<PAGE> 1
As filed with the Securities and Exchange Commission on September 18, 1998
Registration No. 33-488/811-4416
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[x]
POST-EFFECTIVE AMENDMENT NO. 44
[x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x]
Amendment No. 43
[x]
Armada Funds (formerly known as "NCC Funds")
(Exact Name of Registrant as Specified in Charter)
Oaks, Pennsylvania, 19456
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-622-FUND
W. Bruce McConnel, III, Esq.
DRINKER BIDDLE & REATH LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Thomas F. Harvey, Esq.
National City Bank
National City Center
P.O. Box 5756
Cleveland, Ohio 44101-0756
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (b)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(iii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
========================================
The Title of Securities Being Registered . . . . Shares of beneficial interest
<PAGE> 2
CROSS REFERENCE SHEET
---------------------
Balanced Allocation Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
1. Cover Page...................................... Cover Page
2. Synopsis........................................ Expense Table
3. Condensed Financial Information................. Yield and Performance
Information
4. General Description of Registrant............... Investment Objective and
Policies; Investment
Limitations; Description of
the Trust and Its Shares
5. Management of the Trust......................... Management of the Trust;
Custodian and Transfer
Agent
6. Capital Stock and Other Securities.............. How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes;
Description of the Trust
and Its Shares;
Miscellaneous
7. Purchase of Securities.......................... Pricing of Shares; How
Being Offered to Purchase and Redeem
Shares; Distribution
Agreement
8. Redemption or Repurchase........................ How to Purchase and Redeem
Shares
9. Pending Legal Proceedings....................... Inapplicable
</TABLE>
<PAGE> 3
ARMADA FUNDS
----------------------
PROSPECTUS
----------------------
SEPTEMBER 18, 1998
BALANCED ALLOCATION FUND
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ 2
Expense Table............................................... 3
Investment Objective and Policies........................... 5
Investment Limitations...................................... 18
Yield and Performance Information........................... 19
Pricing of Shares........................................... 20
How to Purchase and Redeem Shares........................... 21
Distribution and Servicing Arrangements..................... 30
Dividends and Distributions................................. 31
Taxes....................................................... 31
Management of The Trust..................................... 32
Description of The Trust and Its Shares..................... 34
Custodian and Transfer Agent................................ 36
Expenses.................................................... 36
Miscellaneous............................................... 36
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT MANAGEMENT
COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES OR ANY BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Investment Management Company serves as investment adviser to
Armada Funds for which it receives an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 5
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
One Freedom Valley Drive If you purchased your shares through NatCity Investments,
Oaks, Pennsylvania 19456 Inc. or any other broker-dealer, please call your Financial
Consultant for information.
For current performance, fund information, account
redemption information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares of the Balanced Allocation Fund (the
"Fund") of Armada Funds (the "Trust").
BALANCED ALLOCATION FUND'S investment objective is to seek current income,
long-term capital growth and conservation of capital. The Fund invests primarily
in three major asset groups: equity securities; fixed income securities; and
cash equivalent securities.
The net asset value per share of the Fund will fluctuate as the value of
its investment portfolio changes in response to changing market prices and other
factors.
National City Investment Management Company ("IMC" or the "Adviser") serves
as investment adviser to the Fund.
SEI Investments Distribution Co. (the "Distributor") serves as the Trust's
sponsor and distributor. The Fund pays a fee to the Distributor for distributing
its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Balanced
Allocation Fund that a prospective investor should consider before investing.
Investors should carefully read this Prospectus and retain it for future
reference. Additional information about the Fund, contained in a Statement of
Additional Information, has been filed with the Securities and Exchange
Commission ("SEC") and is available upon request without charge by contacting
the Trust at its telephone number or address shown above. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT MANAGEMENT
COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 18, 1998
<PAGE> 6
INTRODUCTION
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund consists
of a pool of assets with investment objective and policies as described below
under "Investment Objective and Policies." The Fund is classified as a
diversified investment fund under the 1940 Act.
Shares of the Fund have been classified into three separate classes -- A
shares (formerly, Retail shares), B shares and I shares (formerly, Institutional
shares). A shares, B shares and I shares represent equal pro rata interests in
the investments held in the Fund and are identical in all respects, except that
shares of each class bear separate distribution and/or shareholder
administrative servicing fees and enjoy certain exclusive voting rights on
matters relating to these fees. See "Distribution and Servicing Arrangements,"
"Dividends and Distributions" and "Description of the Trust and Its Shares."
Except as provided below, A shares and B shares are sold through selected
broker-dealers and other financial intermediaries to individual or institutional
customers. A shares are sold with a front-end sales charge. B shares are sold
with a contingent deferred sales charge (back-end charge) imposed on a sliding
schedule when such shares are redeemed.
2
<PAGE> 7
EXPENSE TABLE
<TABLE>
<CAPTION>
BALANCED BALANCED BALANCED
ALLOCATION ALLOCATION ALLOCATION
A SHARES(1) B SHARES(1) I SHARES
------------------ ------------------ ------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases(2)................ 4.75% None None
Sales Charge Imposed on Reinvested Dividends................ None None None
Deferred Sales Charge(3).................................... None 5.00% None
Redemption Fee.............................................. None None None
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. .75% .75% .75%
12b-1 Fees (after fee waivers)(4)........................... .04% .75% .04%
Other Expenses(5)........................................... .51% .51% .26%
----- ----- -----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(5).................................. 1.30% 2.01% 1.05%
===== ===== =====
</TABLE>
- ---------------
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to A shares and B shares of the Fund. Pursuant to such plans, the
Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own A shares or B shares in
consideration for the payment of up to .25% (on an annualized basis) of the
net asset value of such A shares or B shares of the Fund. For further
information concerning these plans, see "Distribution and Servicing
Arrangements" below.
(2) A reduced sales charge may be available. A contingent deferred sales charge
of 1% may be assessed on certain redemptions of A shares purchased without
an initial sales charge as part of an investment of $1 million or more. See
"How to Purchase and Redeem Shares -- Reduced Sales Charges Applicable to
Purchases of A Shares."
(3) This amount applies to redemptions during the first and second years. The
deferred sales charge decreases in subsequent years. For more information,
see "How to Purchase and Redeem Shares -- Sales Charges Applicable to
Purchases of B Shares."
(4) The Trust has in effect a 12b-1 Plan for the A and I classes of shares
pursuant to which the Fund's A and I shares may bear fees in an amount of up
to .10% per annum of such classes' average net assets. A separate 12b-1 Plan
exists with respect to the Fund's B class of shares, pursuant to which the
Fund's B shares may bear fees in an amount of up to .75% of average daily
net assets. As a result of the payment of sales charges and 12b-1 fees,
long-term shareholders may pay more than the economic equivalent of the
maximum sales charges permitted by the National Association of Securities
Dealers, Inc. ("NASD"). The NASD has adopted rules which generally limit the
aggregate sales charges and payment under the Trust's 12b-1 Plans to a
certain percentage of total new gross share sales, plus interest. The Trust
would stop accruing 12b-1 and related fees if, to the extent, and for as
long as, such limit would otherwise be exceeded.
(5) Since the Fund commenced investment operations on July 10, 1998, the "Other
Expenses" for this Fund are estimates only.
3
<PAGE> 8
EXAMPLE
- ---------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Balanced Allocation Fund A Shares(1)........................ $ 60 $ 87
Balanced Allocation Fund A Shares(2)........................ $ 23 $ 41
Balanced Allocation Fund B Shares(3)........................ $ 70 $ 103
Balanced Allocation Fund B Shares(4)........................ $ 20 $ 63
Balanced Allocation Fund I Shares........................... $ 11 $ 33
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes no front-end sales charge but the maximum deferred sales charge at 1
year.
(3) Assumes deduction of maximum applicable contingent deferred sales charge.
(4) Assumes no redemption.
The purpose of the Expense Table is to assist investors in understanding the
various fees and expenses that investors in the Fund will bear directly or
indirectly. THE INFORMATION INCLUDED IN THE EXPENSE TABLE AND HYPOTHETICAL
EXAMPLE ABOVE IS BASED ON THE FUND'S ESTIMATED FEES AND EXPENSES FOR THE CURRENT
FISCAL YEAR AND SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES. ACTUAL FEES AND EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE FUND'S ACTUAL
PERFORMANCE MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%.
For more complete descriptions of these fees and expenses, see "Management
of the Trust" and "Distribution and Servicing Arrangements" in this Prospectus.
Any fees that are charged by affiliates of the adviser or other institutions
directly to their customer accounts for services related to investments in
shares of the Fund are in addition to and not reflected in the fees and expenses
described above.
4
<PAGE> 9
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective may be changed without a vote of
shareholders, although the Board of Trustees would only change the Fund's
objective upon 30 days' notice to shareholders. There can be no assurance that
the Fund will achieve its objective. See "Investment Objective and Policies" in
the Statement of Additional Information for further information on the
investments in which the Fund may invest.
BALANCED ALLOCATION FUND
The investment objective of the Fund is to seek current income, long-term
capital growth and conservation of capital.
The Fund may invest in any type or class of security. Under normal market
conditions the Fund invests in common stocks, fixed income securities,
securities convertible into common stocks (i.e., warrants, convertible preferred
stock, fixed rate preferred stock, convertible fixed income securities, options
and rights) and cash equivalent securities. The Fund intends to invest 45% to
65% of its net assets in common stocks and securities convertible into common
stocks, 25% to 55% of its net assets in fixed income securities and up to 30% of
its net assets in cash and cash equivalents. Of these investments, no more than
20% of the Fund's total assets will be invested in foreign securities.
The Fund holds common stocks primarily for the purpose of providing
long-term growth of capital. When selecting stocks for the Fund, the Adviser
will consider primarily their potential for long-term capital appreciation. The
Fund intends to invest predominantly in those companies which are
growth-oriented and have exhibited consistent, above-average growth in revenues
and earnings. The Fund will invest in the common and preferred stocks of
companies with a market capitalization of at least $100 million and which are
traded either in established over-the-counter markets or on national exchanges.
The Fund invests the fixed income portion of its portfolio of investments
in a broad range of investment grade debt securities which are rated at the time
of purchase within the four highest rating categories assigned by Moody's, S&P,
Fitch, Duff or IBCA (defined under "Ratings Criteria"). These fixed income
securities will consist of bonds, debentures, notes, zero coupon securities,
asset-backed securities, state, municipal and industrial revenue bonds,
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, certificates of deposit, time deposits, high quality
commercial paper, bankers' acceptances and variable amount master demand notes.
In addition, a portion of the Fund's assets may be invested from time to time in
first mortgage loans and participation certificates in pools of mortgages issued
or guaranteed by the U.S. government or its agencies or instrumentalities. Some
fixed income securities may have warrants or options attached.
The Fund expects to invest in a variety of U.S. Treasury obligations,
differing in their interest rates, maturities and times of issuance, as well as
"stripped" U.S. Treasury obligations, such as Treasury receipts issued by the
U.S. Treasury representing either future interest or principal payments, and
other obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
The cash equivalent securities in which the Fund normally invests are
short-term obligations (with maturities of 18 months or less) consisting of
domestic and foreign commercial paper, variable amount master demand notes,
bankers' acceptances, certificates of deposit and time deposits of domestic and
foreign branches of U.S. banks and foreign banks and repurchase agreements. The
Fund may also invest in the securities of investment companies.
The amounts invested in equity, fixed income and cash equivalent securities
will vary from time to time, depending on the adviser's assessment of business,
economic and market conditions, including any potential advantage of price
shifts between the equity markets and the fixed income markets. During temporary
defensive periods, the Fund may hold
5
<PAGE> 10
up to 100% of its assets in short-term obligations. However, to the extent that
the Fund's assets are so invested, its investment objective may not be achieved.
SPECIAL RISK FACTORS AND CONSIDERATIONS
Foreign Securities and Currencies
Investments in foreign securities involve certain inherent risks, such as
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns, changes in exchange rates
of foreign currencies and the possibility of adverse changes in investment or
exchange control regulations. There may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
Further, foreign stock markets are generally not as developed or efficient as
those in the U.S., and in most foreign markets, volume and liquidity are less
than in the U.S. Fixed commissions on foreign stock exchanges are generally
higher than the negotiated commissions on U.S. exchanges, and there is generally
less government supervision and regulation of foreign stock exchanges, brokers
and companies than in the U.S.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets, or diplomatic developments that could affect investment within
those countries. Because of these and other factors, securities of foreign
companies acquired by the Fund may be subject to greater fluctuation in price
than securities of domestic companies.
To the extent the Fund invests in securities denominated in or quoted in
currencies other than the U.S. dollar, changes in currency exchange rates (as
well as changes in market values) will affect the value in U.S. dollars of
securities held by the Fund. Foreign exchange rates are influenced by trade and
investment flows, policy decisions of governments, and investor sentiment about
these and other issues. In addition, costs are incurred in connection with
conversions between various currencies.
The conversion of the eleven member states of the European Union to a
common currency, the "euro," is scheduled to occur on January 1, 1999. As a
result of the conversion, securities issued by the member states will be subject
to certain risks, including competitive implications of increased price
transparency of European Union markets (including labor markets) resulting from
adoption of a common currency and issuers' plans for pricing their own products
and services in euro; an issuer's ability to make any required information
technology updates on a timely basis, and costs associated with the conversion
(including costs of dual currency operations through January 1, 2002); currency
exchange rate risk and derivatives exposure (including the disappearance of
price sources, such as certain interest rate indices); continuity of material
contracts and potential tax consequences. Other risks include whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2000 and beyond; whether the interest rate, tax and labor
regimes of participating European countries will converge over time; and whether
the conversion of the currencies of other EU countries such as the United
Kingdom, Denmark and Greece into the euro and the possible admission of other
non-EU countries such as Poland, Latvia and Lithuania as members of the EU may
have an impact on the euro. These or other factors, including political and
economic risks, could cause market disruptions before or after the introduction
of the euro, and could adversely affect the value of securities and foreign
currencies held
6
<PAGE> 11
by the Funds. Commissions on transactions in foreign securities may be higher
than those for similar transactions on domestic stock markets. In addition,
clearance and settlement procedures may be different in foreign countries and,
in certain markets, such procedures have been unable to keep pace with the
volume of securities transactions, thus making it difficult to conduct such
transactions.
