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ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 15, 1998
MONEY MARKET FUND
GOVERNMENT MONEY MARKET FUND
TREASURY MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND
OHIO MUNICIPAL MONEY MARKET FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 15, 1998 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at 1-800-622-FUND
(3863), One Freedom Valley Drive, Oaks, Pennsylvania 19456.
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TABLE OF CONTENTS
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STATEMENT OF ADDITIONAL INFORMATION........................................ 1
INVESTMENT OBJECTIVES AND POLICIES......................................... 1
NET ASSET VALUE............................................................ 16
DIVIDENDS.................................................................. 17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................. 17
DESCRIPTION OF SHARES...................................................... 18
ADDITIONAL INFORMATION CONCERNING TAXES.................................... 20
TRUSTEES AND OFFICERS...................................................... 22
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS............................................. 26
SHAREHOLDER SERVICES PLANS................................................. 31
PORTFOLIO TRANSACTIONS..................................................... 31
AUDITORS................................................................... 32
COUNSEL.................................................................... 33
STANDARDIZED YIELD QUOTATIONS.............................................. 33
MISCELLANEOUS.............................................................. 34
FINANCIAL STATEMENTS....................................................... 42
APPENDIX A................................................................. A-1
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STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in conjunction
with the Prospectus of Armada Funds (the "Trust") that describes the Money
Market Fund, Government Money Market Fund (the "Government Fund"), Treasury
Money Market Fund (the "Treasury Fund"), Tax Exempt Money Market Fund (the "Tax
Exempt Fund"), Pennsylvania Tax Exempt Money Market Fund (the "Pennsylvania Tax
Exempt Fund") and Ohio Municipal Money Market Fund (the "Ohio Municipal Fund").
The information contained in this Statement of Additional Information expands
upon matters discussed in the Prospectus. No investment in shares of a Fund
should be made without first reading the Prospectus.
The Pennsylvania Tax Exempt Fund commenced operations on August 8, 1994
as a separate investment portfolio (the "Predecessor Fund") of Inventor Funds,
Inc, which was organized as a Maryland corporation. On September 9, 1996, the
Predecessor Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Fund offered and sold shares of stock that were
similar to the Trust's A Shares of beneficial interest.
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, "Standardized Yield Quotations" below.
Attached to this Statement of Additional Information is Appendix A
which contains descriptions of the rating symbols used by S&P, Fitch, Duff, IBCA
and Moody's for municipal bonds, short term notes and other securities which may
be held by the Funds.
ELIGIBLE SECURITIES
The Funds may purchase "eligible securities" that present minimal
credit risks as determined by the Adviser pursuant to guidelines established by
the Trust's Board of Trustees. Eligible securities generally include: (1)
securities that are rated by two or more Rating Agencies (or the only Rating
Agency which has issued a rating) in one of the two highest rating categories
for short term debt securities; (2) securities that have no short term rating,
if the issuer has other outstanding short term obligations that are comparable
in priority and security as determined by the Adviser ("Comparable Obligations")
and that have been rated in accordance with (1) above; (3) securities that have
no short term rating, but are determined to be of comparable quality to a
security satisfying (1) or (2) above, and the issuer does not have Comparable
Obligations rated by a Rating Agency; and (4) securities with credit supports
that meet specified rating criteria similar to the foregoing and other criteria
in accordance with applicable Securities and Exchange Commission ("SEC")
regulations. Securities issued by a money market fund and securities issued by
the U.S. Government may constitute eligible
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securities if permitted under applicable SEC regulations and Trust procedures.
The Board of Trustees will approve or ratify any purchases by the Money Market,
Government, Treasury, Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal
Funds of securities that are rated by only one Rating Agency or that qualify
under (3) above as long as required by applicable regulations or Trust
procedures.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Funds may purchase variable rate and floating rate obligations as
described in the Prospectus. The Adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers and guarantors of such notes and
will continuously monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, a variable or floating rate
instrument issued or guaranteed by the U.S. government or an agency or
instrumentality thereof will be deemed to have a maturity equal to the period
remaining until the obligation's next interest rate adjustment. Other variable
and floating rate obligations will be deemed to have a maturity equal to the
longer or shorter of the periods remaining to the next interest rate adjustment
or the demand notice period in accordance with applicable regulations or Trust
procedures.
Variable and floating rate obligations held by a Fund may have
maturities of more than 397 days, provided: (a) (i) the Fund is entitled to
payment of principal and accrued interest upon not more than 30 days' notice or
at specified intervals not exceeding one year (upon not more than 30 days'
notice) and (ii) the rate of interest on such instrument is adjusted
automatically at periodic intervals which normally will not exceed 31 days, but
may extend up to one year, or (b) if the obligation is an asset-backed security,
and if permitted under Trust procedures and applicable regulations, the security
has a feature permitting the holder unconditionally to receive principal and
interest within 13 months of making demand.
GUARANTEED INVESTMENT CONTRACTS
As stated in the Prospectus, the Money Market Fund may invest in GICs
issued by insurance companies. Pursuant to such contracts, the Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund on a monthly basis guaranteed
interest which is based on an index. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company may
assess periodic charges against a GIC for expense and service costs allocable to
it, and the charges will be deducted from the value of the deposit fund. The
Fund will only purchase a GIC when the Adviser has determined, under guidelines
established by the Board of Trustees, that the GIC presents minimal credit risks
to the Fund and is of comparable quality to instruments that are rated high
quality by Rating Agencies. The Fund's investments in GICs will not exceed 10%
of the Fund's net assets. In addition, because the Fund may not receive the
principal amount of a GIC from the insurance company on seven days' notice or
less, the GIC is considered an illiquid investment, and, together with other
instruments in the Fund which are not readily marketable, will not exceed 10% of
the Fund's net assets. The term of a GIC will be one year or less. In
determining average weighted portfolio maturity, a GIC will be deemed to
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have a maturity equal to the period of time remaining until the next
readjustment of the guaranteed interest rate.
BANK OBLIGATIONS AND COMMERCIAL PAPER
The Money Market, Pennsylvania Tax Exempt and Ohio Municipal Funds may
invest in bank obligations. Bank obligations include bankers' acceptances
generally having a maturity of six months or less and negotiable certificates of
deposit. Bank obligations also include U.S. dollar denominated bankers'
acceptances and certificates of deposit. Investment in bank obligations is
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase. For purposes of the Money Market Fund's
investment policy with respect to bank obligations, the assets of a bank or
savings institution will be deemed to include the assets of its domestic and
foreign branches.
Investments by the Pennsylvania Tax Exempt Fund and Ohio Municipal Fund
include commercial paper and other short term promissory notes issued by
corporations, municipalities and other entities (including variable and floating
rate instruments).
REPURCHASE AGREEMENTS; REVERSE REPURCHASE AGREEMENTS; LENDING OF PORTFOLIO
SECURITIES
Securities held by the Money Market, Government, Pennsylvania Tax
Exempt and Ohio Municipal Funds may be subject to repurchase agreements. Under
the terms of a repurchase agreement, the Funds purchase securities from
financial institutions such as banks and broker-dealers which the 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.
Reverse repurchase agreements are considered to be borrowings by the
Funds under the 1940 Act. Whenever a Fund enters into a reverse repurchase
agreement as described in the Prospectus, it will place in a segregated
custodial account liquid assets at least equal to the
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repurchase price marked to market daily (including accrued interest) and will
subsequently monitor the account to ensure such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
it is obligated to repurchase.
With respect to loans by the Money Market or Government Funds of its
portfolio securities as described in the Prospectus, the Fund would continue to
accrue interest on loaned securities and would also earn income on loans. Any
cash collateral received by the Funds in connection with such loans would be
invested in short-term U.S. Government obligations.
GOVERNMENT SECURITIES
Examples of the types of U.S. government obligations that may be held
by the Money Market, Government, Tax Exempt, Pennsylvania Tax Exempt and Ohio
Municipal Funds include, in addition to Treasury Bills, the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks and Maritime Administration. Some
of these obligations are supported by the full faith and credit of the U.S.
