operation of the Plan
or any agreement relating to the Plan, by vote cast in person at a meeting
called for the purpose of voting on the Plan and related agreement. In
compliance with the Rule, the trustees requested and evaluated information they
thought necessary to an informed determination of whether the Plan and related
agreement should be implemented, and concluded, in the exercise of reasonable
business judgment and in light of their fiduciary duties, that there is a
reasonable likelihood that the Plan and related agreement will benefit the Trust
and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
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<PAGE> 74
Any change in the Plan that would materially increase the
distribution expenses of the Fund requires approval by its shareholders, but
otherwise, the Plan may be amended by the trustees, including a majority of the
disinterested trustees who do not have any direct or indirect financial interest
in the Plan or related agreement. The Plan and related agreement may be
terminated as to the Fund by a vote of the Trust's disinterested trustees or by
vote of the shareholders of the Fund, on not more than 60 days written notice.
The selection and nomination of disinterested trustees has been committed to the
discretion of such disinterested trustees as required by the Rule.
The Trust's Plan provides that the Fund will compensate the
Distributor for distribution expenses in an amount not to exceed .10% per annum
of the average aggregate net assets of such Fund. Distribution expenses payable
by the Distributor pursuant to the Plan include direct and indirect costs and
expenses incurred in connection with advertising and marketing the Fund's
shares, and direct and indirect costs and expenses of preparing, printing and
distributing its prospectuses to other than current shareholders. 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.
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<PAGE> 75
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Fund. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of the
Fund; (ii) hold and disburse portfolio securities on account of the Fund; (iii)
collect and make disbursements of money on behalf of the Fund; (iv) collect and
receive all income and other payments and distributions on account of the Fund's
portfolio securities; (v) respond to correspondence by security brokers and
others relating to its duties; and (vi) make periodic reports to the Board of
Trustees concerning the Fund's operations. National City Bank is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Fund, provided that it shall remain responsible for the performance of
all of its duties under the Custodian Services Agreement and shall hold the Fund
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian. The Fund reimburses National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by the Fund in any year may not exceed $.225
for each $1,000 of average gross assets of the Fund.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Fund. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of the Fund; (ii) transmit all communications by the Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Fund's operations. The Transfer Agent sends each
shareholder of record a statement (not less frequently than quarterly) showing
the total number of shares owned as of the last business day of the month (as
well as the dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's account with the Fund.
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<PAGE> 76
SHAREHOLDER SERVICES PLAN
-------------------------
As stated in the Prospectus, the Trust has implemented the
Services Plan with respect to Retail shares in the Fund. Pursuant to the
Services Plan, the Trust may enter into agreements with financial institutions
pertaining to the provision of administrative services to their customers who
are the beneficial owners of Retail shares in consideration for the payment of
up to .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 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 Fund. The adviser
purchases portfolio securities either directly from the issuer or from an
underwriter or dealer making a market in the securities involved. Purchases from
an underwriter of portfolio securities include a commission or concession paid
by the issuer to the underwriter and purchases from dealers serving as market
makers may include the spread between the bid and asked price. Transactions on
stock exchanges involve the payment of negotiated brokerage commissions. There
is generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up.
While the adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction
-27-
<PAGE> 77
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 its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to the
adviser may receive orders for transactions by the Fund. Information so received
is in addition to and not in lieu of services required to be performed by the
adviser and does not reduce the fees payable to the adviser by the Fund. Such
information may be useful to the adviser in serving both the Trust and other
clients, and, similarly, supplemental information obtained by the placement of
business of other clients may be useful to the adviser in carrying out its
obligations to the Trust.
Portfolio securities will not be purchased from or sold to the
Fund's adviser, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as adviser to the Fund, National City has agreed
to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department. In making investment recommendations
for the Trust, Trust Department personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Trust's account are customers of the Commercial Department. In dealing with
commercial customers, the Commercial Department will not inquire or take into
consideration whether securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the adviser. Such other Funds, investment companies and
accounts may also invest in the same securities as such Fund. When a purchase or
sale of the same security is made at substantially the same
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time on behalf of the Fund and another investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the adviser believes to be equitable to the Fund
and such other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund. To the extent permitted by
law, the adviser may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
AUDITORS
--------
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust.