The expense ratio of a fund investing in foreign securities can be expected
to be higher than that of funds investing in domestic securities. The costs of
investing abroad are generally higher for several reasons, including the cost of
investment research, increased costs of custody for foreign securities, higher
commissions paid for comparable transactions involving foreign securities, and
costs arising from delays in settlements of transactions involving foreign
securities.
Interest and dividends payable on the Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by tax credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the return to the Fund's shareholders.
Derivative Instruments
The Fund may purchase certain "derivative" instruments. Derivative
instruments are instruments that derive value from the performance of underlying
securities, interest or currency exchange rates, or indices, and include (but
are not limited to) futures contracts, options, forward currency contracts and
structured debt obligations (including collateralized mortgage obligations
("CMOs"), various floating rate instruments and other types of securities).
Like all investments, derivative instruments involve several basic types of
risks which must be managed in order to meet investment objectives. The specific
risks presented by derivatives include, to varying degrees, market risk in the
form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
is based; liquidity risk that the Fund will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying securities, rates or
indices on which it is based; extension risk that the expected duration of an
instrument may increase or decrease; and operations risk that loss will occur as
a result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The risk to the Fund due to the use of derivatives in the equity portion of
the Fund's portfolio of investments will be limited to 10% of such investments
at the time of the derivative transaction.
With respect to the fixed income portion of the Fund's investments, the
Fund's Adviser has determined that the risk features that most distinguish
derivatives from other investment instruments (and which heavily influence the
market, volatility and leveraging, liquidity, and pricing risks referred to
above) can be described generally as "structural risk." Structural risk refers
to the contractual features of an investment that can cause its total return to
vary with changes in interest rates or other variables. Structural risk is not
unique to derivatives, but because derivatives often are created through the
intricate division of the cash flows of the underlying security, they can (but
do not necessarily) present a high degree of structural risk. Structural risk
can arise from variations in coupon levels, principal, and/or average life.
The Adviser has adopted the following internal policies concerning
management of the structural risk inherent in derivative instruments in the
fixed income portion of the Fund's portfolio. The risk to
7
<PAGE> 12
the Fund due to the use of such derivatives will be limited to the principal
invested in such instruments. When the Fund engages in short sales "against the
box," risk of loss will be limited to the value of the securities "in the box."
The adviser does not presently intend to invest in the following types of
derivatives which are structured instruments, such as range notes, dual index
notes, leveraged or deleveraged bonds, inverse floaters, index amortizing notes
and other structured instruments having similar cash flow characteristics.
The cash equivalent portion of the Fund's portfolio of investments is
managed with an emphasis on safety and high credit quality. This requires that
liquidity risk and market risk or interest rate risk, as well as credit risk, be
held to minimal levels. The Adviser has determined that many types of floating
rate and variable rate instruments, commonly referred to as "derivatives," are
considered to be potentially volatile. These derivative instruments are
structured in a way that may not allow them to reset to par at an interest rate
adjustment date. Accordingly, the Adviser has adopted the following policies
with respect to this portion of the Fund's assets.
The following types of derivative instruments ARE NOT permitted investments
for the cash equivalent portion of the Fund's portfolio of investments:
- leveraged or deleveraged floaters (whose interest rate reset provisions
are based on a formula that magnifies the effect of changes in interest
rates);
- range floaters (which do not pay interest if market interest rates move
outside of a specified range);
- dual index floaters (whose interest rate reset provisions are tied to
more than one index so that a change in the relationship between these
indices may result in the value of the instrument falling below face
value);
- inverse floaters (which reset in the opposite direction of their index);
and
- any other structured instruments having cash flow characteristics that
can create potential market volatility similar to the instruments listed
above.
Additionally, the cash equivalent portion of the Fund's portfolio will not
be invested in instruments indexed to longer than one-year rates, or in
instruments whose interest rate reset provisions are tied to an index that
materially lags short-term interest rates, such as "COFI floaters."
At the present time, the only derivative investments that have been
determined to be suitable for the cash equivalent portion of the Fund's
portfolio are:
- securities based on short-term, fixed-rate contracts; and
- floating-rate or variable-rate securities whose interest rates reset
based on changes in standard money market rate indices such as U.S.
government Treasury bills, London Interbank Offered Rate, published
commercial paper rates, or federal funds rates.
The risk to the Fund due to the use of derivatives in the cash equivalent
portion of its assets will be limited to the principal invested in such
instruments.
The Adviser will evaluate the risks presented by the derivative instruments
purchased by the Fund, and will determine, in connection with day-to-day
management of the Fund, how they will be used in furtherance of the Fund's
investment objective.
OTHER INVESTMENT POLICIES OF THE FUND
Futures Contracts and Related Options
The Fund may invest in stock index, interest rate, bond index and foreign
currency futures contracts and options on these futures contracts. The Fund may
do so either to hedge the value of its portfolio securities as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, the
8
<PAGE> 13
Fund may utilize futures contracts in anticipation of changes in the composition
of its holdings for hedging purposes or to maintain liquidity.
Futures contracts obligate the Fund, at maturity, to take or make delivery
of certain securities or the cash value of an index or the cash value of a
stated amount of a foreign currency.
The Fund may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When the Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price at any time during the
option period. When the Fund sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised. In
anticipation of a market advance, the Fund may purchase call options on futures
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Fund intends to
purchase. Similarly, if the value of the Fund's securities is expected to
decline, it might purchase put options or sell call options on futures contracts
rather than sell futures contracts.
The Fund intends to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC") exempting it from registration as a "commodity pool
operator." The Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to such regulations. In addition, the
Fund may not engage in such transactions if the sum of the amount of initial
margin deposits and premiums paid for unexpired commodity options, other than
for bona fide hedging transactions, would exceed 5% of the liquidation value of
its assets, after taking into account unrealized profits and unrealized losses
on such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in calculating the percentage limitation. In connection with the
Fund's position in a futures contract or option thereon, it will create a
segregated account of liquid assets, such as cash, U.S. government securities or
other liquid high grade debt obligations, or will otherwise cover its position
in accordance with applicable requirements of the SEC.
The primary risks associated with the use of futures contracts and options
are:
(i) an imperfect correlation between the change in market value of the
securities held by the Fund and the price of the futures contracts and options;
(ii) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures contract when desired;
(iii) losses greater than the amount of the principal invested as initial
margin due to unanticipated market movements which are potentially unlimited;
and
(iv) the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors.
Options
The Fund may write covered call options, buy put options, buy call options
and sell or "write" secured put options on a national securities exchange and
issued by the Options Clearing Corporation for hedging purposes. Such
transactions may be effected on a principal basis with primary reporting dealers
in U.S. government securities in an amount not exceeding 5% of the Fund's net
assets. Such options may relate to particular securities, stock or bond indices,
financial instruments or foreign currencies. Purchasing options is a specialized
investment technique which entails a substantial risk of a complete loss of the
amounts paid as premiums to the writer of the option.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of
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the security. The premium paid to the writer is the consideration for
undertaking the obligations under the option contract. A put option for a
particular security gives the purchaser the right to sell the underlying
security at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security. In contrast to an
option on a particular security, an option on a securities index provides the
holder with the right to make or receive a cash settlement upon exercise of the
option.
The Fund may purchase and sell put options on portfolio securities at or
about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits its risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of and yield otherwise available from the underlying security, however,
will be partially offset by the amount of the premium paid for the put option
and any related transaction costs. Call options may be purchased by the Fund in
order to acquire the underlying security at a later date at a price that avoids
any additional cost that would result from an increase in the market value of
the security. The Fund may also purchase call options to increase its return to
investors at a time when the call is expected to increase in value due to
anticipated appreciation of the underlying security. Prior to its expiration, a
purchased put or call option may be sold in a closing sale transaction (a sale
by the Fund, prior to the exercise of an option that it has purchased, of an
option of the same series), and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the option
plus the related transaction costs.
In addition, the Fund may write covered call and secured put options. A
covered call option means that the Fund owns or has the right to acquire the
underlying security subject to call at all times during the option period. A
secured put option means that the Fund maintains in a segregated account with
its custodian cash or U.S. government securities in an amount not less than the
exercise price of the option at all times during the option period. Such options
will be listed on a national securities exchange and issued by the Options
Clearing Corporation and may be effected on a principal basis with primary
reporting dealers in the U.S.
The aggregate value of the securities subject to options written by the
Fund will not exceed 25% of the value of its net assets. In order to close out
an option position prior to maturity, the Fund may enter into a "closing
purchase transaction" by purchasing a call or put option (depending upon the
position being closed out) on the same security with the same exercise price and
expiration date as the option which it previously wrote.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, the Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, it will not be able to
sell the underlying security until the covered call option expires or is
exercised or the Fund closes out the option. In writing a secured put option,
the Fund assumes the risk that the market value of the security will decline
below the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of the Fund.
Foreign Securities and Currencies
The Fund may invest up to 20% of its total assets at the time of purchase
in securities issued by foreign issuers either directly or indirectly through
investments in ADRs, EDRs and similar instruments (defined below). The Fund also
may invest in securities of domestic issuers denominated in foreign currencies
and foreign currencies. See "Special Risk Factors -- Foreign Securities and
Currencies" above.
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American, Standard & Poor's, MidCap Standard & Poor's European and Global
Depository Receipts
The Fund may invest in both sponsored and unsponsored American Depository
Receipts ("ADRs"), Standard & Poor's Depository Receipts ("SPDRs"), European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other
similar global instruments. ADRs are receipts issued in registered form by a
U.S. bank or trust company evidencing ownership of underlying securities issued
by a foreign issuer. ADRs may be listed on a national securities exchange or may
be traded in the over-the-counter markets. ADR prices are denominated in U.S.
dollars although the underlying securities may be denominated in a foreign
currency. SPDRs are receipts designed to replicate the performance of the S&P
500. MidCap SPDRs represent ownership in the MidCap SPDR Trust, a unit
investment trust which holds a portfolio of common stocks that closely tracks
the price performance and dividend yield of the S&P MidCap 400 Index. EDRs,
which are sometimes referred to as Continental Depository Receipts, are receipts
issued in Europe typically by non-U.S. banks or trust companies and foreign
branches of U.S. banks that evidence ownership of foreign or U.S. securities.
EDRs are designed for use in European exchange and over-the-counter markets.
GDRs are receipts structured similarly to EDRs and are marketed globally. GDRs
are designed for trading in non-U.S. securities markets. Investments in ADRs,
EDRs and GDRs involve risks similar to those accompanying direct investments in
foreign securities, but those that are traded in the over-the-counter market
which do not have an active or substantial secondary market will be considered
illiquid and, therefore, will be subject to the Fund's limitation with respect
to illiquid securities.
The principal difference between sponsored and unsponsored ADR, EDR and GDR
programs is that unsponsored ones are organized independently and without the
cooperation of the issuer of the underlying securities. Consequently, available
information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more
volatile.
Forward Currency Exchange Contracts
The Fund may enter into forward currency exchange contracts in an effort to
reduce the level of volatility caused by changes in foreign currency exchange
rates or where such transactions are deemed economically appropriate for the
reduction of risks inherent in the ongoing management of the Fund. The Fund may
not enter into such contracts for speculative purposes. A forward currency
exchange contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of contract. Although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
that might be realized should the value of such currency increase. Consequently,
the Fund may choose to refrain from entering into such contracts. In connection
with forward currency exchange contracts, the Fund will create a segregated
account of liquid assets or otherwise cover its position in accordance with
applicable SEC requirements.
Exchange Rate-Related Securities
The Fund may invest in debt securities for which the principal due at
maturity, while paid in U.S. dollars, is determined by reference to the exchange
rate between the U.S. dollar and the currency of one or more foreign countries
("Exchange Rate-Related Securities"). The interest payable on these securities
is also denominated in U.S. dollars and is not subject to foreign currency risk
and, in most cases, is paid at rates higher than most other similarly rated
securities in recognition of the risks associated with these securities. There
is the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid
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secondary market will exist for a particular Exchange Rate-Related Security due
to conditions in the debt and foreign currency markets. Illiquidity in the
forward foreign exchange market and the high volatility of the foreign exchange
market may, from time to time, combine to make it difficult to sell an Exchange
Rate-Related Security prior to maturity without incurring a significant price
loss.
Debt Securities
The Fund may invest in debt securities which may include: equipment lease
and trust certificates; corporate issues; collateralized mortgage obligations;
state, municipal and private activity bonds; obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; securities of
supranational organizations such as the World Bank; participation certificates
in pools of mortgages, including mortgages issued or guaranteed by the U.S.
government, its agencies or instrumentalities; asset-backed securities such as
mortgage backed securities, Certificates of Automobile Receivables ("CARS") and
Certificates of Amortizing Revolving Debts ("CARDS"); private placements; and
income participation loans. Some of the securities in which the Fund invests may
have warrants or options attached.
Fund appreciation may result from an improvement in the credit standing of
an issuer whose securities are held or a general decline in the level of
interest rates or a combination of both. An increase in the level of interest
rates generally reduces the value of the fixed rate debt instruments held by the
Fund; conversely, a decline in the level of interest rates generally increases
the value of such investments. An increase in the level of interest rates may
temporarily reduce the value of the floating rate debt instruments held by the
Fund; conversely, a decline in the level of interest rates may temporarily
increase the value of those investments.
Ratings Criteria
The Fund invests only in investment grade debt securities which are rated
at the time of purchase within the four highest ratings groups assigned by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A and Baa), Standard &
Poor's Ratings Group ("S&P") (AAA, AA, A and BBB), Fitch Investors Service, Inc.
("Fitch") (AAA, AA, A and BBB), Duff & Phelps Credit Rating Co. ("Duff ") (AAA,
AA, A and BBB) or IBCA (AAA, AA, A and BBB), or, if unrated, which are
determined by the Fund's adviser to be of comparable quality pursuant to
guidelines approved by the Trust's Board of Trustees. Debt securities rated in
the lowest investment grade debt category (Baa by Moody's or BBB by S&P, Fitch,
Duff or IBCA) may have speculative characteristics; changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
securities.