Treasury, such as obligations issued by the Government National Mortgage
Association. Others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality issuing the obligation. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. The Money Market,
Government and Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds will
invest in the obligations of such agencies or instrumentalities only when the
Adviser believes that their credit risk with respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment companies
as described in the Prospectus. Each Fund currently intends to limit such
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 5% of the value of its total assets will be invested in
the securities of any one investment company; (b) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding voting
stock of any one investment company will be owned by the Fund; and (d) not more
than 10% of the outstanding voting stock of any one investment company will be
owned in the aggregate by the Fund and other investment companies advised by the
Adviser. As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of
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that company's expenses, including advisory fees. These expenses would be in
addition to the advisory and other expenses that a Fund bears directly in
connection with its own operations. Investment companies in which a Fund may
invest may also impose a sales or distribution charge in connection with the
purchase or redemption of their shares and other types of commissions or
charges. Such charges will be payable by the Fund and, therefore, will be borne
indirectly by its shareholders.
MUNICIPAL SECURITIES
As described in the Prospectus, the Tax Exempt, Pennsylvania Tax Exempt
and Ohio Municipal Funds may purchase Municipal Securities. The two principal
classifications of Municipal Securities consist of "general obligation" and
"revenue" issues. The Funds also may invest in "moral obligation" issues, which
are normally issued by special purpose authorities. Municipal Securities include
debt obligations issued by governmental entities to obtain funds for various
public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities. Private activity bonds may be purchased if the interest paid is
excludable from federal income tax. Private activity bonds are issued by or on
behalf of states or political subdivisions thereof to finance privately owned or
operated facilities for business and manufacturing, housing, sports, and
pollution control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public facilities
such as airports, mass transit systems, ports, parking and low income housing.
The payment of the principal and interest on private activity bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and may be secured by a pledge of real and personal property so financed.
Ohio and Pennsylvania Municipal Securities which are payable only from
the revenues derived from a particular facility may be adversely affected by
federal, by Ohio in the case of Ohio Municipal Securities and by Pennsylvania in
the case of Pennsylvania Municipal Securities, laws, regulations or court
decisions which make it more difficult for the particular facility to generate
revenues sufficient to pay such interest and principal, including, among others,
laws, decisions and regulations which limit the amount of fees, rates or other
charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. Pennsylvania Municipal
Securities, the payment of interest and principal on which is insured in whole
or in part by a Pennsylvania governmentally created fund, may be adversely
affected by Pennsylvania laws or regulations which restrict the aggregate
proceeds available for payment of principal and interest in the event of a
default on such municipal securities. The payment of interest and principal on
Ohio and Pennsylvania Municipal Securities may be adversely affected by
respective state laws which limit the availability of remedies or the scope of
remedies available in the event of a default on such municipal securities.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific Ohio or Pennsylvania Municipal Securities
the Ohio Municipal or Pennsylvania Tax Exempt Funds will invest from time to
time or predicting the nature or extent of future judicial interpretation or
changes in existing laws or regulations or the future enactment or adoption of
additional laws or regulations,
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it is not presently possible to determine the impact of such laws,
regulations and judicial interpretation on the securities in which the Ohio
Municipal and Pennsylvania Tax Exempt Funds may invest and, therefore, on the
shares of that Fund.
There are, of course, variations in the quality of Municipal Securities
both within a particular classification and between classifications, and the
yields on Municipal Securities depend upon a variety of factors, including the
financial condition of the issuer, general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of Rating Agencies represent their opinions
as to the quality of Municipal Securities. It should be emphasized, however,
that ratings are general and are not absolute standards of quality, and
Municipal Securities with the same maturity, interest rate and rating may have
different yields while Municipal Securities of the same maturity and interest
rate with different ratings may have the same yield. Subsequent to its purchase
by the Tax Exempt Fund, Pennsylvania Tax Exempt Fund or Ohio Municipal Fund, an
issue of Municipal Securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by such Funds. The Adviser will
consider such an event in determining whether it should continue to hold the
obligation.
The payment of principal and interest on most Municipal Securities
purchased by the Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds
will depend upon the ability of the issuers to meet their obligations. An
issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its Municipal Securities may be materially
adversely affected by litigation or other conditions.
Certain Municipal Securities held by the Tax Exempt, Pennsylvania Tax
Exempt or Ohio Municipal Funds may be insured at the time of issuance as to the
timely payment of principal and interest. The insurance policies will usually be
obtained by the issuer or original purchaser of the Municipal Bond at the time
of its original issuance. In the event that the issuer defaults on interest or
principal payments, the insurer of the bond is required to make payment to the
bondholders upon proper notification. There is, however, no guarantee that the
insurer will meet its obligations. In addition, such insurance will not protect
against market fluctuations caused by changes in interest rates and other
factors.
Municipal notes in which the Tax Exempt, Pennsylvania Tax Exempt and
Ohio Municipal Funds may invest include, but are not limited to, general
obligation notes, tax anticipation notes (notes sold to finance working capital
needs or capital facilities of the issuer in anticipation of receiving taxes on
a future date), revenue anticipation notes (notes sold to provide needed cash
prior to receipt of expected non-tax revenues from a specific source), bond
anticipation notes, certificates of indebtedness, demand notes and construction
loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
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Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 or SP-2 by S&P, F-2 by Fitch or
Prime-2, MIG-2 or VMIG-2 by Moody's at the time of investment or which are of
equivalent quality as determined by the Adviser. Investments in floating rate
instruments will normally involve industrial development or revenue bonds which
provide that the investing Fund can demand payment of the obligation at all
times or at stipulated dates on short notice (not to exceed 30 days) at par plus
accrued interest. A Fund must use the shorter of the period required before it
is entitled to prepayment under such obligations or the period remaining until
the next interest rate adjustment date for purposes of determining the maturity.
Such obligations are frequently secured by letters of credit or other credit
support arrangements provided by banks. The quality of the underlying credit or
of the bank, as the case may be, must, in the opinion of the Adviser be
equivalent to the commercial paper ratings stated above. The Adviser will
monitor the earning power, cash flow and liquidity ratios of the issuers of such
instruments and the ability of an issuer of a demand instrument to pay principal
and interest on demand. Other types of tax-exempt instruments may also be
purchased as long as they are of a quality equivalent to the bond or commercial
paper ratings stated above.
STAND-BY COMMITMENTS
The Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds may
acquire stand-by commitments (also known as put options) with respect to
Municipal Securities held in their portfolios. These Funds expect that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, the Funds may pay
for a stand-by commitment either separately in cash or by paying a higher price
for portfolio securities which are acquired subject to the commitment (thus
reducing the yield to maturity otherwise available for the same securities). The
Funds will not acquire stand-by commitments unless immediately after the
acquisition, not more than 5% of their respective total assets will be invested
in instruments subject to a demand feature, or in stand-by commitments, with the
same institution.
The Tax Exempt, Pennsylvania Tax Exempt, and Ohio Municipal Funds'
right to exercise stand-by commitments will be unconditional and unqualified. A
stand-by commitment will be transferable only with the underlying Municipal
Securities which may be sold to a third party at any time. Until a Fund
exercises its stand-by commitment, it owns the securities in its portfolio which
are subject to the commitment.
The amount payable to the Tax Exempt, Pennsylvania Tax Exempt or Ohio
Municipal Fund upon its exercise of a stand-by commitment will normally be (i)
the Fund's acquisition cost of the Municipal Securities (excluding any accrued
interest which the Fund paid on its acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Under normal
market conditions, in determining net asset value the Funds value the underlying
Municipal Securities on an amortized cost basis. Accordingly, the amount payable
by a dealer upon exercise of a
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stand-by commitment will normally be substantially the same as the portfolio
value of the underlying Municipal Securities.
The Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds intend
to enter into stand-by commitments only with dealers, banks and broker-dealers
which, in the Adviser's opinion, present minimal credit risks. The Funds'
reliance upon the credit of these dealers, banks and broker-dealers will be
secured by the value of the underlying Municipal Securities subject to the
commitment. Thus, the risk of loss to the Funds in connection with a stand-by
commitment will not be qualitatively different from the risk of loss faced by a
person that is holding securities pending settlement after having agreed to sell
the securities in the ordinary course of business.
WHEN-ISSUED SECURITIES
The Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds may
purchase Municipal Securities on a "when-issued" basis (i.e., for delivery
beyond the normal settlement date at a stated price and yield). When a Fund
agrees to purchase when-issued securities, the custodian sets aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment,
marked to market daily. It is likely that a Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Funds will set aside cash
or liquid assets to satisfy the Funds' purchase commitments in the manner
described, their liquidity and ability to manage their portfolios might be
affected in the event the Funds' commitments to purchase when-issued securities
ever exceeded 25% of the value of their respective total assets.