COUNSEL
-------
Drinker Biddle & Reath 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 certain legal
matters for the Trust.
PERFORMANCE INFORMATION
-----------------------
The Fund computes its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
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ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
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 the Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the measuring period
covered by the computation.
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more
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<PAGE> 80
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, the Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. The Fund will, however, disclose the maximum sales charge and will also
disclose that the performance data do not reflect sales charges and that
inclusion of sale charges would reduce the performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on the Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments, economic
conditions, the relationship between sectors of the economy and the economy as a
whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Fund), as well as the views of the adviser as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related
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<PAGE> 81
matters believed to be of relevance to the Fund. The Fund may also include in
Materials charts, graphs or drawings which compare the investment objective,
return potential, relative stability and/or growth possibilities of the Fund
and/or other mutual funds, or illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury securities and shares of the Fund and/or other mutual funds.
Materials may include a discussion of certain attributes or benefits to be
derived by an investment in the Fund and/or other mutual funds (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable investments), shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Materials may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
-------------
The Fund 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 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 the Fund's net asset value, assets belonging to
the Fund are charged with the liabilities in respect of that Fund.
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<PAGE> 82
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<PAGE> 83
APPENDIX A
----------
DESCRIPTION OF RATINGS
Ru
Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the highest rating category used by S&P for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the highest rating
category used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Principal repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
The following summarizes the highest rating category used by
Duff & Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
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<PAGE> 84
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
The following summarizes the highest rating category used by
Fitch for short-term notes, municipal notes, variable rate demand instruments
and commercial paper:
"F-1+" - Instruments assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
"F-1" - Instruments assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues
rated 'F-1+."
IBCA uses the following highest rating category for short term
notes including commercial paper:
"A1+" - These issues display the very highest quality
borrowing characteristics and are of undoubted or prime
creditworthiness.
"A1" - These issues display very strong borrowing
characteristics.
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<PAGE> 85
APPENDIX B
As stated in the Prospectus, the Equity Index Fund (the
"Fund") may enter into certain futures transactions and options for hedging
purposes. Such transactions are described in this Appendix.
I. Index Futures Contracts
-----------------------
GENERAL. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's Ratings Group 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes or indexes based on an industry or market
segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract. The Fund will purchase index futures contracts in
anticipation of purchases of securities. A long futures position may be
terminated without a corresponding purchase of securities.
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II. Margin Payments
---------------
Unlike purchases or sales of portfolio securities, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, the
adviser may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination 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.
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<PAGE> 87
III. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures
by the Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, the Fund may buy or sell futures contracts in a greater
dollar amount than the dollar amount of instruments being hedged if the
volatility over a particular time period of the prices of such instruments has
been greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the adviser. Conversely, the Fund may buy
or sell fewer futures contracts if the volatility over a particular time period
of the prices of the instruments being hedged is less than the volatility over
such time period of the futures contract being used, or if otherwise deemed to
be appropriate by the advisers. It is also possible that, where the Fund has
sold futures to hedge its Fund against a decline in the market, the market may
advance and the value of instruments held in the Fund may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities.
When futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then
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concludes not to invest its cash at that time because of concern as to possible
further market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of the
instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund will continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
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<PAGE> 89
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Fund is also subject to the
advisers, ability to predict correctly movements in the direction of the market.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may 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
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<PAGE> 90
specified price at any time during the period of the option. Upon exercise, the
writer of the option is obligated to pay the difference between the cash value
of the futures contract and the exercise price. Like the buyer or seller of a
futures contract, the holder, or writer, of an option has the right to terminate
its position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. The Fund will be required
to deposit initial margin and variation margin with respect to put and call
options on futures contracts written by it pursuant to brokers' requirements
similar to those described above. Net option premiums received will be included
as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
V. Other Matters
-------------
Accounting for futures contracts will be in accordance with
generally accepted accounting principles. The Fund intends to comply with the
regulations of the Commodity Futures Trading Commission exempting it from
registration as a "commodity pool operator." The Fund's commodities transactions
must constitute bona fide hedging or other permissible transactions pursuant to
such regulations.
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