In the event that subsequent to its purchase by the Fund, a rated security
ceases to be rated or its rating is reduced below investment grade, the adviser
will consider whether the Fund should continue to hold the security. The adviser
expects, however, to sell promptly any securities that are non-investment grade
as a result of such events that exceed 5% of the Fund's net assets where the
adviser has determined that such sale is in the best interest of the Fund.
Rating symbols are more fully described in Appendix A to the Statement of
Additional Information.
Mortgage-Backed Securities
The Fund may purchase securities that are secured or backed by mortgages
and are issued by entities such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC"), or private mortgage conduits.
Mortgage-backed securities represent an ownership interest in a pool of
mortgages, the interest and principal payments on which may be guaranteed by an
agency or instrumentality of the U.S.
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<PAGE> 17
government, although not necessarily by the U.S. government itself.
Mortgage-backed securities include CMOs and mortgage pass-through certificates.
Mortgage pass-through certificates, which represent interests in pools of
mortgage loans, provide the holder with a pro rata interest in the underlying
mortgages. One type of such certificate in which the Fund may invest is a GNMA
Certificate which is backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government. Another type is a FNMA
Certificate, the principal and interest of which are guaranteed only by FNMA
itself, not by the full faith and credit of the U.S. government. Another type is
a FHLMC Participation Certificate which is guaranteed by FHLMC as to timely
payment of principal and interest. However, like a FNMA security it is not
guaranteed by the full faith and credit of the U.S. government. Privately issued
mortgage backed securities will carry an investment grade rating at the time of
purchase by S&P or by Moody's or, if unrated, will be in the adviser's opinion
equivalent in credit quality to such rating. Mortgage-backed securities issued
by private issuers, whether or not such obligations are subject to guarantees by
the private issuer, may entail greater risk than obligations directly or
indirectly guaranteed by the U.S. government.
The yield and average life characteristics of mortgage-backed securities
differ from traditional debt securities. A major difference is that the
principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, if a mortgage-backed security is purchased at a premium, a prepayment
rate that is faster than expected will reduce the expected yield to maturity and
average life, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and average life. Conversely, if
a mortgage-backed security is purchased at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will decrease,
the expected yield to maturity and average life. There can be no assurance that
the Trust's estimation of the duration of mortgage-backed securities it holds
will be accurate or that the duration of such instruments will always remain
within the maximum target duration. In calculating the average weighted maturity
of the Funds, the maturity of mortgage-backed securities will be based on
estimates of average life.
Prepayments on mortgage-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. Like other
fixed income securities, when interest rates rise, the value of mortgage-backed
securities generally will decline; however, when interest rates decline, the
value of mortgage-backed securities may not increase as much as that of other
similar duration fixed income securities, and, as noted above, changes in market
rates of interest may accelerate or retard prepayments and thus affect
maturities.
These characteristics may result in a higher level of price volatility for
these assets under certain market conditions. In addition, while the market for
Mortgage-backed securities is ordinarily quite liquid, in times of financial
stress the market for these securities can become restricted.
Asset-Backed Securities
The Fund may also invest in asset-backed securities including interests in
pools of receivables, such as motor vehicle installment purchase obligations and
credit card receivables. In general, the collateral supporting non-mortgage,
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Such securities may also be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Asset-backed securities
are not issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
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Asset-backed securities involve certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws. Most issuers
of motor vehicle receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
motor vehicle receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
Corporate Debt Obligations
Each Fund may invest in corporate debt obligations. In addition to
obligations of corporations, corporate debt obligations include securities
issued by banks and other financial institutions. Corporate debt obligations are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations.
Interest Rate and Total Return Swaps
In order to protect its value from interest rate fluctuations, the Fund may
enter into interest rate and total return swaps. The Fund expects to enter into
these hedging transactions primarily to preserve a return or spread of a
particular investment or portion of its holdings and to protect against an
increase in the price of securities the Fund anticipates purchasing at a later
date. Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (i.e., an exchange of floating
rate payments for fixed rate payments). The net amount of the excess, if any, of
the Fund's obligations over its entitlements with respect to each swap will be
accrued on a daily basis and an amount of liquid assets, such as cash, U.S.
government securities or other liquid high grade debt securities, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by the Fund's custodian. The Fund will not
enter into any swap unless the unsecured commercial paper, senior debt, or
claims paying ability of the other party is rated either "A" or "A-1" or better
by S&P, Duff or Fitch, or "A" or "P-1" or better by Moody's or the claims paying
ability of the other party is deemed creditworthy and any such obligation the
Fund may have under such an arrangement will be covered by setting aside liquid
high grade securities in a segregated account.
U.S. Government Obligations
The Fund may purchase obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities. Obligations of certain agencies
and instrumentalities of the U.S. government, such as the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law. Some of these investments may be variable or floating rate instruments.
See "Variable and Floating Rate Obligations."
U.S. Treasury Obligations and Receipts
The Fund may invest in U.S. Treasury obligations consisting of bills, notes
and bonds issued by the U.S. Treasury, and separately traded interest and
principal component parts of such obligations
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that are transferable through the Federal book-entry system known as STRIPS
(Separately Traded Registered Interest and Principal Securities).
The Fund may invest in separately traded interest and principal component
parts of the U.S. Treasury obligations that are issued by banks or brokerage
firms and are created by depositing U.S. Treasury obligations into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
"Liquid Yield Option Notes" ("LYON's"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). TIGR's, LYON's and CATS are interests in private
proprietary accounts while TR's are interests in accounts sponsored by the U.S.
Treasury.
Securities denominated as TR's, TIGR's, LYON's and CATS are sold as zero
coupon securities which means that they are sold at a substantial discount and
redeemed at face value at their maturity date without interim cash payments of
interest or principal. This discount is accreted over the life of the security,
and such accretion will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater interest rate volatility than interest paying investments.
Dollar Rolls
The Fund may invest in reverse repurchase agreements in the form of Dollar
Rolls. Dollar Rolls are transactions in which securities are sold by the Fund
for delivery in the current month and the Fund simultaneously contracts to
repurchase substantially similar securities on a specified future date. Any
difference between the sale price and the purchase price is netted against the
interest income foregone on the securities sold to arrive at an implied
borrowing rate. Alternatively, the sale and purchase transactions can be
executed at the same price, with the Fund being paid a fee as consideration for
entering into the commitment to purchase. Dollar Rolls may be renewed prior to
cash settlement and initially may involve only a firm commitment agreement by
the Fund to buy a security. If the broker-dealer to which the Fund sells the
security becomes insolvent, the Fund's right to repurchase the security may be
restricted. Other risks involved in entering into Dollar Rolls include the risk
that the value of the security may change adversely over the term of the Dollar
Roll and that the security the Fund is required to repurchase may be worth less
than the security that the Fund originally held.
Short Sales
The Fund may engage in short sales of its securities. Selling securities
short involves selling securities the seller does not own (but has borrowed) in
anticipation of a decline in the market price of such securities. To deliver the
securities to the buyer, the seller must arrange through a broker to borrow the
securities and, in so doing, the seller becomes obligated to replace the
securities borrowed at their market price at the time of replacement. In a short
sale, the proceeds the seller receives from the sale are retained by a broker
until the seller replaces the borrowed securities. The seller may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Fund may only sell securities short "against the box." A short sale is
"against the box" if, at all times during which the short position is open, the
Fund owns at least an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issuer as the securities that are sold short.
Variable and Floating Rate Obligations
The Fund may purchase variable and floating rate instruments (including
variable amount master
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demand notes and adjustable rate mortgages) which are unsecured instruments that
permit the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market with
respect to particular variable and floating rate instruments could make it
difficult for the Fund to dispose of instruments if the issuer defaulted on its
payment obligation or during periods that the Fund is not entitled to exercise
its demand rights, and the Fund could, for these or other reasons, suffer a loss
with respect to such instruments.
When-Issued Securities
The Fund may purchase securities on a "when-issued" or delayed delivery
basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The Fund
expects that commitments to purchase when-issued securities will not exceed 25%
of the value of its total assets under normal market conditions. The Fund does
not intend to purchase when-issued securities for speculative purposes but only
for the purpose of acquiring portfolio securities. In when-issued and delayed
delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause it to miss a price or yield
considered to be attractive.
Lending Portfolio Securities
In order to generate additional income, the Fund may, from time to time,
lend its portfolio securities to broker-dealers, banks or other institutional
borrowers. The Fund must receive at least 100% collateral in the form of cash or
U.S. government securities. This collateral must be valued daily by the Fund's
Adviser and the borrower will be required to provide additional collateral
should the market value of the loaned securities increase. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination by the Fund
or the borrower at any time. While the Fund does not have the right to vote
securities on loan, it intends to terminate the loan and regain the right to
vote if this is considered important with respect to the investment. The Fund
will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Trust's Board of Trustees.
Illiquid Securities
The Fund will not invest more than 15% of its net assets in securities that
are illiquid. Illiquid securities would generally include repurchase agreements
and other instruments with notice/termination dates in excess of seven days,
interest rate swaps and certain securities which are subject to trading
restrictions because they are not registered under the Securities Act of 1933,
as amended (the "1933 Act").
The Fund may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long as it is determined by the Board of Trustees or the Fund's Adviser,
acting under guidelines approved and monitored by the Board, that an adequate
trading market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in the Fund during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities.
Short-Term Obligations
The Fund may hold temporary cash balances which may be invested in various
short-term obligations (with maturities of 18 months or less) such as domestic
and foreign commercial paper, bankers' acceptances, certificates of deposit and
demand and time deposits of domestic and foreign branches of U.S. banks and
foreign banks, U.S. government securities, repurchase agreements, reverse
repurchase agreements and guaranteed investment contracts ("GICs").
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Bank Obligations
Bank obligations include bankers' acceptances, negotiable certificates of
deposit, and non-negotiable time deposits issued for a definite period of time
and earning a specified return by a U.S. bank which is a member of the Federal
Reserve System. Bank obligations also include U.S. dollar denominated bankers'
acceptances, certificates of deposit and time deposits of domestic and foreign
branches of U.S. banks and foreign banks. Investment in bank obligations is
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase.
Commercial Paper
Investments in commercial paper and other short-term promissory notes
issued by corporations (including variable and floating rate instruments) must
be rated at the time of purchase "A-2" or better by S&P, "Prime-2" or better by
Moody's, "F-2" or better by Fitch, "Duff 2" or better by Duff, or "A2" or better
by IBCA or, if not rated, determined by the adviser to be of comparable quality
pursuant to guidelines approved by the Trust's Board of Trustees. Investments
may also include corporate notes. In addition, the Fund may invest in Canadian
Commercial Paper ("CCP"), which is U.S. dollar denominated commercial paper
issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and in Europaper, which is U.S. dollar denominated commercial paper
of a foreign issuer.
Repurchase Agreements
Securities held by the Fund may be subject to repurchase agreements. Under
the terms of a repurchase agreement, the Fund purchases securities from
financial institutions such as banks and broker-dealers which the Fund's Adviser
deems creditworthy under guidelines approved by the Board of Trustees, subject
to the seller's agreement to repurchase such securities at a mutually agreed-
upon date and price. The repurchase price generally equals the price paid by the
Fund plus interest negotiated on the basis of current short term rates, which
may be more or less than the rate on the underlying portfolio securities. The
seller under a repurchase agreement will be required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).
If the seller were to default on its repurchase obligation or become
insolvent, the Fund 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 agreements, or to the extent that the disposition of such securities
by the Fund were delayed pending court action. Although there is no controlling
legal precedent confirming that the Fund would be entitled, as against a claim
by such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities, the Board of Trustees of the Trust believes that, under
the regular procedures normally in effect for custody of the Fund's securities
subject to repurchase agreements and under federal laws, a court of competent
jurisdiction would rule in favor of the Trust if presented with the question.
Securities subject to repurchase agreements will be held by the Trust's
custodian or another qualified custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans by the Fund
under the 1940 Act.
Reverse Repurchase Agreements
The Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with its investment restrictions. Pursuant
to such agreements, the Fund would sell its portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them at a
mutually agreed-upon date and price. The Fund intends to enter into reverse
repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time the Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account assets such as U.S. government securities or other liquid, high grade
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debt securities consistent with the Fund's investment restrictions having a
value equal to the repurchase price (including accrued interest), and will
subsequently monitor the account to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Fund may decline below the price at which it is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Fund may invest in securities issued by other investment
companies which invest in high quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. As a shareholder of another investment company, the Fund would
bear, along with other shareholders, its pro rata portion of that company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that the Fund bears directly in connection with its
own operations. Investment companies in which the Fund may invest may also
impose a sales or distribution charge in connection with the purchase or
redemption of their shares and other types of commissions or charges. Such
charges will be payable by the Fund and, therefore, will be borne indirectly by
its shareholders.
Portfolio Turnover
The Fund may engage in short-term trading and may sell securities which
have been held for periods ranging from several months to less than a day. The
object of such short-term trading is to increase the potential for capital
appreciation and/or income by making portfolio changes in anticipation of
expected movements in interest rates or security prices or in order to take
advantage of what the Fund's Adviser believes is a temporary disparity in the
normal yield relationship between two securities. Any such trading would
increase the Fund's turnover rate and its transaction costs. Higher portfolio
turnover may result in increased taxable gains to shareholders (see "Taxes"
below) and increased expenses paid by the Fund due to transaction costs. The
Fund's annual portfolio turnover is not expected to exceed 200% under normal
market conditions.
INVESTMENT LIMITATIONS
The Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to the Fund without the affirmative vote of its outstanding shares
(as defined under "Miscellaneous"). (Other fundamental investment limitations,
as well as non-fundamental investment limitations, are contained in the
Statement of Additional Information under "Investment Objective and Policies.")