When the Funds engage in when-issued transactions, they rely on the
seller to consummate the trade. Failure of the seller to do so may result in a
Fund incurring a loss or missing an opportunity to obtain a price considered to
be advantageous.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the following investment limitations which may be
changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
No Fund may:
1. Purchase 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.
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2. Invest in commodities, except that as consistent with its
investment objective and policies a 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. For purposes of this investment limitation,
"commodities" includes commodity contracts.
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 Funds are subject to the following non-fundamental
limitations, which may be changed without the vote of shareholders.
No Fund may:
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 a 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)
it may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising
control.
5. Invest more than 10% of its net assets in illiquid securities.
The Funds do not intend to purchase securities while their outstanding
borrowings (including reverse repurchase agreements) are in excess of 5% of
their respective total assets. Securities held in escrow or separate accounts in
connection with a Fund's investment practices are not deemed to be pledged for
purposes of this limitation.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA MUNICIPAL
SECURITIES
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Potential shareholders should consider the fact that the Pennsylvania
Tax Exempt Fund's portfolio consists primarily of securities issued by the
Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize that such Fund's performance is closely tied to
general economic conditions within the Commonwealth as a whole and to economic
conditions within particular industries and geographic areas located within the
Commonwealth.
Although the General Fund of the Commonwealth (the principal operating
fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax
increases and spending decreases have resulted in surpluses the last four years;
as of June 30, 1996, the General Fund had a surplus of $635.2 million.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly into
medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suit relating to the following matters: (i) the American
Civil Liberties Union ("ACLU") filed suit in federal court demanding additional
funding for child welfare services; the Commonwealth settled a similar suit in
the Commonwealth Court of Pennsylvania and is seeking the dismissal of the
federal suit, among other things, because of that settlement. After its earlier
denial of class certification was reversed by the Third Circuit Court of
Appeals, the district court granted class certification to the ACLU and the
parties are proceeding with discovery; (ii) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for country funding of the judicial
system to be in conflict with the constitution of the Commonwealth, but it
stayed judgment pending enactment by the legislature of funding consistent with
the opinion, and the legislature has yet to consider legislation implementing
the judgment. In 1992, a new action in mandamus was filed seeking to compel the
Commonwealth to comply with the original decision. The Court issued a writ in
mandamus and appointed a special master in 1996 to submit a plan for
implementation, which it intended to require by January 1, 1998. In January
1997, the Court established a committee, consisting of the special master and
representatives of the Executive and Legislative branches, to develop an
implementation plan; (iii) litigation was filed in both state and federal court
by an association of rural and small schools and several individual school
districts and parents challenging the constitutionality of the Commonwealth's
system for funding local school districts -- the federal case has been stayed
pending the resolution of the state case; a trial in the state case commenced in
January 1997 and has recessed; no briefing schedule or date for oral argument
has yet been set; (iv) Envirotest/Synterra Partners ("Envirotest") filed suit
against the Commonwealth asserting that it sustained damages in excess of $350
million, as a
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result of investments it made in reliance on a contract to conduct emissions
testing before the emission testing program was suspended. Envirotest entered
into a Standstill Agreement with the Commonwealth pursuant to which the parties
will attempt to resolve Envirotest will receive $145 million, with interest at 6
percent per annum; and (v) in 1995, the Commonwealth, the Governor of
Pennsylvania, the City of Philadelphia and the Mayor of Philadelphia were joined
as additional respondents in an enforcement action commenced in Commonwealth
Court in 1973 by the Pennsylvania Human Relations Commission against the School
District of Philadelphia pursuant to the Pennsylvania Human Relations Act. The
Commonwealth and the City were joined to determine their liability, if any, to
pay additional costs necessary to remedy segregation-related conditions found to
exist in Philadelphia public schools. In January 1997, the Pennsylvania Supreme
Court ordered the parties to brief certain issues, but no decision by the
Supreme Court has been issued.
A disaster emergency was declared by the Governor and a federal major
disaster declaration was made by the President of the United States for certain
counties in the Commonwealth for a blizzard and subsequent flooding in January
1996. The General Assembly authorized $123 million to provide for the
Commonwealth's share of the required match for federal public assistance and
disaster mitigation funds.
Although there can be no assurance that such conditions will continue,
the Commonwealth's general obligation bonds are currently rated AA- by S&P and
A1 by Moody's and Philadelphia's and Pittsburgh's general obligation bonds are
currently rated BBB- and BBB+, respectively, by S&P and Baa and Baa1,
respectively, by Moody's.
The City of Philadelphia (the "City") experienced a series of General
Fund deficits for fiscal years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term solution
for its economic difficulties. The audited balance of the City's General Fund as
of June 30, 1996 was a surplus of $118.5 million.
In recent years, an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.76
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. As one
of the conditions of issuing bonds on behalf of the City, PICA exercises
oversight of the City's finances. The City is currently operating under a five
year plan approved by PICA in 1995. PICA's power to issue further bonds to
finance capital projects expired on December 31, 1994. PICA's authority to issue
bonds to finance cash flow deficits expired on December 31, 1996, but its
authority to refund existing debt will not expire.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN OHIO MUNICIPAL SECURITIES
As described in the Prospectus, the Ohio Municipal Fund will invest
most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Municipal Securities"). The Fund
is therefore susceptible to general or particular economic, political or
regulatory factors that may affect issuers of Ohio Municipal Securities. The
following information constitutes only a
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brief summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Municipal Securities of local
issuers is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Municipal Securities or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Municipal Securities, or in those of particular issuers,
as to which those factors apply. However, the information below is intended only
as a general summary, and is not intended as a discussion of any specific
factors that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Municipal
Securities has been guaranteed by bond insurance purchased by the issuers, the
Fund or other parties. Those Ohio Municipal Securities may not be subject to the
factors referred to in this section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1996 is 11,173,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last seven years the State rates were below the national rates (4.6% versus
4.9% in 1997). The unemployment rate and its effects vary among geographic areas
of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio Municipal
Securities held in the Fund or the ability of particular obligors to make timely
payments of debt service on (or lease payments relating to) those Obligations.
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The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
The 1992-93 biennium presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11, 1991,
$200 million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both
in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed, an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed
for debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF. The significant
GRF fund balance, after leaving in the GRF an unreserved and undesignated
balance of $70 million, was transferred to the BSF and other funds including
school assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.
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From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million went to school building
construction and renovation, $94 million to the school computer network, $44.2
million for school textbooks and instructional materials and a distance learning
program, and $34 million to the BSF, and the $263 million balance to a State
income tax reduction.
The GRF appropriations act for the 1997-98 biennium was passed on June
25, 1997 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. Subsequent
legislation increased the fiscal year 1999 GRF appropriation level for
elementary and secondary education, with the increase to be funded in part by
mandated small percentage reductions in State appropriations for various State
agencies and institutions. Expressly exempt from those reductions are all
appropriations for debt service, including lease rental payments.
The BSF had a July 30, 1998 balance of more than $862 million.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At July 30, 1998, $1.14 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding or awaiting delivery. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($26.7 million outstanding); (b)
$240 million of obligations authorized for local infrastructure improvements, no
more than $120 million of which may be issued in any calendar year (over $1
billion outstanding or awaiting delivery); and (c) up to $200 million in general
obligation bonds for parks, recreation and natural resources purposes which may
be outstanding at any one time ($88.6 million outstanding, with no more than $50
million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the
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prior $500 million outstanding authorization, and authorizes not more that $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.2 billion of
which were outstanding at July 30, 1998.
The State estimates that aggregate FY 1998 rental payments under
various capital lease and lease purchase agreements were approximately $9.1
million. In recent years, State agencies have also participated in
transportation and office building projects that may have some local as well as
State use and benefit, in connection with which the State enters into lease
purchase agreements with terms ranging from 7 to 20 years. Certificates of
participation, or special obligation bonds of the State or a local agency, are
issued that represent fractionalized interests in or are payable from the
State's anticipated payments. The State estimates highest future FY payments
under those agreements (as of July 30, 1998) to be approximately $30.7 million
(of which $27.2 million is payable from sources other than the GRF, such as
federal highway money distributions). State payments under all those agreements
are subject to biennial appropriations, with the lease terms being two years
subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 119 districts
(as of July 30, 1998) from voter-
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authorized income taxes, for significant portions of their budgets. Litigation,
similar to that in other states, has been pending questioning the
constitutionality of Ohio's system of school funding. The Ohio Supreme Court has
concluded that aspects of the system (including basic operating assistance and
the loan program described below) are unconstitutional, and ordered the State to
provide for and fund a system complying with the Ohio Constitution, staying its
order for a year (to March 24, 1998) to permit time for responsive corrective
actions. The parties await eventual trial court decision on the adequacy of
steps taken to date by the State to enhance school funding consistent with the
Supreme Court decision. A small number of the State's 612 local school districts
have in any year required special assistance to avoid year-end deficits. A
program has provided for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to repayment
if needed. Recent borrowings under this program totalled $41.1 million for 28
districts in FY 1994, $71.1 million for 29 districts in FY 1995 (including $29.5
million for one), and $87.2 million for 20 districts in FY 1996 (including $42.1
million for one), and $113.2 million for 12 districts in 1997 (including $90
million to one for restructuring prior loans).
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys distributed
by the State.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
25 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated (one village and one city are in preliminary "fiscal
watch" status). As of July 30, 1998, the 1996 school district "fiscal emergency"
provision was applied to six districts, and 10 were on preliminary "fiscal
watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
NET ASSET VALUE
The Trust uses the amortized cost method to value shares in the Funds.
Pursuant to this method, a security is valued at its cost initially and
thereafter a constant amortization to maturity of any discount or premium is
assumed, regardless of the impact of fluctuating interest rates on the market
value of the security. Where it is not appropriate to value a security by the
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amortized cost method, the security will be valued either by market quotations,
or by fair value as determined by the Board of Trustees. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price each respective
Fund would receive if it sold the security. The value of the portfolio
securities held by each respective Fund will vary inversely to changes in
prevailing interest rates. Thus, if interest rates have increased from the time
a security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its purchase cost. In either instance, if the security is held to maturity,
no gain or loss will be realized.
Each Fund invests only in high-quality instruments and maintains a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value per share, provided that a Fund will
neither purchase any security deemed to have a remaining maturity of more than
397 calendar days within the meaning of the 1940 Act nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Trust's
Board of Trustees has established procedures pursuant to rules promulgated by
the SEC, that are intended to help stabilize the net asset value per share of
each Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Board of Trustees, at such intervals as it deems
appropriate, to determine the extent, if any, to which the net asset value per
share of each Fund calculated by using available market quotations deviates from
$1.00 per share. In the event such deviation exceeds one-half of one percent,
the Board of Trustees will promptly consider what action, if any, should be
initiated. If the Board of Trustees believes that the extent of any deviation
from a Fund's $1.00 amortized cost price per share may result in material
dilution or other unfair results to investors or existing shareholders, it has
agreed to take such steps as it considers appropriate to eliminate or reduce, to
the extent reasonably practicable, any such dilution or unfair results. These
steps may include selling portfolio instruments prior to maturity; shortening
the average portfolio maturity; withholding or reducing dividends; redeeming
shares in kind; reducing the number of a Fund's outstanding shares without
monetary consideration; or utilizing a net asset value per share determined by
using available market quotations.
DIVIDENDS
As stated, the Trust uses its best efforts to maintain the net asset
value per share of the Funds at $1.00. As a result of a significant expense or
realized or unrealized loss incurred by the Funds, it is possible that a Fund's
net asset value per share may fall below $1.00. Should the Trust incur or
anticipate any unusual or unexpected significant expense or loss which would
affect disproportionately the income of a Fund for a particular period, the
Board of Trustees would at that time consider whether to adhere to the present
dividend policy with respect to the Funds or to revise it in order to ameliorate
to the extent possible the disproportionate effect of such expense or loss on
the income of the Fund experiencing such effect. Such expense or loss may result
in a shareholder's receiving no dividends for the period in which he or she
holds shares of a Fund and/or in his or her receiving upon redemption a price
per share lower than the price he or she paid.
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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.
As of the date hereof, the B share class of the Tax Exempt Fund has not
commenced operations.
The Trust may suspend the right of redemption or postpone the date of
payment for shares for more than seven days during any period when (a) trading
on the Exchange is restricted by applicable rules and regulations of the SEC;
(b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
As described in the Prospectus, I (formerly, Institutional) shares of
the Funds are sold to certain qualified investors at their net asset value
without a sales charge. A (formerly, Retail) shares of the Funds are sold to
public investors at the public offering price based on the Fund's net asset
value, without a front-end load or sales charge, as described in the Prospectus.
B shares of the Money Market and Tax Exempt Funds are available only to the
holders of B shares of another Fund who wish to exchange their B shares of such
other Fund for B shares of the Money Market and/or Tax Exempt Funds. B shares of
the Funds are sold to public investors at net asset value but are subject to a
contingent deferred sales charge which is payable upon redemption of such shares
as described in the Prospectus. There is no front-end sales charge or contingent
deferred sales charge imposed for shares acquired through the reinvestment of
dividends or distributions on such shares.
EXCHANGE PRIVILEGE
Investors may exchange all or part of their A or B shares as described
in the Prospectus. Any rights an Investor may have (or have waived) to reduce
the sales load applicable to an exchange, as may be provided in a Fund
Prospectus, will apply in connection with any such exchange. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
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By use of the exchange privilege, the Investor authorizes the Trust's
Transfer Agent or his or her 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 or her financial institution must notify the
Transfer Agent of his or her prior ownership of A or B 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 the classes or
series of shares, including fourteen classes or series, which represent
interests in the Money Market Fund (Class A, Class A - Special Series 1 and
Class A - Special Series 2), Government Fund (Class B and Class B - Special
Series 1), Treasury Fund (Class C and Class C - Special Series 1), Tax Exempt
Fund (Class D, Class D - Special Series 1 and Class D - Special Series 2),
Pennsylvania Tax Exempt Fund (Class Q and Class Q - Special Series 1) and Ohio
Municipal Fund (Class BB and Class BB Special Series 1).
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectus, the Trust's shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of the Trust or
an individual Fund, shareholders of a Fund are entitled to receive the assets
available for distribution belonging to the particular Fund, and a proportionate
distribution, based upon the relative asset values of the respective Funds, of
any general assets of the Trust not belonging to any particular Fund which are
available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required by the
1940 Act, applicable state law, or otherwise, to be submitted to the holders of
the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each investment fund affected
by such matter. Rule 18f-2 further provides that an investment fund is affected
by a matter unless the interests of each fund in the matter are substantially
identical or the matter does not affect any interest of the fund. Under the
Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment fund only if approved by a majority of the outstanding shares of such
fund. However, the Rule also provides that the ratification of the appointment
of independent public accountants, the approval of principal underwriting
contracts, and the election of trustees may be effectively acted upon by
shareholders of the Trust voting together in the aggregate without regard to a
particular fund. In addition, shareholders of each class in a particular
investment fund have equal voting rights except that only I and A shares of an
investment fund will be entitled to vote on matters submitted to a vote of
shareholders (if
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any) relating to a distribution plan for such shares, and only B shares of a
fund will be entitled to vote on matters relating to a distribution plan with
respect to B shares.
Although the following types of transactions are normally subject to
shareholder approval, the Board of Trustees may, under certain limited
circumstances, (a) sell and convey the assets of an investment fund to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such fund involved to be redeemed at a price which is equal to their
net asset value and which may be paid in cash or by distribution of the
securities or other consideration received from the sale and conveyance; (b)
sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his or her 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 adviser with
specific reference to their own tax situation.
GENERAL
Each Fund of the Trust will be treated as a separate corporate entity
under the Code and intends to qualify as a regulated investment company. A 4%
non-deductible excise tax is imposed on regulated investment companies that fail
to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income each calendar year to avoid liability for this excise tax. If for any
taxable year a Fund does not qualify for federal tax treatment as a regulated
investment company, all of such Fund's taxable income will be subject to federal
income tax at regular corporate rates without any deduction for distributions to
its shareholders. In such event, dividend distributions (including amounts
derived from interest on
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Municipal Securities with respect to the Tax Exempt, Pennsylvania Tax Exempt and
Ohio Municipal Funds) would be taxable as ordinary income to the Fund's
shareholders to the extent of the Fund's current and accumulated earnings and
profits, and would be eligible for the dividends received deduction for
corporations.
Each Fund may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, or who are subject to withholding by the Internal
Revenue Service for failure to properly include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
Depending upon the extent of a Fund's activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, such Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of a Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Under state or local law,
distributions of net investment income may be taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
TAX EXEMPT FUND, PENNSYLVANIA TAX EXEMPT FUND AND OHIO MUNICIPAL FUND
As described above and in the Prospectus, the Tax Exempt, Pennsylvania
Tax Exempt and Ohio Municipal Funds are designed to provide investors with
tax-exempt interest income. The Funds are not intended to constitute a balanced
investment program and are not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Funds would not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and IRAs since such plans and accounts are generally
tax-exempt and, therefore, would not gain any additional benefit from the Funds'
dividends being tax-exempt.