The Fund may not:
1. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the securities of one
or more issuers conducting their principal business activities in the same
industry, provided that:
(a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. government, any state, territory or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, and repurchase
agreements secured by such obligations;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents;
(c) utilities will be divided according to their services, for
example, gas, gas transmis-
18
<PAGE> 23
sion, electric and gas, electric, and telephone will each be considered a
separate industry; and
(d) personal credit and business credit businesses will be considered
separate industries.
2. Purchase securities of any one issuer, other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities or
securities issued or guaranteed by any foreign government, if, immediately after
such purchase, more than 5% of the value of the Fund's total assets would be
invested in such issuer or the Fund would hold more than 10% of any class of
securities of the issuer or more than 10% of the outstanding voting securities
of the issuer, except that up to 25% of the value of the Fund's total assets may
be invested without regard to such limitations.
3. Make loans, except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies and may lend portfolio securities in an amount not exceeding one-
third of its total assets.
4. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
For purposes of the above investment limitations, the Fund treats all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry. In addition, a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
Except for the Fund's policy on illiquid securities, if a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of the Fund's portfolio
securities will not constitute a violation of such limitation for purposes of
the 1940 Act.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders the Fund's yield and total return data for its A shares, B shares
and I shares. The "yield" quoted in advertisements refers to the income
generated by an investment in a class of shares of the Fund over a 30-day period
identified in the advertisement. This income is then "annualized." The amount of
income so generated by the investment during the 30-day period is assumed to be
earned and reinvested at a constant rate and compounded semi-annually; the
annualized income is then shown as a percentage of the investment. The Fund
calculates the total returns for each class of shares on an "average annual
total return" basis for various periods from the date they commenced investment
operations and for other periods as permitted under the rules of the SEC.
Average annual total return reflects the average annual percentage change in
value of an investment in the class over the measuring period. Total returns for
each class of shares may also be calculated on an "aggregate total return" basis
for various periods. Aggregate total return reflects the total percentage change
in value over the measuring period.
Both methods of calculating total return reflect changes in the price of
the shares and assume that any dividends and capital gain distributions made by
the Fund with respect to a class during the period are reinvested in shares of
that class. When considering average total return figures for periods longer
than one year, it is important to note that the annual total return of a class
for any one year in the period might have been greater or less than the average
for the entire period. The Fund may also advertise, from time to time, the total
returns of one or more classes of shares on a year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
Investors may compare the performance of each class of shares of the Fund
to the performance
19
<PAGE> 24
of other mutual funds with comparable investment objectives, to various mutual
fund or market indices, such as the S&P 500, and to data or rankings prepared by
independent services such as Lipper Analytical Services, Inc. or other financial
or industry publications that monitor the performance of mutual funds.
Comparisons may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
U.S.A. Today, CDA/ Weisenberger, The American Banker, Morningstar, Incorporated
and other publications of a local, regional or financial industry nature.
The performance of each class of shares of the Fund is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in net asset value of a class should be
considered in ascertaining the total return to shareholders for a given period.
Total return data should also be considered in light of the risks associated
with the Fund's composition, quality, maturity, operating expenses and market
conditions. Any fees charged by financial institutions (as described in "How to
Purchase and Redeem Shares") are not included in the computation of performance
data but will reduce a shareholder's net return on an investment in the Fund.
Shareholders should note that the yields and total returns of A shares and
B shares will be lower than those of the I shares of the Fund because of the
different distribution and/or servicing fees. The total returns of the B shares
will be lower than those of the A shares of the Fund due to the different
distribution fees of the classes. See "Distribution and Servicing Arrangements."
Further information about the performance of the Fund is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain these
materials from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For processing purchase and redemption orders, the net asset value per
share of the Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined on each business day, except those
holidays which the Exchange observes (currently New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day) ("Business Day").
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
Investments of the Fund in securities traded on an exchange are valued at
the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices. Other
securities and temporary cash investments acquired more than 60 days from
maturity are valued at the mean between the most recent bid and asked prices.
Such valuations are provided by one or more independent pricing services when
such valuations are believed to reflect fair market value. When valuing
securities, pricing services consider institutional size trading in similar
groups of securities and any developments related to specific issues, among
other things. Securities and other assets for which no quotations are readily
available are valued at their fair value under procedures approved by the Board
of Trustees. Absent unusual circumstances, short-term investments hav-
20
<PAGE> 25
ing maturities of 60 days or less are valued on the basis of amortized cost
unless the Trust's Board of Trustees determines that this does not represent
fair value. The net asset value per share of each class of shares of the Fund
will fluctuate as the value of its portfolio changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Fund are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The Distributor, Adviser and/or their affiliates, at their own expense, may
provide compensation to dealers in connection with the sale and/or servicing of
shares of the funds of the Trust. Compensation may include financial assistance
to dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
funds of the Trust, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell a significant amount of such
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a business nature. Compensation may
also include the following types of non-cash items offered through sales
contests: (1) vacation trips, including travel arrangements and lodging at
resorts; (2) tickets for entertainment events (such as concerts, cruises and
sporting events); and (3) merchandise (such as clothing, trophies, clocks and
pens). The Distributor, at its expense, currently conducts sales contests for
dealers in connection with their sales of shares of the Fund. Dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc.
PURCHASE OF A SHARES AND B SHARES
A shares of the Fund are sold with a front-end sales charge. B shares of
the Fund are sold subject to a back-end sales charge. This back-end sales charge
declines over time and is known as a "contingent deferred sales charge." Before
choosing between A shares and B shares of the Fund, investors should read
"Characteristics of A Shares and B Shares" and "Factors to Consider When
Selecting A Shares or B Shares" below.
A shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase A or B shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. Investors purchasing shares
of the Fund must specify at the time of investment whether they are purchasing A
shares or B shares.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. Investors may
be charged a fee if they effect transactions in fund shares through a broker or
agent. (For information on such fees, the Investor should review his or her
agreement with the institution or contact it directly.) For direct purchases of
shares, Investors should call 1-800-622-FUND(3863) or to speak with a NatCity
Investments professional, call 1-888-4NATCTY (462-8289).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact NatCity Investments, Inc., the Distributor
or their financial institu-
21
<PAGE> 26
tions for information as to applications and annual fees. Investors should also
consult their tax advisers to determine whether the benefits of an IRA are
available or appropriate.
The minimum investment is $500 for the initial purchase of A shares or B
shares in the Fund; there is no minimum for subsequent investments. All
purchases made by check should be in U.S. dollars. Please make the check payable
to Armada Funds (fund name), or, in the case of a retirement account, the
custodian or trustee for the account. The Trust will not accept third-party
checks under any circumstance. Investments made in A shares or B shares through
the Planned Investment Program ("PIP"), a savings program described below, are
not subject to the minimum initial investment requirements or any minimum
account balance requirements described under "Other Redemption Information."
Purchases for an IRA through the PIP will be considered as contributions for the
year in which the purchases are made.
Under a PIP, Investors may add to their investment in A shares or B shares
of the Fund, in a consistent manner each month or quarter, with a minimum amount
of $50. Monies may be automatically withdrawn from a checking or savings account
available through an Investor's financial institution and invested in additional
A shares at the Public Offering Price or B shares at the net asset value next
determined after an order is received by the Trust. An Investor may apply for
participation in a PIP by completing an application obtained through a financial
institution, such as banks, brokers, or dealers selling A shares or B shares of
the Fund, or by calling 1-800-622-FUND(3863). The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The Public Offering Price for A shares of the Fund is the sum of the net
asset value of the shares being purchased plus any applicable sales charge per
account, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- ----------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $50,000.... 4.75 5.00 4.50
$50,000 but less than
$100,000........... 4.00 4.20 3.75
$100,000 but less
than $250,000...... 3.75 3.90 3.50
$250,000 but less
than $500,000...... 2.50 2.80 2.25
$500,000 but less
than $1,000,000.... 2.00 2.00 1.75
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
A 1% sales charge will be assessed against a shareholder's fund account if
its value falls below $1,000,000 due to a redemption by the shareholder within
the first year following the initial investment of $1,000,000 or more. With
respect to purchases of $1,000,000 or more of the Fund, the Adviser may pay from
its own funds a fee of 1% of the amount invested to the financial institution
placing the purchase order.
Under the 1933 Act, the term "underwriter" includes persons who offer or
sell for an issuer in connection with the distribution of a security or have a
direct or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
22
<PAGE> 27
No sales charge will be assessed on purchases of A shares made by:
(a) trustees and officers of the Trust;
(b) directors, employees and participants in employee benefit/retirement
plans (annuitants) of National City Corporation or any of its affiliates;
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above;
(d) individuals investing in the Fund by way of a direct transfer or a
rollover from a qualified plan distribution where affiliates of National City
Corporation are serving as a trustee or agent, or certain institutions having
relationships with affiliates of National City Corporation;
(e) investors purchasing Fund shares through a payroll deduction plan;
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services; and
(g) investors purchasing fund shares through "one-stop" mutual fund
networks.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, Investors have the
privilege of combining "concurrent purchases" of A shares of one or more of the
investment funds of the Trust that are sold with a sales charge (each a "load
fund"). The Investor's "concurrent purchases" described above shall include the
combined purchases of the Investor, the Investor's spouse and children under the
age of 21 and the Investor's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Investors must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This privilege, however, may be modified
or eliminated at any time or from time to time by the Trust without notice.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The applicable sales charge may be reduced on purchases of A shares of the
Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND(3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in A shares in determining
the applicable sales charge. An Investor's aggregate investment in A shares is
the total value (based on the higher of current net asset value or any Public
Offering Price originally paid) of:
(a) current purchases
(b) A shares that are already beneficially owned by the Investor for which
a sales charge has been paid
(c) A shares purchased by dividends or capital gains that are reinvested
If, for example, an Investor beneficially owns A shares of the Fund with an
aggregate current value of $90,000 and subsequently purchases A shares of that
Fund having a current value of $10,000, the sales charge applicable to the
subsequent purchase would be reduced to 4.00% of the Public Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. The Letter of Intent option is included on the
account application which may be
23
<PAGE> 28
obtained from the Investor's financial institution or directly from the Trust by
calling 1-800-622-FUND(3863). If an Investor so elects, the 13 month period may
begin up to 30 days prior to the Investor's signing the Letter of Intent. The
initial investment under the Letter of Intent must be equal to at least 4.0% of
the amount indicated in the Letter of Intent. During the term of a Letter of
Intent, the Transfer Agent will hold A shares representing 4.0% of the amount
indicated in the Letter of Intent in escrow for payment of a higher sales charge
if the entire amount is not purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13 month period or is redeemed within one year from the
time of fulfillment, the Investor will be required to pay an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge the Investor would have had to pay on the aggregate purchases if
the total of such purchases had been made at a single time.
SALES CHARGES APPLICABLE TO PURCHASES OF B SHARES
B shares of the Fund are sold at their net asset value next determined
after a purchase order is received in good form by the Trust's Distributor.
Although Investors pay no front-end sales charge on purchases of B shares, such
shares are subject to a deferred sales charge at the rates set forth in the
chart below if they are redeemed within five years of purchase. Broker-dealers
and other organizations selling B shares to Investors will receive commissions
from the Distributor in connection with sales of B shares. These commissions may
be different than the reallowances or placement fees, if any, paid to dealers in
connection with sales of A shares.
The deferred sales charge on B shares is based on the lesser of the net
asset value of the shares on the redemption date or the original cost of the
shares being redeemed. As a result, no sales charge is charged on any increase
in the principal value of an Investor's shares. In addition, a contingent
deferred sales charge will not be assessed on B shares purchased through
reinvestment of dividends or capital gain distributions.
The amount of any contingent deferred sales charge an Investor must pay on
B shares depends on the number of years that elapse between the purchase date
and the date such B shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for an Investor's share purchase, all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
- -------------------------- ---------------------------
<S> <C>
Less than one............. 5.0%
More than one, but less
than two................ 5.0%
More than two, but less
than three.............. 4.0%
More than three, but less
than four............... 3.0%
More than four, but less
than five............... 2.0%
After five years.......... None
After eight years......... *
</TABLE>
- ---------------
* Conversion to A shares.
When an Investor redeems his or her B shares, the redemption order is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. B shares are redeemed first from those B shares that are not
subject to the deferred sales load (i.e., B shares that were acquired through
reinvestment of dividends or capital gain distributions) and thereafter, unless
otherwise designated by the shareholder, from the B shares that have been held
the longest.
For example, assume an Investor purchased 100 B shares at $10 a share (for
a total cost of $1,000), three years later the shares have a net asset value of
$12 per share and during that time the investor acquired 10 additional shares
through dividend reinvestment. If the Investor then makes one redemption of 50
shares (resulting in proceeds of $600, 50 shares x $12 per share), the first 10
shares
24
<PAGE> 29
redeemed will not be subject to the contingent deferred sales charge because
they were acquired through reinvestment of dividends. With respect to the
remaining 40 shares redeemed, the contingent deferred sales charge is charged at
$10 per share (because the original purchase price of $10 per share is lower
than the current net asset value of $12 per share). Therefore, only $400 of the
$600 such Investor received from selling his or her shares will be subject to
the contingent deferred sales charge, at a rate of 4.0% (the applicable rate in
the third year after purchase). The proceeds from the contingent deferred sales
charge that the Investor may pay upon redemption go to the Distributor, which
may use such amounts to defray the expenses associated with the
distribution-related services involved in selling B shares. The contingent
deferred sales charge, along with ongoing distribution fees paid with respect to
B shares, enables those shares to be purchased without the imposition of a
front-end sales charge.
Exemptions From Contingent Deferred Sales Charge
The following types of redemptions qualify for an exemption from the
contingent deferred sales charge:
(a) exchanges described under "Exchange Privilege Applicable to A shares
and B shares" below
(b) redemptions in connection with required (or, in some cases,
discretionary) distributions to participants or beneficiaries of an employee
pension, profit-sharing or other trust or qualified retirement or Keogh plan,
individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Internal Revenue Code due to death, disability or the
attainment of a specified age
(c) redemptions effected pursuant to the Fund's right to liquidate a
shareholder's account if the aggregate net asset value of shares held in the
account is less than the minimum account size
(d) redemptions in connection with the death or disability of a shareholder
(e) redemptions by a settlor of a living trust
(f) redemptions resulting from a tax-free return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF A SHARES AND B SHARES
The primary difference between A shares and B shares lies in their sales
charge structures and distribution arrangements. An Investor should understand
that the purpose and function of the sales charge structures and distribution
arrangements for both A shares and B shares are the same.