The policy of the Tax Exempt, Pennsylvania Tax Exempt and Ohio
Municipal Funds is to pay each year as federal exempt-interest dividends
substantially all the Funds' Municipal Securities interest income net of certain
deductions. In order for the Funds to pay federal exempt-interest dividends with
respect to any taxable year, at the close of each taxable quarter at least 50%
of the aggregate value of their respective portfolios must consist of tax-exempt
obligations. An exempt-interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by the Funds cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Funds during the taxable year over any amounts disallowed as deductions under
Sections 265
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<PAGE> 24
and 171(a)(2) of the Code. The percentage of total dividends paid by the Funds
with respect to any taxable year which qualifies as federal exempt-interest
dividends will be the same for all shareholders receiving dividends from the
Funds with respect to such year.
The Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds do not
expect to realize long-term capital gains and, therefore, do not expect to
distribute any capital gain dividends.
Shareholders are advised to consult their tax advisers with respect to
whether exempt-interest dividends would retain the exclusion under Section
103(a) if the shareholder would be treated as a "substantial user" or a "related
person" to such user with respect to facilities financed through any of the
tax-exempt obligations held by the Tax Exempt, Pennsylvania Tax Exempt and Ohio
Municipal Funds. A "substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his or her trade or business and whose gross revenues derived with respect to
the facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. A "related
person" includes certain related natural persons, affiliated corporations,
partners and partnerships, and S corporations and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Fund shares is not
deductible for federal income tax purposes if the Funds distribute
exempt-interest dividends during the shareholder's taxable year. In addition, if
a shareholder holds Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends received with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six months
holding requirement to a period of not less than the greater of 31 days or the
period between regular dividend distributions where the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
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<PAGE> 25
<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 to 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), June 1995 to June 1998.
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
Cleveland, OH 44114 and Chief Executive Officer, NatCity
Age 46 Investments, Inc. (investment banking),
since July 1995; President and Chief
Executive Officer, Raffensberger,
Hughes & Co. (broker-dealer), from 1993
until 1995; President, Reserve Capital
Group, from 1990 until 1993.
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 73 Express Company (closed-end investment
company), April 1982 to December 1997; Director,
Acromed Corporation (producer of spinal implants),
June 1992 to March 1998; 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 54 Bloomington Property Company, since
January 1981; partner, KK&D (Affiliated
Real Estate Companies of Kittle's Home
Furnishings Center), since January 1989.
</TABLE>
-23-
<PAGE> 26
<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 61 October 1997; Director, National City
Bank, 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,
Age 60 since 1981; Director, The Seed
Corporation (restaurant group), since
1990; Director, Foam Design, Inc.
(manufacturer of industrial and
commercial foam products), since 1993.
Gerald L. Gherlein Trustee Executive Vice-President and General
3679 Greenwood Drive Counsel, Eaton Corporation, since 1991
Pepper Pike, OH 44124 (global manufacturing); Trustee,
Age 60 Meridia Health System (four hospital
health system), 1994 to 1998; Trustee,
WVIZ Educational Television (public television).
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 59 (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 55
Carol L. Rooney Treasurer Director of SEI Fund Resources since
c/o SEI Fund Resources 1992.
One Freedom Valley Drive
Oaks, PA 19456
Age 34
Kathryn L. Stanton Assistant Treasurer Vice President and Assistant Secretary
c/o SEI Fund Resources of SEI Fund Resources and SEI
One Freedom Valley Drive Investments Distribution Co. since
Oaks, PA 19456 1994; Associate, Morgan Lewis & Bockius
Age 39 LLP (law firm).
</TABLE>
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<PAGE> 27
* Messrs. Carter and Martens are considered by the Trust to be
"interested persons" of the Trust as defined in the 1940 Act.
Each trustee of the Trust serves as a trustee of The Parkstone Group
of Funds ("Parkstone") and The Parkstone Advantage Fund ("Parkstone
Advantage"), registered investment companies.
Herbert R. Martens, Jr. is employed by National City Corporation, the
parent corporation to National City Investment Management Company, which
receives fees as investment adviser to the Trust. Mmes. Rooney and Stanton are
employed by SEI Fund Resources, which receives fees as Administrator to the
Trust. Ms. Stanton is also employed by SEI Investments Distribution Co., which
receives fees as Distributor to the Trust. Mr. McConnel is a partner of the law
firm, Drinker Biddle & Reath LLP, which receives fees as counsel to the Trust.
With respect to the Trust, Parkstone and Parkstone Advantage, each
trustee receives an aggregate annual fee of $12,500 plus $3,000 for each Board
meeting attended and reimbursement of expenses incurred in attending meetings.
The three fund companies generally hold concurrent Board meetings. The Chairman
of the Board is entitled to receive an additional $5,000 per annum for services
in such capacity. For the year ended May 31, 1998, the Trust's trustees and
officers as a group received aggregate fees of $199,375. The trustees and
officers of the Trust own less than 1% of the shares of the Trust.
-25-
<PAGE> 28
The following table summarizes the compensation for each of
the trustees of the Trust for the fiscal year ended May 31, 1998:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Accrued Compensation
Aggregate as Part of Estimated from the Trust
Name of Compensation the Trust's Approval Benefits and Fund
Person, Position from the Trust Expenses Upon Retirement Complex*
---------------- -------------- -------- --------------- --------
<S> <C> <C> <C> <C>
Robert D. Neary, $31,500 $0 $0 $31,500
Chairman and Trustee
Thomas R. Benua, Jr., $ 4,375 $0 $0 $ 4,375
Trustee**
Leigh Carter, Trustee $27,750 $0 $0 $27,750
John F. Durkott, Trustee $27,750 $0 $0 $27,750
Robert J. Farling, Trustee*** $20,875 $0 $0 $20,875
Richard W. Furst, Trustee $27,750 $0 $0 $27,750
Gerald L. Gherlein, Trustee*** $27,750 $0 $0 $27,750
Herbert R. Martens, Jr.,*** $0 $0 $0 $0
President and Trustee
J. William Pullen, Trustee $24,750 $0 $0 $24,750
Richard B. Tullis, Trustee** $6,875 $0 $0 $6,875
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder and not because of his or her acts or omissions or some other
reason. The Declaration of Trust also provides that the Trust shall, upon
request, assume the
------------------------
* The "Fund Complex" consists of Armada, Parkstone and Parkstone
Advantage. Each of the trustees serves as trustee to all three
investment companies. The trustees became trustees of Parkstone
and Parkstone Advantage effective August 14, 1998.
** Messrs. Benua and Tullis resigned as Trustees effective July 17, 1997
and November 19, 1997, respectively.
*** Messrs. Farling, Gherlein and Martens became Trustees as of November
19, 1997, July 17, 1997 and November 19, 1997, respectively.
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<PAGE> 29
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 or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her 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 or she may be involved or
with which he or she may be threatened by reason of his or her 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 or she been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
ADVISORY AGREEMENTS
IMC serves as investment adviser to the Money Market, Government,
Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds under an Advisory
Agreement dated November 19, 1997. Prior to such date, National City Bank,
National City Bank of Columbus and National City Bank of Kentucky served as
investment adviser to these Funds (together, the "three Advisers"). IMC serves
as investment adviser to the Ohio Municipal Money Market Fund pursuant to an
Advisory Agreement dated April 9, 1998. IMC and the three Advisers are
affiliates of National City Corporation, a bank holding company with over $81
billion in assets, and headquarters in Cleveland, Ohio and over 1,000 branch
offices in six states. From time to time, the Adviser may voluntarily waive fees
or reimburse the Trust for expenses.
Pursuant to the advisory agreements in effect for the
following periods, the Trust incurred advisory fees in the following amounts for
the fiscal years ended May 31, 1998, 1997 and 1996: (i) 6,126,877 (after waivers
of $2,451,233), $5,067,456 (after waivers of $2,026,982) and $3,686,919 (after
waivers of $1,473,398), respectively, for the Money Market Fund; (ii) $2,815,875
(after waivers of $1,126,349), $2,415,282 (after waivers of $966,112) and
$1,654,730 (after waivers of $661,292), respectively, for the Government Fund,
and (iii) $742,324 (after waivers of $989,768), $573,529 (after waivers of
$764,704)
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<PAGE> 30
and $444,402 (after waivers of $592,531), respectively, for the Tax Exempt Fund.