A shares are sold at their net asset value plus a front-end sales charge.
This front-end sales charge may be reduced or waived in some cases. A and I
shares are subject to ongoing distribution fees at an annual rate of up to 0.10%
of the Fund's average daily net assets attributable to its A and I shares.
B shares are sold at net asset value without an initial sales charge.
Normally, however, a deferred sales charge is paid if the shares are redeemed
within five years of investment. B shares are subject to ongoing distribution
fees at an annual rate of up to .75% of the Fund's average daily net assets
attributable to its B shares. These ongoing fees, which are higher than those
charged on A shares, will cause B shares to have a higher expense ratio and pay
lower dividends than A shares.
B shares which have been outstanding for eight years after the end of the
month in which the shares were initially purchased will automatically convert to
A shares. The purpose of the conversion is to relieve a holder of B shares of
the higher ongoing expenses charged to those shares, after enough time has
passed to allow the Distributor to recover approximately the amount it would
have received if a front-end sales charge had been charged. The conversion from
B shares to A shares takes place at net asset value, as a result of which an
Investor receives dollar-for-dollar the same value of A shares
25
<PAGE> 30
as he or she had of B shares. As a result of the
conversion, the converted shares are relieved of the distribution and service
fees borne by B shares, although they are subject to the distribution and
service fees borne by A shares.
B shares acquired through a reinvestment of dividends or distributions are
also converted at the earlier of two dates -- eight years after the beginning of
the calendar month in which the reinvestment occurred or the date of conversion
of the most recently purchased B shares that were not acquired through
reinvestment of dividends or distributions. For example, if an Investor makes a
one-time purchase of B shares of the Fund, and subsequently acquires additional
B shares of the Fund only through reinvestment of dividends and/or
distributions, all of such Investor's B shares in the Fund, including those
acquired through reinvestment, will convert to A shares of the Fund on the same
date.
FACTORS TO CONSIDER WHEN SELECTING A SHARES OR B SHARES
Before purchasing Shares of the Fund, Investors should consider whether,
during the anticipated life of their investment in the Fund, the accumulated
distribution fees and potential contingent deferred sales charges on B shares
prior to conversion would be less than the initial sales charge and accumulated
distribution fees on A shares purchased at the same time, and to what extent
such differential would be offset by the higher yield of A shares. In this
regard, to the extent that the sales charge for A shares is waived or reduced by
one of the methods described above, investments in A shares become more
desirable. The Trust will refuse all purchase orders for B shares of over
$250,000.
Although A shares are subject to a distribution fee, they are not subject
to the higher distribution fee applicable to B shares. For this reason, A shares
can be expected to pay correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, purchasers
of A shares that do not qualify for waivers of or reductions in the initial
sales charge would have less of their purchase price initially invested in the
Fund than purchasers of B shares of the Fund.
As described above, purchasers of B shares will have more of their initial
purchase price invested. Any positive investment return on this additional
invested amount would partially or wholly offset the expected higher annual
expenses borne by B shares. Because the Fund's future returns cannot be
predicted, there can be no assurance that this will be the case. Holders of B
shares would, however, own shares that are subject to higher annual expenses
and, for a five-year period, such shares would be subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this five-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
annual B shares' distribution fees to the cost of the initial sales charge and
distribution fees on the A shares. Over time, the expense of the annual
distribution fees on the B shares may equal or exceed the initial sales charge,
if any, and annual distribution fees applicable to A shares. For example, if net
asset value remains constant, the aggregate distribution fees with respect to B
shares of the Fund would equal or exceed the initial sales charge and aggregate
distribution fees of A shares of the Fund approximately eight years after the
purchase. In order to reduce such fees of Investors that hold B shares for more
than eight years, B shares will be automatically converted to A shares as
described above at the end of such eight-year period.
PURCHASE OF I SHARES
I shares are sold primarily to banks and trust companies which are
affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions and
registered investment advisers and financial planners affiliated with National
City Corporation ("Financial Advisers") who charge an advisory, consulting or
other fee for their services and buy shares for their own accounts or the
accounts of their clients ("Customers"). I shares
26
<PAGE> 31
are sold without a sales charge imposed by the Trust or the Distributor.
However, depending on the terms governing the particular account, the Banks,
NAM, or Financial Advisers may impose account charges such as account
maintenance fees, compensating balance requirements or other charges based upon
account transactions, assets or income which will have the effect of reducing
the shareholder's net return on his or her investment in the Fund. There is no
minimum investment.
It is the responsibility of the Banks, NAM and Financial Advisers to
transmit their Customers' purchase orders to the Transfer Agent and to deliver
required funds on a timely basis, in accordance with the procedures stated
above. I shares will normally be held of record by the Banks, NAM, or Financial
Advisers. Confirmations of share purchases and redemptions will be sent to the
Banks, NAM, or Financial Advisers. Beneficial ownership of I shares will be
recorded by the Banks, NAM, or Financial Advisers and reflected in the account
statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Fund which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern Time) on any business day are priced according
to the net asset value per share next determined after receipt of the order plus
any applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF A SHARES AND B SHARES
Redemption orders are effected at the Fund's net asset value per share next
determined after receipt of the order by the Fund. Proceeds from the redemptions
of B shares will be reduced by the amount of any applicable contingent deferred
sales charge. Redemption orders must be placed in writing or by telephone to the
same financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND(3863). Redemption proceeds
are paid by check or credited to the Investor's account with his or her
financial institution.
REDEMPTION OF I SHARES
Customers may redeem all or part of their I shares in accordance with
instructions and limitations pertaining to their accounts at the Banks, NAM or
Financial Advisers. It is the responsibility of the Banks, NAM or Financial
Advisers to transmit redemption orders to the Transfer Agent and credit their
Customers' accounts with the redemption proceeds on a timely basis. Redemption
orders are effected at the net asset value per share next determined after
receipt of the order by the Transfer Agent. No charge for wiring redemption
payments is imposed by the Trust, although the Banks, NAM or Financial Advisers
may charge their Customers' accounts for services. Information relating to such
services and charges, if any, is available from the Banks, NAM or Financial
Advisers.
If a Customer has agreed with a particular Bank, NAM or Financial Adviser
to maintain a minimum balance in his or her account and the balance in such
account falls below that minimum, the Customer may be obliged to redeem all or
part of his or her I shares to the extent necessary to maintain the required
minimum balance. Customers who have instructed that automatic purchases and
redemptions be made for their accounts receive monthly confirmations of share
transactions.
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WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $10,000, no
signature guarantee is needed. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or Armada Funds at the
address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming A shares or B shares by telephone may be modified or terminated at any
time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of the Fund held on the Transfer Agent's system. The
Plan allows the shareholder to have a fixed minimum sum of $100 distributed at
regular intervals. Withdrawals will be reduced by any applicable contingent
deferred sales charge. Because automatic withdrawals of B shares will be subject
to the contingent deferred sales charge, it may not be in the best interest of B
shares shareholders to make systematic withdrawals. Additional information
regarding this service may be obtained from an Investor's financial institution
or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN THE FUND, SHAREHOLDERS SHOULD INDICATE WHETHER
THEY ARE REDEEMING A SHARES OR B SHARES. In the event a redeeming shareholder
owns both A shares and B shares in the Fund, the A shares will be redeemed first
unless the shareholder indicates otherwise. Due to the relatively high cost of
maintaining small accounts, the Trust reserves the right to redeem, at net asset
value, any account maintained by a shareholder (with the exception of a Planned
Investment Program account) that has a value of less than $500 due to
redemptions (including exchanges as
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<PAGE> 33
described below) where the shareholder does not increase the amount in the
account to at least $500 upon 60 days notice.
If any portion of the shares to be redeemed represents an investment made
by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to 15 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his or her investment should purchase shares by Federal funds, bank wire,
certified or cashier's check. Financial institutions normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and Federal funds.
The Trust may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of the
Trust's responsibilities under the 1940 Act. See "Additional Purchase and
Redemption Information" in the Statement of Additional Information.
Payment to Shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO A SHARES AND B SHARES
Subject to the conditions described below, the Trust offers an exchange
program whereby Investors who have paid a front-end sales charge to purchase A
shares of the Fund or other investment funds offered by the Trust or Parkstone
which are sold with a front-end sales charge (each a "load Fund") may exchange
those A shares for A shares of another load Fund, or another investment fund
offered by the Trust or Parkstone without the imposition of a front-end sales
charge (each a "no load Fund"), at the net asset value per share on the date of
exchange subject to the following. If a shareholder paid a sales charge on the
previously exchange A shares that is less than the sales charge applicable to
the A shares sought to be acquired through the exchange, he or she must pay a
sales charge on the exchange equal to such difference. Shareholders may also
exchange A shares of a no load Fund for A shares of another no load Fund at the
net asset value per share without payment of a sales charge. In addition,
shareholders of a no load Fund may exchange A shares for A shares of a load Fund
subject to payment of the applicable sales charge. However, shareholders
exchanging A shares of a no load Fund which were received in a previous exchange
transaction involving A shares of a load Fund will not be required to pay an
additional sales charge upon the reinvestment of the equivalent amount into the
A shares of a load Fund except to the extent of any difference in the applicable
sales loads.
Shareholders who have purchased B shares of the Fund or another investment
fund offered by the Trust or Parkstone (including shares acquired through
reinvestment of dividends or distributions on such shares) may exchange those
shares for B shares of another fund without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of B shares, the holding period of the B shares originally held will
be added to the holding period of the B shares acquired through the exchange.
No exchange fee is imposed by the Trust. Shareholders contemplating an
exchange should carefully review the Prospectus of the fund into which the
exchange is being considered. An Armada Funds Prospectus may be obtained from
NatCity Investments, Inc., an Investor's financial institution or by calling
1-800-622-FUND(3863).
Any A shares or B shares exchanged must have a value at least equal to the
minimum initial investment required by the particular investment fund into which
the exchange is being made. Investors should make their exchange requests in
writing or by telephone to the financial institutions through which they
purchased their original A shares or B shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests
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<PAGE> 34
directly to the Transfer Agent. Exchange requests received by the Transfer Agent
prior to 4:00 p.m. (Eastern Time) will be processed as of the close of business
on the day of receipt; requests received by the Transfer Agent after 4:00 p.m.
(Eastern Time) will be processed on the next Business Day. The Trust reserves
the right to reject any exchange request. During periods of unusual economic or
market changes, telephone exchanges may be difficult to implement. In such
event, an Investor should mail the exchange request to his or her financial
institution, and an Investor who directly purchased shares from the Trust should
mail the exchange request to the Transfer Agent. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to shareholders.
The exchange privilege is a convenient way to respond to changes in
investment goals or in market conditions. This privilege is not designed for
frequent trading in response to short-term market fluctuations. Management of
the Trust reserves the right to limit, amend, impose charges upon, terminate or
otherwise modify the exchange privilege upon 60 days' notice to shareholders.
Except for the Systematic Exchange Program described below, as of the date of
this Prospectus, an Investor is limited to one exchange every two months during
a given 12-month period beginning upon the date of the first exchange
transaction.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO A SHARES AND B SHARES
Shares of the Fund may also be purchased through automatic monthly or
quarterly deductions from a shareholder's account from any Armada money market
fund. Under a systematic exchange program, a shareholder enters an agreement to
purchase shares of one or more specified funds over a specified period of time,
and initially purchases shares of one Armada money market fund in an amount
equal to the total amount of the investment. On a monthly or quarterly basis, a
specified dollar amount of shares of the Armada money market fund is exchanged
for shares of the Fund specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Fund. This effect also can be achieved through the Planned
Investment Program described previously in this Prospectus. Because purchases of
A shares are subject to an initial sales charge, it may be beneficial for an
investor to execute a Letter of Intent in indicating an intent to purchase A
shares in connection with the systematic exchange program. A shareholder may
apply for participation in this program through his or her financial institution
or by calling 1-800-622-FUND(3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement and Rule 12b-1 under the
1940 Act, the Trust adopted a Service and Distribution Plan For A and I Share
Classes ("A and I Plan") and a separate B shares Distribution and Servicing Plan
("B shares Plan"). Under the A and I Plan, the Trust reimburses the Distributor
for direct and indirect costs and expenses incurred in connection with
advertising, marketing and other distribution services related to the A and I
shares of each of the Trust's investment funds and in preparing and distributing
such shares' prospectus. In the case of the Fund, such reimbursement shall not
exceed .10% per annum of the average aggregate net assets of its A and I shares.
Under the B shares Plan, the Trust pays the Distributor up to .75% annually of
the average daily net assets of each fund's B shares for the same types of
services provided and expenses assumed as in the A and I Shares Plan. Such
compensation is payable monthly and accrued daily by the Fund's B shares only.
Although B shares are sold without an initial sales charge, the Distributor
pays a sales commission equal to 4.25% of the amount invested (including a
prepaid service fee of 0.25% of the amount invested) to dealers who sell B
shares. These com-
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<PAGE> 35
missions are not paid on exchanges from other Armada funds or on sales to
investors exempt from the contingent deferred sales charge.
Under the Shareholder Services Plan relating to the Fund's A shares and the
B shares Plan, the Trust enters into shareholder servicing agreements with
certain financial institutions. Pursuant to these agreements, the institutions
agree to render shareholder administrative services to their customers who are
the beneficial owners of A or B shares in consideration for the payment of up to
.25% (on an annualized basis) of the average daily net asset value of such
shares. Persons entitled to receive compensation for servicing A or B shares may
receive different compensation with respect to those shares than with respect to
I shares in the same Fund. Shareholder administrative services may include
aggregating and processing purchase and redemption orders, processing dividend
payments from the Fund on behalf of customers, providing information
periodically to customers showing their position in A or B shares, and providing
sub-transfer agent services or the information necessary for sub-transfer agent
services, with respect to A or B shares beneficially owned by customers. Since
financial institutions may charge their customers fees depending on the type of
customer account the Investor has established, beneficial owners of A or B
shares should read this Prospectus in light of the terms and fees governing
their accounts with financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared and paid
quarterly. With respect to the Fund, net income for dividend purposes consists
of dividends, distributions and other income on the Fund's assets, less the
accrued expenses of the Fund. Any net realized capital gains will be distributed
at least annually. Dividends and distributions will reduce the Fund's net asset
value per share by the per share amount thereof.