Advisory fees in the amounts of $766,895 (after waivers of $153,379), $794,834
(after waivers of $158,966) and $527,698 (after waivers of $105,510) were
incurred for the fiscal year ended May 31, 1998, 1997 and 1996 with respect to
the Treasury Fund.
Pursuant to the Advisory Agreement, the Trust incurred advisory
fees in the amount of $142,220 (after waivers of $237,029) for the fiscal year
ended May 31, 1998 for the Pennsylvania Tax Exempt Fund. For the period from
September 9, 1996 (date of reorganization of the Predecessor Fund) until May 31,
1997, IMC, the Adviser of the Pennsylvania Tax Exempt Fund, earned advisory fees
of $224,379 and waived fees in the amount of $140,237 with respect to that Fund.
For the period from June 1, 1996 until September 9, 1996, for the one-month
period ended May 31, 1996 and for the fiscal year ended April 30, 1996, Integra
Trust Company ("Integra"), the investment adviser to the Predecessor Fund,
earned advisory fees of $85,768, $26,907 and $310,912, respectively, and Integra
waived fees in the amount of $51,068, $9,868 and $110,272, respectively.
Each of the Advisory Agreements 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
Agreements, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by them of their duties and
obligations thereunder.
The Advisory Agreement relating to the Money Market, Government,
Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds was approved by the
shareholders of each Fund on November 19, 1997. The Advisory Agreement with
IMC relating to the Ohio Municipal Fund was approved by the sole shareholder of
the Fund as of the day prior to the day it commenced operations. Unless sooner
terminated, each of the Advisory Agreements will continue in effect with
respect to a particular Fund to which it relates until September 30, 1999, and
from year to year thereafter, subject to annual approval by the Trust's Board
of Trustees, or by a vote of a majority of the outstanding shares of such Fund
(as defined in the Funds' Prospectus) and a majority of the trustees who are
not parties to the Agreement or interested persons (as defined in the 1940 Act)
of any party by votes cast in person at a meeting called for such purpose. The
Advisory Agreements may be terminated by the Trust or the Adviser on 60 days
written notice, and will terminate immediately in the event of their
assignment.
ADMINISTRATION AGREEMENT AND SUB-ADMINISTRATION
The Trust and SEI Fund Resources (the "Administrator") have
entered into an administration agreement (the "Administration Agreement")
effective May 1, 1998.
The Administration Agreement provides that the Administrator 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 matters to which the Administration
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence on the part of the Administrator in the performance of its duties
or from reckless disregard by it of its duties and obligations thereunder.
-28-
<PAGE> 31
The Administrator, a Delaware business trust, has its principal
business offices at Oaks, Pennsylvania 19456. SEI Investments Management
Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interests in the Administrator.
SEI Investments and its affiliates, including the Administrator, are leading
providers of funds evaluation services, trust accounting systems, and brokerage
and information services to financial institutions, institutional investors, and
money managers. The Administrator and its affiliates also serve as administrator
or sub-administrator to the following other mutual funds: The Achievement Funds
Trust, The Advisors' Inner Circle Fund, The Arbor Fund, ARK Funds, Bishop Street
Funds, Boy 1784 Funds(R), CUFUND, The Expedition Funds, FMB Funds, Inc., First
American Funds, Inc., First American Investment Funds, Inc., First American
Strategy Funds, Inc., HighMark Funds, Marquis Funds(R), Monitor Funds, Morgan
Grenfell Investment Trust, Oak Associates Funds, The PBHG Funds, Inc., PBHG
Insurance Series Fund, Inc., The Pillar Funds, Santa Barbara Group of Mutual
Funds, Inc., SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic
Funds, STI Classic Variable Trust, TIP Funds and TIP Institutional Funds.
For the period from May 1, 1998 through May 31, 1998, the
Administrator earned administration fees of $138,647, $68,244, $18,670, $29,782
and $5,562 with respect to the Money Market, Government, Treasury, Tax Exempt
and Pennsylvania Tax Exempt Funds.
Prior to May 1, 1998, PFPC served as the administrator and
accounting agent to the Funds. Pursuant to the former Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC for
the period from June 1, 1997 to April 30, 1998 and the fiscal years ended 1997
and 1996: (i) $523,266, $502,464 and $421,493, respectively, for the Money
Market Fund; (ii) $239,017, $239,708 and $187,373, respectively, for the
Government Fund; (iii) $187,219, $170,489 and $145,303, respectively, for the
Tax Exempt Fund; and (iv) $65,115, $79,005 and $37,703 and $59,255 respectively
for the Treasury Fund.
For the period from June 1, 1997 to April 30, 1998, PFPC earned
administration fees of $36,010 with respect to the Pennsylvania Tax Exempt Fund.
For the period from September 9, 1996 (date of reorganization of the Predecessor
Fund) until May 31, 1997, PFPC earned administration fees of $24,530 with
respect to the Pennsylvania Tax Exempt Fund. For the period from June 1, 1996
until September 9, 1996, for the one-month period ended May 31, 1996, for the
fiscal year ended April 30, 1996, SEI Financial Management Corporation, a
wholly-owned subsidiary of SEI Corporation, served as administrator to the
Predecessor Fund and earned the following fees: $28,589; $8,969; and $103,634;
respectively.
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<PAGE> 32
DISTRIBUTION PLANS AND RELATED AGREEMENT
The Distributor acts as distributor of the Funds' shares pursuant
to its Distribution Agreement with the Trust as described in the Prospectus.
Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a
Service and Distribution Plan for A and I shares (the "A and I Shares Plan") and
a B Shares Distribution and Servicing Plan ("B Shares Plan," and, collectively,
the "Distribution Plans") which permit the Trust to bear certain expenses in
connection with the distribution of I and A shares, or B shares, respectively.
As required by Rule 12b-1, the Trust's Distribution Plans and the 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 Distribution Plans or any agreement relating to
the Distribution Plans, by vote cast in person at a meeting called for the
purpose of voting on the Distribution Plans and related agreement. In compliance
with the Rule, the trustees requested and evaluated information they thought
necessary to an informed determination of whether the Distribution Plans 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 Distribution Plans and related agreement
will benefit the Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in a Distribution Plan that would materially increase
the distribution expenses of a class would require approval by the shareholders
of such class, but otherwise, such Distribution 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 particular Plan or related
agreement. The Distribution Plans and related agreement may be terminated as to
a particular Fund or class by a vote of the Trust's disinterested trustees or by
vote of the shareholders of the Fund or class in question, 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 A and I Shares Plan provides that each fund will reimburse the
Distributor for distribution expenses related to the distribution of A and I
shares in an amount not to exceed .10% per annum of the average aggregate net
assets of such shares. The B Shares Plan provides that each B share class will
compensate the Distributor for distribution of B shares in an amount not to
exceed .75% of the average net assets of such class. Distribution expenses
reimbursable by the Distributor pursuant to each Distribution Plan include
direct and indirect costs and expenses incurred in connection with advertising
and marketing a fund's shares, and direct and indirect costs and expenses of
preparing, printing and distribution of its prospectuses to other than current
shareholders.
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<PAGE> 33
Under the former A and I Shares Plan and related distribution
agreement (effective for the period from June 1, 1997 to May 1, 1998) each fund
compensated the Distributor for distribution expenses related to the
distribution of I and A shares in an amount not to exceed .10% per annum of the
average aggregate net assets of such shares. This former Plan provided that the
Trust 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 Trusts'
investment funds with respect to the I and A shares.
For the fiscal year ended May 31, 1998, the Trust paid the
Distributor $1,466,472 with respect to the Money Market Fund, $685,793 with
respect to the Government Fund, $186,159 with respect to the Treasury Fund,
$301,662 with respect to the Tax Exempt Fund and $42,981 with respect to the
Pennsylvania Tax Exempt Fund under the A and I Shares Plans then in effect. Of
the aggregate amounts paid to the Distributor by the Trust with respect to the
Money Market Fund, approximately $936,000 was attributable to distribution
services and approximately $530,000 was attributable to marketing/consultation.
Of the aggregate amount paid to the Distributor by the Trust with respect to the
Government Fund, approximately $406,000 was attributable to distribution
services and approximately $277,000 was attributable to marketing/consultation.
Of the aggregate amounts paid to the Distributor by the Trust with respect to
the Treasury Fund approximately $101,000 was attributable to distribution
services and approximately $85,000 was attributable to marketing/consultation.
Of the aggregate amounts paid to the Distributor by the Trust with respect to
the Tax Exempt Fund, approximately $209,000 was attributable to distribution
services and $93,000 was attributable to marketing/consultation. Of the
aggregate amounts paid to the Distributor by the Trust with respect to the
Pennsylvania Tax Exempt Fund, approximately $39,000 was attributable to
distribution services and approximately $3,000 was attributable to
marketing/consultation. Distribution services include broker/dealer and investor
support, voice response development, wholesaling services, legal review and NASD
filings and transfer agency management. Marketing/Consultation includes planning
and development, market and industry research and analysis and marketing
strategy and planning.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with respect to
the Funds. Under its Custodian Services Agreement, National City Bank has agreed
to: (i) maintain a separate account or accounts in the name of each Fund; (ii)
hold and disburse portfolio securities on account of each Fund; (iii) collect
and make disbursements of money on behalf of each Fund; (iv) collect and receive
all income and other payments and distributions on account of each Fund's
portfolio securities; (v) respond to correspondence by security brokers and
others relating to its duties; and (vi) make periodic reports to the Board of
Trustees concerning the Funds' operations. National City Bank is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Funds, provided that it shall remain responsible for the performance of
all of its duties under the Custodian Services Agreement and shall hold the
Funds harmless from the acts and omissions of any bank or trust company serving
as sub-custodian. The Funds reimburse National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by each Fund in any year may not exceed $.225
for each $1,000 of average gross assets of such Fund.
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<PAGE> 34
State Street Bank and Trust Company (the "Transfer Agent") serves
as the Trust's transfer agent and dividend disbursing agent with respect to the
Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue and
redeem shares of each Fund; (ii) transmit all communications by each Fund to its
shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
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<PAGE> 35
SHAREHOLDER SERVICES PLANS
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan for A shares and the B Shares Plan for each Fund
offering B shares. Pursuant to these plans, 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 A shares or B
shares in consideration for the payment of up to .15% (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
A or B shares; (iii) processing dividend payments from the Fund; (iv) providing
information periodically to customers showing their position in A or B shares;
(v) arranging for bank wires; (vi) responding to customer inquiries relating to
the services performed with respect to A or B 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 Agreements with the Trust, IMC is
responsible for making decisions with respect to and placing orders for all
purchases and sales of portfolio securities for the Funds. 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 to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. Under the Advisory Agreements, pursuant to Section
28(e) of the Securities Exchange Act of 1934, as amended, the adviser is
authorized to negotiate and pay higher brokerage commissions in exchange for
research services rendered by broker-dealers. Subject to this consideration,
broker-dealers who provide supplemental investment research to the Adviser may
receive orders for transactions by a Fund. Information so received is in
addition to and not in lieu of services required to be performed by the Adviser
and does not reduce the fees payable to the Adviser by the Funds. 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.
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<PAGE> 36
Portfolio securities will not be purchased from or sold to the
Trust'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 Trust will not give preference to
its Adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements. Under
certain circumstances, the Trust may be at a disadvantage because of these
limitations compared with the portfolios of other investment companies with
similar objectives that are not subject to such limitations.
The Trust is required to identify any securities of its "regular
brokers or dealers" that it has acquired during its most recent fiscal year. At
May 31, 1998, (a) the Money Market Fund had entered into repurchase transactions
with: Prudential Bache Securities; (b) the Government Fund had entered into
repurchase transactions with: Prudential Bache Securities and Goldman Sachs; (c)
the Treasury Fund had entered into repurchase transactions with Goldman Sachs;
and (d) the Tax Exempt Fund had entered into repurchase transactions with
Goldman Sachs.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the 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 time on behalf of a
Fund and another investment company or account, the transaction will be averaged
as to price, and available investments allocated as to amount, in a manner which
the 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 a Fund or the size of the position obtained
or sold by such Fund. In connection therewith, and to the extent permitted by
law and by the Advisory Agreements, the Adviser may aggregate the securities to
be sold or purchased for a Fund with those to be sold or purchased for other
investment companies or advisory clients.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at Two
Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania
19103, serve as independent auditors of the Trust. The financial statements, as
of and for the period ended May 31, 1998, for the Money Market, Government,
Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds, which are incorporated
by reference in this Statement of Additional Information, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report referred
to under "Financial Statements," and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements for periods or years prior to May 31,
1997 with respect to the Predecessor Fund, which are incorporated by reference
in this Statement of Additional
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<PAGE> 37
Information, were audited by PricewaterhouseCoopers LLP, independent accountants
for the Predecessor Fund, whose report dated July 26, 1996, expressed an
unqualified opinion on such financial statements, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby. Squire, Sanders & Dempsey, L.L.P. with offices at
4900 Key Center, 127 Public Square, Cleveland, Ohio 44114-1304 act as special
Ohio tax counsel for the Trust and have reviewed the sections of this Statement
of Additional Information entitled "Special Risk Considerations Regarding
Investment in Ohio Municipal Securities" and "Additional Information Concerning
Taxes - Tax Exempt Fund, Pennsylvania Tax Exempt Fund and Ohio Municipal Fund"
and the Prospectus entitled "Taxes - Ohio Taxes."
STANDARDIZED YIELD QUOTATIONS
"Yields," as described in the Prospectus, are calculated according
to formulas prescribed by the SEC. The standardized seven-day yield for a class
of Fund shares is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the class having
a balance of one share at the beginning of the period, subtracting a
hypothetical charge reflecting deductions from shareholder accounts, dividing
the difference by the value of the account at the beginning of the base period
to obtain the base period return, and then multiplying the base period return by
(365/7). The net change in the value of an account in a class includes the value
of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares,
net of all fees, other than nonrecurring account or sales charges, that are
charged to all shareholder accounts in proportion to the length of the base
period and the class' mean or median account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The "effective yield" for a class of Fund shares is computed by
compounding the unannualized base period return (calculated as above) by adding
1 to the base period return, raising the sum to a power equal to 365 divided by
7, and subtracting 1 from the result.
The Tax Exempt, Pennsylvania Tax Exempt and Ohio Municipal Funds'
"tax-equivalent yields" are computed by dividing the portion of those Funds'
yields (calculated as above) that is exempt from federal income tax by one minus
a stated federal income tax rate (using 39.6% tax bracket) and adding that
figure to that portion, if any, of the respective Fund's yield that is not
exempt from federal income tax.
For the seven-day period ended May 31, 1998, the yields of the A
and I shares of the Money Market Fund, Government Fund, Treasury Fund, Tax
Exempt Fund and Pennsylvania Tax Exempt Fund were 5.07% and 5.21%, 4.95% and
5.12%, 4.55% and 4.69%, 3.42% and 3.57%, and 3.44% and 3.60%, respectively, and
their respective effective yields were 5.20% and 5.34%, 5.07% and 5.25%, 4.65%
and 4.80%, 3.48% and 3.64%, and 3.50% and 3.67%, respectively. For the seven-day
period ended May 31, 1998, the yield of the B shares of the Money Market Fund
was 4.38%.
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<PAGE> 38
For the Tax Exempt and Pennsylvania Tax Exempt Funds, the
tax-equivalent effective yields (assuming a 39.6% federal tax rate in the case
of both Funds and a 2.8% Pennsylvania tax rate in the case of the Pennsylvania
Tax Exempt Fund) for their A and I shares for the seven-day period ended May 31,
1998 were 5.76% and 6.03%, and 6.08% and 6.37%, respectively.
The current yield for each class of shares in a Fund may be
obtained by calling the Trust at the telephone number provided on the cover
page. Quoted yields are not indicative of future yields. Yields will depend upon
factors such as fund maturity, the Fund's expenses and the types of instruments
held by the Fund.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of a Fund, high- quality investments, economic conditions, the
relationship between sectors of the economy and the economy as a whole, various
securities markets, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the Adviser as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to a Fund. The Funds may also include in Materials charts, graphs
or drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Funds and/or other mutual funds, or
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury securities and
shares of a Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund
and/or other mutual funds (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternatives to certificates of deposit and other financial
instruments. Such Materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
MISCELLANEOUS
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<PAGE> 39
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. With respect to the
Money Market, Government, Treasury, Tax Exempt and Pennsylvania Tax Exempt
Funds, all organization expenses are or were being amortized on the
straight-line method over a period of five years from the date of commencement
of operations.
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the liabilities in respect of that Fund.