Shareholders of the Fund may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class of any Armada Funds
at the net asset value of such shares on the ex-dividend date. Shareholders must
make such election, or any revocation thereof, in writing to their Banks or
financial institutions. The election will become effective with respect to
dividends and distributions paid after its receipt.
TAXES
The Fund intends to qualify as a separate "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally relieves the Fund of liability for federal income taxes
to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, the Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. The Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by the Fund will be taxable as ordinary income to their
respective shareholders who are not currently exempt from federal income taxes,
whether such income is received in cash or reinvested in additional shares.
(Federal income taxes for distributions to an IRA or to a qualified retirement
plan are deferred under the Code.) For corporate share-
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<PAGE> 36
holders, the dividends received deduction will apply to such distributions to
the extent of the gross amount of qualifying dividends received by the
distributing Fund from domestic corporations for the taxable year.
Substantially all of the Fund's net realized long-term capital gains, if
any, will be distributed at least annually to Fund shareholders. The Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by the Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his or her
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his or her tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Fund within 90 days of the purchase and is able to reduce the sales
charge applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included (subject to this
limitation) in the tax basis of the new shares.
Shareholders of the Fund will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Fund and its
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations, and the
compensation paid by the Trust and the fees and reimbursed expenses they
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receive in connection with each meeting of the
Board of Trustees they attend are included in the Statement of Additional
Information.
INVESTMENT ADVISER
IMC serves as the investment adviser to the Fund. IMC is a registered
investment adviser and an indirect, wholly owned subsidiary of National City
Corporation ("NCC"). On June 30, 1998, IMC had approximately $18.73 billion in
assets under management. The principal office of the Adviser is:
1900 East Ninth Street
Cleveland, Ohio 44114.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment policies, the Adviser has agreed to manage
the Fund, make decisions with respect to and place orders for all purchases and
sales of the Fund's securities, and maintain the Fund's records relating to such
purchases and sales.
IMC manages the Fund, makes decisions with respect to and places orders for
all purchases and sales of the Fund's securities and maintains the Fund's
records relating to such purchases and sales. IMC utilizes a team approach to
the investment management of the Fund, with professionals working as a team to
ensure a disciplined investment process designed to result in long-term
performance consistent with the Fund's investment objective. No one person is
responsible for the Fund's management.
IMC has established investment management teams by market segment: equities
and fixed income instruments. Within the equities segment, teams have been
formed based on style - growth or value - and market capitalization.
The investment management teams within IMC share the management duties of
the Fund. The teams manage their respective segment allocation within the Fund,
according to their areas of specialization.
For the services provided and expenses assumed pursuant to the Advisory
Agreement relating to the Fund, the Adviser is entitled to receive an advisory
fee, computed daily and payable monthly, at the annual rate of .75% of the
average net assets of Fund. Shareholders should note that these fees are higher
than those payable by other investment companies. However, the Trust believes
that the fees are within the range of fees payable by investment funds with
comparable investment objectives and policies. The adviser may from time to time
waive all or a portion of their advisory fees to increase the net income of the
Fund available for distribution as dividends.
YEAR 2000 RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser and the Fund's other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. This a commonly known as the "Year 2000 Problem." The
Adviser is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurance that comparable steps are
being taken by the Fund's other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund as a result of the Year 2000 Problem.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SEI Fund Resources (the "Administrator"), located at One Freedom Valley
Drive, Oaks, Pennsylvania 19456, serves as the administrator to the Fund. SEI
Fund Resources is an indirect, wholly-owned subsidiary of SEI Investments
Company ("SEI").
Under its Administration Agreement with the Trust relating to the Fund, SEI
provides the Fund with administrative services, including fund accounting,
regulatory reporting, necessary office
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<PAGE> 38
space, equipment, personnel and facilities. The Administrator also acts as
shareholder servicing agent of the Fund. SEI is entitled to receive with respect
to the Trust an administrative fee, computed daily and paid monthly, at the
annual rate of .07% of the aggregate average daily net assets of all the
investment funds of the Trust up to the first eighteen (18) billion, and .06% of
the aggregate average daily net assets over eighteen (18) billion. In addition,
SEI is entitled to be reimbursed for its out-of-pocket expenses incurred on
behalf of the Fund.
IMC serves as Sub-administrator for the Fund and provides certain services
as may be requested by the Administrator from time to time. For its services as
Sub-Administrator, IMC receives, from the Administrator, pursuant to its
Sub-Administration Agreement with the Administrator, a fee, computed daily and
paid monthly, at the annual rate of .01% of the aggregate average daily net
assets of all of the investment funds of Armada up to the first $15 billion, and
.015% of the aggregate average daily net assets over $15 billion.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue the separate classes or
series of shares of beneficial interest ("shares") mentioned below. Three of
these classes or series, which represent interests in the Balanced Allocation
Fund (Class AA, Class AA -- Special Series 1 and Class AA -- Special Series 2).
Class AA shares constitute the I class or series of shares; Class AA -- Special
Series 1 shares constitute the A class or series of shares; and Class
AA -- Special Series 2 shares constitute the B class or series of shares. The
other Funds of the Trust are:
Money Market Fund
(Class A, Class A -- Special Series 1 and Class A -- Special Series 2)
Government Money Market Fund
(Class B and Class B -- Special Series 1)
Treasury Money Market Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Money Market Fund
(Class D, Class D -- Special Series 1 and Class D -- Special Series 2)
Ohio Municipal Money Market Fund
(Class BB and Class BB -- Special Series 1)
Intermediate Bond Fund
(Class I, Class I -- Special Series 1 and Class I -- Special Series 2)
Ohio Tax Exempt Fund
(Class K, Class K -- Special Series 1 and Class K -- Special Series 2)
National Tax Exempt Fund
(Class L, Class L -- Special Series 1 and Class L -- Special Series 2)
Equity Growth Fund
(Class H, Class H -- Special Series 1 and Class H -- Special Series 2)
Equity Income Fund
(Class M, Class M -- Special Series 1 and Class M -- Special Series 2)
Small Cap Value Fund
(Class N, Class N -- Special Series 1 and Class N -- Special Series 2)
Enhanced Income Fund
(Class O, Class O -- Special Series 1 and Class O -- Special Series 2)
Total Return Advantage Fund
(Class P, Class P -- Special Series 1 and Class P Special Series 2)
Pennsylvania Tax Exempt Money Market Fund
(Class Q and Class Q -- Special Series 1)
Bond Fund
(Class R, Class R -- Special Series 1 and Class R -- Special Series 2)
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<PAGE> 39
GNMA Fund
(Class S, Class S -- Special Series 1 and Class S -- Special Series 2)
Pennsylvania Municipal Fund
(Class T, Class T -- Special Series 1 and Class T -- Special Series 2)
International Equity Fund
(Class U, Class U -- Special Series 1 and Class U -- Special Series 2)
Equity Index Fund
(Class V and Class V -- Special Series 1)
Core Equity Fund
(Class W, Class W -- Special Series 1 and Class W -- Special Series 2)
Small Cap Growth Fund
(Class X, Class X -- Special Series 1 and Class X -- Special Series 2)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Tax Managed Equity Fund
(Class Z, Class Z -- Special Series 1 and Class Z -- Special Series 2)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such Fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment Funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the I and A Plan and B
Shares Plan, only the holders of A/I or B shares in an investment fund are, or
would be entitled to vote on matters submitted to a vote of shareholders (if
any) concerning their respective plans. Voting rights are not cumulative, and
accordingly, the holders of more than 50% of the aggregate shares of the Trust
may elect all of the trustees irrespective of the vote of the other
shareholders.
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Trust provides for indemnification out of
the trust property for any shareholder held personally liable solely by reason
of his or her being or having been a shareholder and not because of his or her
acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of September 3, 1998, IMC's bank affiliates held beneficially or of
record approximately 99.89% of the outstanding I shares of the Balanced
Allocation Fund. Neither IMC nor its affiliates have any
35
<PAGE> 40
economic interest in such shares which are held
solely for the benefit of their customers, but may be deemed to be a controlling
person of the Fund within the meaning of the 1940 Act by reason of their record
ownership of such shares. The names of beneficial owners and record owners who
are controlling shareholders under the 1940 Act may be found in the Statement of
Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank, an affiliate of IMC, serves as the custodian of the
Trust's assets. With respect to each fund, the Trust pays National City Bank an
annual custody fee, calculated daily and paid monthly, of .02% of each fund's
first $100 million of average daily net assets, .01% of each fund's next $650
million of average daily net assets and .008% of the average daily net assets of
each fund which exceed $750 million, exclusive of out-of-pocket expenses and
transaction charges. The Trust reimburses the custodian for its out-of-pocket
expenses including, but not limited to, postage, telephone, telex, interest
claim fee ($50.00 per claim), transfer and registration fees, federal express
charges, Federal Reserve and wire fees, as well as its out-of-pocket costs in
providing any foreign custody services and/or precious metal custody services.
The transaction charges are a bundled fee which will not exceed .25% of the
total monthly asset based fee payable by the Trust.
State Street Bank and Trust Company serves as the Trust's transfer and
dividend disbursing agent. Communications to the Transfer Agent should be
directed to P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by
the Trust for these services are described in the Statement of Additional
Information.
EXPENSES
Except as noted below, the Adviser bears all expenses in connection with
the performance of its services. The Fund bears its own expenses incurred in its
operations including: taxes; interest; fees (including fees paid to its trustees
and officers); SEC fees; state securities qualification fees; costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders; expenses related to the distribution and servicing plans;
advisory fees; administration fees and expenses; charges of the custodian and
Transfer Agent; certain insurance premiums; outside auditing and legal expenses;
costs of shareholders' reports and shareholder meetings; and any extraordinary
expenses. The Fund also pays for brokerage fees and commissions in connection
with the purchase of its portfolio securities.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, since National City Bank serves the Trust as its
custodian and is affiliated with IMC, the Trust's investment adviser, a
procedure has been established requiring three annual verifications, two of
which are to be unannounced, of all investments held pursuant to the Custodian
Services Agreement, to be conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding
36
<PAGE> 41
shares of the Trust or such fund or (b) 67% or more of the shares of the Trust
or such fund present at a meeting if more than 50% of the outstanding shares of
the Trust or such fund are represented at the meeting in person or by proxy.
The portfolio managers of the Fund and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
37
<PAGE> 42
LOGO ARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
HERBERT R. MARTENS, JR.
President
Executive Vice President
National City Corporation
Chairman, President and Chief Executive
Officer, NatCity Investments, Inc.
LEIGH CARTER
Retired President and Chief Operating
Officer, B.F. Goodrich Company
Director:
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
ROBERT J. FARLING
Retired Chairman, President and
Chief Executive Officer, Centerior Energy
Director:
Republic Engineered Steels
RICHARD W. FURST, DEAN
Professor of Finance and Dean
Carol Martin Gatton College of Business
and Economics, University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
GERALD L. GHERLEIN
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 43
ARMADA FUNDS
INVESTMENT ADVISER
AFFILIATE OF NATIONAL
CITY CORPORATION
- --------------------------------------------------------------------------------
National City Investment Management Company
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 44
CROSS REFERENCE SHEET
---------------------
Total Return Advantage Fund
Intermediate Bond
Enhanced Income Fund
GNMA Fund
Bond Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
1. Cover Page................................ Cover Page
2. Synopsis.................................. Expense Table
3. Condensed Financial
Information............................... Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant................................ Risk Factors, Investment
Objectives and Policies;
Investment Limitations;
Description of the Trust and Its
Shares
5. Management of the Trust................... Management of the Trust; Custodian
and Transfer Agent
6. Capital Stock and Other
Securities................................ How to Purchase and Redeem Shares;
Dividends and Distributions;
Taxes; Description of the Trust
and Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered............................. Pricing of Shares; How to Purchase
and Redeem Shares; Distribution
Agreement
8. Redemption Repurchase..................... How to Purchase and Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
</TABLE>
<PAGE> 45
ARMADA FUNDS
----------------------
PROSPECTUS
----------------------
SEPTEMBER 18, 1998
TOTAL RETURN ADVANTAGE FUND
INTERMEDIATE BOND FUND
ENHANCED INCOME FUND
GNMA FUND
BOND FUND
<PAGE> 46
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ 3
Expense Table............................................... 4
Financial Highlights........................................ 8
Investment Objectives and Policies.......................... 17
Investment Limitations...................................... 34
Yield and Performance Information........................... 35
Pricing of Shares........................................... 37
How to Purchase and Redeem Shares........................... 37
Distribution and Servicing Arrangements..................... 50
Dividends and Distributions................................. 51
Taxes....................................................... 52
Management of the Trust..................................... 53
Description of the Trust and Its Shares..................... 55
Custodian and Transfer Agent................................ 58
Expenses.................................................... 58
Miscellaneous............................................... 58
</TABLE>
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT
MANAGEMENT COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES OR ANY BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Investment Management Corporation serves as investment adviser to
Armada Funds for which it receives an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 47
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
One Freedom Valley Drive If you purchased your shares through NatCity Investments,
Oaks, Pennsylvania 19456 Inc. or any other broker-dealer, please call your Financial
Consultant for information.
For current performance, fund information, account
redemption information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following five investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
TOTAL RETURN ADVANTAGE FUND'S investment objective is to provide a total
rate of return, income and price appreciation greater than that of popular
market indices with similar maturity and quality characteristics. Under normal
market conditions, the Fund maintains an average dollar-weighted portfolio
maturity of two years above or below the average maturity of the Lehman Brothers
Government/Corporate Bond Index.
INTERMEDIATE BOND FUND'S investment objective is to provide as high a level
of current income as is consistent with prudent investment risk. The Fund
invests in investment grade fixed income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted portfolio maturity of
ten years or less. The Fund's benchmark in terms of its performance is the
Lehman Intermediate Government/Corporate Bond Index. The Fund formerly was named
the "Fixed Income Fund."
ENHANCED INCOME FUND'S investment objective is to seek a total rate of
return greater than that of the Merrill Lynch 1-3 year Treasury Index. The Fund
will normally invest at least 80% of the value of its total assets in investment
grade debt securities of all types. However, up to 20% of the value of its total
assets may be invested in preferred stocks and other investments. Under normal
market conditions, the Fund intends to maintain an average dollar-weighted
portfolio maturity for its debt securities of from 1 1/2 to 4 years.
GNMA FUND'S investment objective is to seek the highest level of current
income consistent with preservation of capital and a high degree of liquidity by
investing primarily in mortgage pass-through securities guaranteed by the
Government National Mortgage Association. The Fund's benchmark in terms of its
performance is the Lehman GNMA Index.
BOND FUND'S investment objective is to seek preservation of capital and a
high degree of liquidity while providing current income. The Fund invests in a
broad array of fixed income securities, including government and corporate bonds
and mortgage and asset-backed securities. The Fund's benchmark in terms of its
performance is the Lehman Aggregate Bond Index. The Fund formerly was named the
"Intermediate Government Fund."
The net asset value per share of each Fund will fluctuate as the value of
its investment fund changes in response to changing market prices and other
factors.
National City Investment Management Company ("IMC" or the "Adviser") serves
as investment adviser to each of the Funds. National Asset Management
Corporation ("NAM") serves as investment sub-adviser to the Total Return
Advantage Fund (the "Sub-adviser")."
SEI Investments Distribution Co. (the "Distributor") serves as the Trust's
sponsor and distributor. Each Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT MANAGEMENT
COMPANY ITS PARENT COMPANIES OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
September 18, 1998
<PAGE> 48
INTRODUCTION
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund consists
of a separate pool of assets with separate investment objectives and policies as
described below under "Investment Objectives and Policies." Each Fund is
classified as a diversified investment fund under the 1940 Act.
Shares of each Fund have been classified into three separate classes -- A
shares (formerly, Retail shares), B shares and I shares (formerly, Institutional
shares). ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED FOR THE TOTAL RETURN
ADVANTAGE, ENHANCED INCOME, AND GNMA FUNDS, THEY MAY BE OFFERED IN THE FUTURE. A
shares, B shares and I shares represent equal pro rata interests in the
investments held in a Fund and are identical in all respects, except that shares
of each class bear separate distribution and/or shareholder administrative
servicing fees and enjoy certain exclusive voting rights on matters relating to
these fees. See "Distribution and Servicing Arrangements," "Dividends and
Distributions" and "Description of the Trust and Its Shares." Except as provided
below, A shares and B shares are sold through selected broker-dealers and other
financial intermediaries to individual or Institutional customers. A shares are
sold subject to a front-end sales charge. B shares are sold with a contingent
deferred sales charge (back-end charge) imposed on a sliding schedule when such
shares are redeemed.
2
<PAGE> 49
EXPENSE TABLE
<TABLE>
<CAPTION>
TOTAL TOTAL
RETURN TOTAL RETURN RETURN INTERMEDIATE INTERMEDIATE
ADVANTAGE A ADVANTAGE B ADVANTAGE I BOND A BOND B
SHARES(1) SHARES(1) SHARES SHARES(1) SHARES(1)
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(2)................................ 4.75% None None 4.75% None
Sales Charge Imposed on Reinvested
Dividends................................... None None None None None
Deferred Sales Charge(3)...................... None 5.00% None None 5.00%
Redemption Fee................................ None None None None None
Exchange Fee.................................. None None None None None
ANNUAL FUND OPERATING EXPENSES (as a percentage
of average net assets)
Management Fees (after fee waivers)(4)...... .35% .35% .35% .40% .40%
12b-1 Fees(5)............................... .00% .75% .00% .04% .75%
Other Expenses.............................. .40% .40% .15% .46% .46%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after fee
waivers)(4)................................... .75% 1.50% .50% .90% 1.61%
==== ==== ==== ==== ====
<CAPTION>
INTERMEDIATE ENHANCED ENHANCED ENHANCED
BOND I INCOME A INCOME B INCOME I
SHARES SHARES(2) SHARES(1,2) SHARES
------------ --------- ----------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(2)................................ None 2.75% None None
Sales Charge Imposed on Reinvested
Dividends................................... None None None None
Deferred Sales Charge(3)...................... None None 5.00% None
Redemption Fee................................ None None None None
Exchange Fee.................................. None None None None
ANNUAL FUND OPERATING EXPENSES (as a percentage
of average net assets)
Management Fees (after fee waivers)(4)...... .40% .20% .20% .20%
12b-1 Fees(5)............................... .04% .00% .75% .00%
Other Expenses.............................. .21% .33% .33% .23%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after fee
waivers)(4)................................... .65% .53% 1.28% .43%
==== ==== ==== ====
</TABLE>
- ---------------
ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED FOR THE TOTAL RETURN
ADVANTAGE, ENHANCED INCOME, AND GNMA FUNDS, THEY MAY BE OFFERED IN THE FUTURE.
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to A shares and B shares of each Fund. Pursuant to such plans, the
Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own A shares or B shares in
consideration for the payment of up to .25% (on an annualized basis) of the
net asset value of such A shares or B shares of the Total Return Advantage
Fund, Intermediate Bond Fund, GNMA Fund and Bond Fund, and up to .10% (on an
annualized basis) of the net asset value of such A shares or B shares of the
Enhanced Income Fund. For further information concerning these plans, see
"Distribution and Servicing Arrangements."
(2) A reduced sales charge may be available. A contingent deferred sales charge
of 1% may be imposed on certain redemptions of A shares purchased without an
initial sales charge as part of an investment of $1 million or more. See
"How to Purchase and Redeem Shares -- Reduced Sales Charges Applicable to
Purchases of A shares."
(3) This amount applies to redemptions during the first and second years. The
deferred sales charge decreases in subsequent years. For more information,
see "How to Purchase and Redeem Shares -- Sales Charges Applicable to
Purchases of B Shares."
(4) The expense information in the table relating to each Fund has been restated
to reflect current fees. For the current fiscal year, IMC will waive fees in
the amount of .15%, .20% and .25% of the average daily net assets of the
Intermediate Bond, Total Return Advantage and Enhanced Income Funds,
respectively, (the Adviser is entitled to receive an advisory fee at the
annual rate of .55%, .55% and .45% of the average daily net assets of the
Intermediate Bond, Total Return Advantage and Enhanced Income Funds,
respectively, pursuant to its Advisory Agreements with the Trust). Without
such fee waivers, Total Fund Operating Expenses would be .95%, 1.70% and
.70% for the A, B and I shares of the Total Return Advantage Fund,
respectively, 1.05%, 1.76% and .80% for the A, B and I shares of the
Intermediate Bond Fund, respectively, .78%, 1.53% and .68% for the A, B and
I shares of the Enhanced Income Fund, respectively.
(5) The Funds have in effect a 12b-1 Plan for the A and I classes of shares
pursuant to which each Fund's A and I shares may bear fees in an amount of
up to .10% per annum of such classes' average net assets. A separate 12b-1
Plan exists with respect to each Fund's B class of shares, pursuant to which
each Fund's B shares may bear fees in an amount of up to .75% of average
daily net assets. As a result of the payment of sales charges and 12b-1
fees, long-term shareholders may pay more than the economic equivalent of
the maximum sales charges permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which
generally limit the aggregate sales charges and payment under the Trust's
12b-1 Plans to a certain percentage of total new gross share sales, plus
interest. The Trust would stop accruing 12b-1 and related fees if, to the
extent, and for as long as, such limit would otherwise be exceeded.
3
<PAGE> 50
EXPENSE TABLE
<TABLE>
<CAPTION>
GNMA GNMA GNMA BOND BOND BOND
A SHARES(1) B SHARES(1) I SHARES A SHARES(1) B SHARES(1) I SHARES
----------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases(2)........................... 4.75% None None 4.75% None None
Sales Charge Imposed on Reinvested Dividends........ None None None None None None
Deferred Sales Charge(3)............................ None 5.00% None None 5.00% None
Redemption Fee...................................... None None None None None None
Exchange Fee........................................ None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee waivers)(4).............. .55% .55% .55% .55% .55% .55%
12b-1 Fees(5)....................................... .04% .75% .04% .04% .75% .04%
Other Expenses...................................... .48% .48% .23% .45% .45% .20%
----- ----- ----- ----- ----- -----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4).......................... 1.07% 1.78% .82% 1.04% 1.75% .79%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED FOR THE TOTAL RETURN
ADVANTAGE, ENHANCED INCOME, AND GNMA FUNDS, THEY MAY BE OFFERED IN THE FUTURE.
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to A shares and B shares of each Fund. Pursuant to such plans, the
Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own A shares or B shares in
consideration for the payment of up to .25% (on an annualized basis) of the
net asset value of such A shares or B shares of the Total Return Advantage
Fund, Intermediate Bond Fund, GNMA Fund and Bond Fund, and up to .10% (on an
annualized basis) of the net asset value of such A shares or B shares of the
Enhanced Income Fund. For further information concerning these plans, see
"Distribution and Servicing Arrangements."
(2) A reduced sales charge may be available. A contingent deferred sales charge
of 1% may be imposed on certain redemptions of A shares purchased without an
initial sales charge as part of an investment of $1 million or more. See
"How to Purchase and Redeem Shares -- Reduced Sales Charges Applicable to
Purchases of A shares."
(3) This amount applies to redemptions during the first and second years. The
deferred sales charge decreases in subsequent years. For more information,
see "How to Purchase and Redeem Shares -- Sales Charges Applicable to
Purchases of B Shares."
(4) The expense information in the table relating to each Fund has been restated
to reflect current fees. For the current fiscal year, IMC will waive fees in
the amount of .15%, .20% and .25% of the average daily net assets of the
Intermediate Bond, Total Return Advantage and Enhanced Income Funds,
respectively, (the Adviser is entitled to receive an advisory fee at the
annual rate of .55%, .55% and .45% of the average daily net assets of the
Intermediate Bond, Total Return Advantage and Enhanced Income Funds,
respectively, pursuant to its Advisory Agreements with the Trust). Without
such fee waivers, Total Fund Operating Expenses would be .95%, 1.70% and
.70% for the A, B and I shares of the Total Return Advantage Fund,
respectively, 1.05%, 1.76% and .80% for the A, B and I shares of the
Intermediate Bond Fund, respectively, .78%, 1.53% and .68% for the A, B and
I shares of the Enhanced Income Fund, respectively.
(5) The Funds have in effect a 12b-1 Plan for the A and I classes of shares
pursuant to which each Fund's A and I shares may bear fees in an amount of
up to .10% per annum of such classes' average net assets. A separate 12b-1
Plan exists with respect to each Fund's B class of shares, pursuant to which
each Fund's B shares may bear fees in an amount of up to .75% of average
daily net assets. As a result of the payment of sales charges and 12b-1
fees, long-term shareholders may pay more than the economic equivalent of
the maximum sales charges permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which
generally limit the aggregate sales charges and payment under the Trust's
12b-1 Plans to a certain percentage of total new gross share sales, plus
interest. The Trust would stop accruing 12b-1 and related fees if, to the
extent, and for as long as, such limit would otherwise be exceeded.
4
<PAGE> 51
- ---------------
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total Return Advantage Fund A Shares(1).................. $ 55 $ 70 $ 87 $136
Total Return Advantage Fund A Shares(2).................. $ 18 $ 24 $ 42 $ 93
Total Return Advantage Fund B Shares(3).................. $ 65 $ 87 $102 $159(3)
Total Return Advantage Fund B Shares(5).................. $ 15 $ 47 $ 82 $159
Total Return Advantage Fund I Shares..................... $ 5 $ 16 $ 28 $ 63
Intermediate Bond Fund A Shares(1)....................... $ 56 $ 75 $ 95 $153
Intermediate Bond Fund A Shares(2)....................... $ 19 $ 29 $ 50 $111
Intermediate Bond Fund B Shares(3)....................... $ 66 $ 91 $108 $172(4)
Intermediate Bond Fund B Shares(5)....................... $ 16 $ 51 $ 88 $172
Intermediate Bond Fund I Shares.......................... $ 7 $ 21 $ 36 $ 81
Enhanced Income Fund A Shares(1)......................... $ 33 $ 44 $ 56 $ 92
Enhanced Income Fund A Shares(2)......................... $ 15 $ 17 $ 30 $ 66
Enhanced Income Fund B Shares(3)......................... $ 63 $ 81 $ 90 $134(4)
Enhanced Income Fund B Shares(5)......................... $ 13 $ 41 $ 70 $134
Enhanced Income Fund I Shares............................ $ 4 $ 14 $ 24 $ 54
GNMA Fund A Shares(1).................................... $ 58 $ 80 $104 $172
GNMA Fund A Shares(2).................................... $ 21 $ 34 $ 59 $131
GNMA Fund B Shares(3).................................... $ 68 $ 96 $116 $191(4)
GNMA Fund B Shares(5).................................... $ 18 $ 56 $ 96 $191
GNMA Fund I Shares....................................... $ 8 $ 26 $ 46 $101
Bond Fund A Shares(1).................................... $ 58 $ 79 $102 $169
Bond Fund A Shares(2).................................... $ 21 $ 33 $ 57 $127
Bond Fund B Shares(3).................................... $ 68 $ 95 $115 $187(4)
Bond Fund B Shares(5).................................... $ 18 $ 55 $ 95 $187
Bond Fund I Shares....................................... $ 8 $ 25 $ 49 $ 98
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes no front end sales charge but the maximum deferred sales charge at 1
year.
(3) Assumes deduction of maximum applicable contingent deferred sales charge.
(4) Based on conversion of B shares to A shares after eight years.