As of September 3, 1998, the following bank subsidiaries of
National City Corporation held of record 5% or more of the outstanding I shares
of the Money Market, Government, Treasury, Tax Exempt and Pennsylvania Tax
Exempt Funds acting as agent or custodian for their customers, but did not own
such shares beneficially:
<TABLE>
<CAPTION>
Percentage of Outstanding
I Shares
---------
Government Treasury Pennsylvania
Money Money Money Tax Tax
Market Market Market Exempt Exempt
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
National City Bank,
Northeast N/A N/A 14.86% N/A N/A
One Cascade Plaza
Akron, OH 44308
National City Bank of Dayton N/A N/A N/A 10.44% N/A
Gem Plaza, 6 N. Main
Dayton, OH 45412
National City Bank of Columbus N/A 13.75% 17.26% 21.53% N/A
155 East Broad Street
Columbus, OH 43251
National City Bank of Kentucky 12.07% 36.61% N/A 12.16% N/A
National City Tower
101 South Fifth Street
Louisville, KY 40202
</TABLE>
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<PAGE> 40
<TABLE>
<S> <C> <C> <C> <C> <C>
National City Bank of Indiana 7.71% 6.78% 25.65% 11.87% N/A
101 W. Washington Street
Indianapolis, IN 46255
National City Bank, Northwest 5.10% N/A N/A N/A N/A
405 Madison Avenue
Toledo, OH 43603
National City Bank of Pennsylvania 13.45% 8.39% 5.31% N/A 98.85%
400 Fourth Avenue
Pittsburgh, PA 15222
National City Trust Co. N/A N/A N/A N/A N/A
1401 Forum Way, Suite 503
West Palm Beach, FL 33401
National City Bank, Cleveland 43.04% 27.70% 26.20% 33.78% N/A
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
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<PAGE> 41
As of August 24, 1998, the following persons owned of record 5
percent or more of the shares of the Funds of the Trust:
Tax Exempt Money Market Fund (A)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat First Securities 108,038,997.8800 57.25%
P.O. Box 6629
Glen Allen, VA 23058-6629
National City Bank 67,863,610.7700 35.96%
FBO PCG/Retail Sweep Customers
770 W. Broad Street, Location 16-0347
Columbus, OH 43222-1419
</TABLE>
Pennsylvania Tax Exempt Money Market Fund (A)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
FBO Corporate Autosweep Customers 18,855,000.0000 50.54%
c/o National City Bank of PA
300 Fourth Street 2-191
Pittsburgh, PA 15278-0001
National City Bank of Pennsylvania 15,433,964.9200 41.37%
FBO PCG/Retail Sweep Customers
Cash Management Operations
770 W. Broad Street 16-0347
Columbus, OH 43222-1419
</TABLE>
Treasury Money Market Fund (A)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Triple S Plastics Georgetown 2,931,931.03 23.27%
Cont. Fund
Attn: John Crandle,
Commercial Loans
108 E. Michigan Avenue
Kalamazoo, MI 49007-3966
Wheat First Securities 7,855,936.3300 61.91%
P.O. Box 6629
Glen Allen, VA 23058-6629
Warner Theatre Preservation 1,124,715.9300 8.86%
Trust Corp.
P.O. Box 1645
Erie, PA 16507-0645
National City Bank 938,723.8900 7.40%
FBO PCG/Retail Sweep Customers
770 W. Broad St. Location 16-0347
Columbus, OH 43222-1419
AFSCME Benefit Trust 1,327,262.86 10.53%
P.O. Box 845
Springfield, IL 62705-0845
</TABLE>
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<PAGE> 42
Government Money Market Fund (A)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
FBO Corporate Autosweep Customers 176,545,000.0000 70.70%
c/o National City Bank of PA
300 Fourth Street 2-191
Pittsburgh, PA 15278-0001
Wheat First Securities 61,699,149.4900 24.71%
P.O. Box 6629
Glen Allen, VA 23058-6629
</TABLE>
Money Market Fund (A)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat First Securities 544,366,016.2000 61.90%
P.O. Box 6629
Glen Allen, VA 23058-6629
FBO Corporate Autosweep 193,624,000.0000 22.02%
Customers
c/o National City Bank of PA
300 Fourth Street 2-191
Pittsburgh, PA 15278-0001
National City Bank 85,189,000.0000 9.69%
FBO PCG/Retail Sweep Customer
770 W. Broad St. Location 16-0347
Columbus, OH 43222-1419
</TABLE>
Money Market Fund (B)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
SEI Trust Company 66,967.2600 86.94%
Custodian for the IRA Rollover
of Robert W. Best
6518 Calais Circle
Indianapolis, IN 46220
SEI Trust Company 5,220.4100 6.78%
Custodian for the IRA of Jack Lewis
10099 Meadville Street, Lot 31
Cranesville, PA 16410-9331
</TABLE>
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<PAGE> 43
Money Market Fund (I)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Bank 630,002,110.7400 32.78%
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 241,476,961.1300 12.56%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 167,416,829.7800 8.71%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 162,642,942.2400 8.46%
Operations Center
Attn: Trust Operations Funds
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 150,021,104.6500 7.81%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
Whitelaw & Co. 102,236,665.9200 5.32%
Daily Valuation Account - Disc.
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 44
Government Money Market Fund (I)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Bank 332,743,009.8100 32.67%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 West 150th Street
Cleveland, OH 44135-1389
National City Bank 249,617,228.6400 24.51%
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 108,703,096.1400 10.67%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 97,577,104.8500 9.58%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 55,288,943.6600 5.43%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 51,117,940.6200 5.02%
Operations Center
Attn: Trust Operations Funds
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
</TABLE>
Treasury Money Market Fund (I)
-42-
<PAGE> 45
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Bank 135,747,303.9800 29.65%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 128,142,434.3000 27.99%
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 55,565,055.3600 12.14%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 52,354,843.0800 11.43%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 46,747,667.3100 10.21%
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
</TABLE>
Tax Exempt Money Market Fund (I)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Bank 146,256,900.9000 33.61%
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
</TABLE>
-43-
<PAGE> 46
<TABLE>
<S> <C> <C>
National City Bank 88,933,741.4400 20.43%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland,, OH 44135-1389
National City Bank 53,897,152.5800 12.38%
Operations Center
Attn: Trust Operations Funds
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 51,260,620.9400 11.78%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 27,657,685.5400 6.35%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
National City Bank 22,188,595.8300 5.10%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
</TABLE>
Pennsylvania Tax Exempt Money Market Fund (I)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Bank 103,347,114.9900 99.55%
Trust Operations
Operations Center
3rd Floor, North Annex
4100 W. 150th Street
Cleveland, OH 44135-1389
</TABLE>
-44-
<PAGE> 47
FINANCIAL STATEMENTS
The audited financial statements contained in the annual report to
shareholders for the fiscal year ended May 31, 1998 are hereby incorporated
herein by reference. Copies of the Funds' annual reports may be obtained by
calling the Trust at 1-800-622-FUND (3863) or by writing to the Trust, One
Freedom Valley Drive, Oaks, Pennsylvania 19456.
-45-
<PAGE> 48
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on the obligation on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - The "D" rating, unlike other ratings, is not prospective;
rather, it is used only where a default has actually occurred--and not where a
default is only expected. S&P changes ratings to "D" either:
- On the day an interest and/or principal payment is due and is
not paid. An exception is made if there is a grace period and
S&P believes that a payment will be made, in which case the
rating can be maintained; or
- Upon voluntary bankruptcy filing or similar action. An
exception is made if S&P expects that debt service payments
will continue to be made on a specific issue. In the absence
of a payment default or bankruptcy filing, a technical
default (i.e., covenant violation) is not sufficient for
assigning a "D" rating.
A-1
<PAGE> 49
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
A-2
<PAGE> 50
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
A-3
<PAGE> 51
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
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"BB" - An obligation rated "BB" is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB", but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - The "D" rating, unlike other ratings, is not prospective;
rather, it is used only where a default has actually occurred--and not where a
default is only expected. S&P changes ratings to "D" either:
- On the day an interest and/or principal payment is due and is
not paid. An exception is made if there is a grace period and
S&P believes that a payment will be made, in which case the
rating can be maintained; or
- Upon voluntary bankruptcy filing or similar action. An
exception is made if S&P expects that debt service payments
will continue to be made on a specific issue. In the absence
of a payment default or bankruptcy filing, a technical
default (i.e., covenant violation) is not sufficient for
assigning a "D" rating.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such
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as interest-only or principal-only mortgage securities and obligations with
unusually risky interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a
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mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
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"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
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"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
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"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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