(5) Assumes no redemption.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution and
Servicing Arrangements" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Funds. Any fees that are charged by affiliates of the
Adviser or other institutions directly to their customer accounts for services
related to an investment in shares of any of the Funds are in addition to and
are not reflected in the fees and expenses described above.
5
<PAGE> 52
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
TOTAL RETURN ADVANTAGE FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Total Return Advantage Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1. As of the date of this Prospectus, "Institutional shares"
are renamed "I shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, ENDED MAY 31,
-------------------------------------------------------------- --------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ --------------------
I A I A I A I(3) A(3)
-------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 9.89 $ 9.89 $ 9.88 $ 9.87 $ 10.55 $10.54 $ 10.00 $10.16
-------- ------ -------- ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............ 0.64 0.61 0.67 0.64 0.70(7) 0.62(7) 0.65(7) 0.49(7)
Net Gain (Loss) on Securities
(Realized and Unrealized)...... 0.36 0.36 0.15 0.16 (0.24) (0.22) 0.43 0.40
-------- ------ -------- ------ -------- ------ -------- ------
Total from Investment
Operations............... 1.00 0.97 0.82 0.80 0.46 0.40 1.08 0.89
-------- ------ -------- ------ -------- ------ -------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income......................... (0.64) (0.61) (0.67) (0.64) (0.70) (0.62) (0.53) (0.49)
Dividends in Excess of Net
Investment Income.............. (0.00) (0.00) (0.00) (0.00) (0.12) (0.14) (0.00) (0.02)
Dividends from Net Realized
Capital Gains.................. (0.00) (0.00) (0.00) (0.00) (0.31) (0.31) (0.00) (0.00)
Dividends in Excess of Net
Realized Capital Gains......... (0.00) (0.00) (0.14) (0.14) (0.00) (0.00) (0.00) (0.00)
-------- ------ -------- ------ -------- ------ -------- ------
Total Distributions........ (0.64) (0.61) (0.81) (0.78) (1.13) (1.07) (0.53) (0.51)
-------- ------ -------- ------ -------- ------ -------- ------
Net Asset Value, End of Period..... $ 10.25 $10.25 $ 9.89 $ 9.89 $ 9.88 $ 9.87 $ 10.55 $10.54
======== ====== ======== ====== ======== ====== ======== ======
TOTAL RETURN....................... 10.35% 10.08%(5) .51% 8.35%(5) 4.22% 3.74%(5) 12.52%(4,6) 12.65%(4,5,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)......................... $296,075 $ 640 $259,228 $2,186 $280,401 $2,040 $261,403 $ 106
Ratio of Expenses to Average Net
Assets......................... .31%(1) .54%(2) .16%(1) .41%(2) .13%(1) .36%(2) .18%(1,4) .31%(2,4)
Ratio of Net Investment Income to
Average Net Assets............... 6.29%(1) 6.14%(2) 6.70%(1) 6.46%(2) 6.67%(1) 6.12%(2) 7.23%(1,4) 6.92%(2,4)
Portfolio Turnover Rate............ 170% 170% 169% 169% 268% 268% 166% 166%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the I class for the years ended May 31, 1998 and
May 31, 1997 would have been .72% and 5.88% and .71% and 6.15%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser and custodian for the I class for
the year ended May 31, 1996 would have been .69% and 6.11%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the adviser, administrator and custodian for the I class for the
period ended May 31, 1995 would have been .77% and 6.64%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the A class for the years ended May 31, 1998 and
May 31, 1997 would have been 0.97% and 5.71% and .96% and 5.91%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser and custodian for the A class for
the year ended May 31, 1996 would have been .89% and 5.59%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the adviser, administrator and custodian for the A class for the
period ended May 31, 1995 would have been .87% and 6.36%, respectively.
(3) I and A classes commenced operations on July 7, 1994 and September 6, 1994,
respectively.
(4) Annualized.
(5) Total Return excludes sales charge.
(6) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the I and A
classes for the period were 11.22% and 9.14%, respectively.
(7) Calculated based upon average shares outstanding.
6
<PAGE> 53
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
INTERMEDIATE BOND FUND
(Formerly, Fixed Income Fund)
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Intermediate Bond Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED PERIOD ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1998 1998 1998 1997 1997 1996 1996
I A CLASS B(7) I A I A
-------- ------- ------------ -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................... $ 10.37 $10.42 $10.70 $ 10.30 $10.35 $ 10.54 $10.60
-------- ------ ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................. 0.60 0.58 0.20 0.60 0.57 0.61 0.59
Net Gain/(Loss) on Securities (Realized
and Unrealized)...................... 0.22 0.21 (0.07) 0.07 0.07 (0.22) (0.23)
-------- ------ ------ -------- ------ -------- ------
Total from Investment Operations..... 0.82 0.79 (0.13) 0.67 0.64 0.39 0.36
-------- ------ ------ -------- ------ -------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income... (0.60) (0.58) (0.20) (0.60) (0.57) (0.61) (0.59)
Dividends in Excess of Net Investment
Income............................... (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Dividends from Net Realized Capital
Gains................................ (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains........................ (0.00) (0.00) (0.00) (0.00) (0.00) (0.02) (0.02)
-------- ------ ------ -------- ------ -------- ------
Total Distributions.................. (0.60) (0.58) (0.20) (0.60) (0.57) (0.63) (0.61)
-------- ------ ------ -------- ------ -------- ------
Net Asset Value, End of Period......... $ 10.59 $10.63 $10.63 $ 10.37 $10.42 $ 10.30 $10.35
======== ====== ====== ======== ====== ======== ======
TOTAL RETURN............................ 8.09% 7.71%(3) 7.39%(2,3) 6.63% 6.36%(3) 3.79% 3.44%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s).... $166,710 $3,288 $ 2 $121,271 $3,720 $111,240 $6,216
Ratio of Expenses to Average Net
Assets............................... 0.65%(4) 0.91%(5) 1.60%(2,6) .70%(4) .96%(5) .80%(4) 1.04%(5)
Ratio of Net Investment Income to
Average Net Assets................. 5.71%(4) 5.48%(5) 3.38%(2,6) 5.76%(4) 5.52%(5) 5.78%(4) 5.50%(5)
Portfolio Turnover Rate................ 160% 160% 160% 217% 217% 45% 45%
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1995 1995 1994 1994 1993 1993 1992 1992
I A I A I A I A
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................... $ 10.24 $10.30 $ 10.93 $10.98 $ 10.60 $10.63 $ 10.15 $10.15
------- ------ ------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................. 0.63 0.61 0.61 0.58 0.70 0.65 0.81 0.79
Net Gain/(Loss) on Securities (Realized
and Unrealized)...................... 0.30 0.30 (0.59) (0.58) 0.46 0.48 0.45 0.45
------- ------ ------- ------ ------- ------ ------- ------
Total from Investment Operations..... 0.93 0.91 0.02 0.00 1.16 1.13 1.26 1.24
------- ------ ------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income... (0.63) (0.61) (0.61) (0.58) (0.70) (0.65) (0.81) (0.76)
Dividends in Excess of Net Investment
Income............................... (0.00) (0.00) (0.05) (0.05) (0.02) (0.02) (0.00) (0.00)
Dividends from Net Realized Capital
Gains................................ (0.00) (0.00) (0.03) (0.03) (0.11) (0.11) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains........................ (0.00) (0.00) (0.02) (0.02) (0.00) (0.00) (0.00) (0.00)
------- ------ ------- ------ ------- ------ ------- ------
Total Distributions.................. (0.63) (0.61) (0.71) (0.68) (0.83) (0.78) (0.81) (0.76)
------- ------ ------- ------ ------- ------ ------- ------
Net Asset Value, End of Period......... $ 10.54 $10.60 $ 10.24 $10.30 $ 10.93 $10.98 $ 10.60 $10.63
======= ====== ======= ====== ======= ====== ======= ======
TOTAL RETURN............................ 9.55% 9.26%(3) 0.00% (0.23%)(3) 11.32% 11.03%(3) 12.96% 12.64%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s).... $88,047 $5,527 $95,907 $5,480 $95,246 $5,208 $40,414 $1,033
Ratio of Expenses to Average Net
Assets............................... .85%(4) 1.09%(5) .83% 1.08% .32%(4) .57%(5) .30%(4) .55%(5)
Ratio of Net Investment Income to
Average Net Assets................. 6.24%(4) 5.95%(5) 5.59% 5.34% 6.46%(4) 6.21%(5) 7.84%(4) 7.57%(5)
Portfolio Turnover Rate................ 42% 42% 34% 34% 33% 33% 13% 13%
</TABLE>
- ------------------
(1) A class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the I class for the years ended May 31, 1998 and
May 31, 1997 would have been .80% and 5.56% and .79% and 5.66%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the custodian for the I class for the years ended May
31, 1996 and 1995 would have been .82% and 5.76%, and .86% and 6.23%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the advisers for the I class for the years ended May
31, 1993, 1992 and 1991 would have been .80% and 5.98%, .85% and 7.29%, and
.88% and 7.79%, respectively.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the adviser the A class for the years ended May 31, 1998 and 1997
would have been 1.06% and 5.33%, and 1.05% and 5.44%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the custodian for the A class for the years ended May 31, 1996 and 1995
would have been 1.06% and 5.48%, and 1.10% and 5.94%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the A class for the years ended May 31, 1993 and 1992
and for the period ended May 31, 1991 would have been 1.05% and 5.73%, 1.10%
and 7.02%, and 1.11% and 7.34%, respectively.
(6) The operating expense ratio and net investment ratio before fee waivers by
the adviser for Class B for the period ended May 31, 1998 would have been
1.49% and 3.49%, respectively.
(7) The B class commenced operations January 6, 1998.
7
<PAGE> 54
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
INTERMEDIATE BOND FUND
(Formerly, Fixed Income Fund)
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Intermediate Bond Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed " I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR DECEMBER 20, 1989
ENDED (COMMENCEMENT OF
MAY 31, MAY 31, OPERATIONS) TO
1991 1991 YEAR ENDED
I A(1) MAY 31, 1990
------- ------- -----------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period................................... $ 9.83 $10.11 $ 10.00
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................................. 0.76 0.10 0.33
Net Gain/(Loss) on Securities (Realized and
Unrealized)........................................ 0.39 0.01 (0.24)
------- ------ -------
Total from Investment Operations................... 1.15 0.11 0.09
------- ------ -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.................. (0.76) (0.07) (0.26)
Dividends in Excess of Net Investment Income.......... (0.07) (0.00) (0.00)
Dividends from Net Realized Capital Gains............. (0.00) (0.00) (0.00)
Dividends in Excess of Net Realized Capital Gains..... (0.00) (0.00) (0.00)
------- ------ -------
Total Distributions................................ (0.83) (0.07) (0.26)
------- ------ -------
Net Asset Value, End of Period........................ $ 10.15 $10.15 $ 9.83
======= ====== =======
TOTAL RETURN............................................ 12.20% 8.45%(2,3) 2.21%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)................... $34,664 $ 284 $30,699
Ratio of Expenses to Average Net Assets............... .33%(4) .56%(2,5) .37%(2)
Ratio of Net Investment Income to Average Net
Assets........................................... 8.34%(4) 7.89%(2,5) 8.34%(2)
Portfolio Turnover Rate............................... 0% 0% 20%
</TABLE>
- ------------------
(1) A class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the I class for the years ended May 31, 1998 and
May 31, 1997 would have been .80% and 5.56% and .79% and 5.66%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the custodian for the I class for the years ended May
31, 1996 and 1995 would have been .82% and 5.76%, and .86% and 6.23%,
respectively. The operating expense ratio and net investment income ratio
before fee waivers by the advisers for the I class for the years ended May
31, 1993, 1992 and 1991 would have been .80% and 5.98%, .85% and 7.29%, and
.88% and 7.79%, respectively.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the adviser for the A class for the years ended May 31, 1998 and
1997 would have been 1.06% and 5.33%, and 1.05% and 5.44%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the custodian for the A class for the years ended May 31, 1996 and 1995
would have been 1.06% and 5.48%, and 1.10% and 5.94%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the A class for the years ended May 31, 1993 and 1992
and for the period ended May 31, 1991 would have been 1.05% and 5.73%, 1.10%
and 7.02%, and 1.11% and 7.34%, respectively.
(6) The operating expense ratio and net investment ratio before fee waivers by
the adviser for Class B for the period ended May 31, 1998 would have been
1.49% and 3.49%, respectively.
(7) The B class commenced operations January 6, 1998.
8
<PAGE> 55
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
ENHANCED INCOME FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Enhanced Income Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, ENDED MAY 31,
--------------------------------------------------------- -------------------
1998 1997 1996 1995
---------------- ---------------- ----------------- -------------------
I A I A I A I(3) A(3)
------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 9.99 $10.00 $ 10.01 $10.02 $ 10.16 $10.18 $ 10.00 $10.10
------- ------ ------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................. 0.57 0.57 0.58 0.57 0.58 0.56 0.51(7) 0.43(7)
Net Gain/(Loss) on Securities (Realized
and Unrealized)...................... 0.08 0.09 0.01 0.01 (0.05) (0.05) 0.06 0.06
------- ------ ------- ------ ------- ------ ------- ------
Total from Investment Operations. 0.65 0.66 0.59 0.58 0.53 0.51 0.57 0.49
------- ------ ------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income... (0.57) (0.57) (0.58) (0.57) (0.58) (0.56) (0.41) (0.41)
Dividends in Excess of Net Investment
Income............................... (0.00) (0.00) (0.00) (0.00) (0.10) (0.11) (0.00) (0.00)
Dividends in Excess of Net Realized
Capital Gains........................ (0.01) (0.01) (0.03) (0.03) (0.00) (0.00) (0.00) (0.00)
------- ------ ------- ------ ------- ------ ------- ------
Total Distributions.............. (0.58) (0.58) (0.61) (0.60) (0.68) (0.67) (0.41) (0.41)
------- ------ ------- ------ ------- ------ ------- ------
Net Asset Value, End of Period........... $ 10.06 $10.08 $ 9.99 $10.00 $ 10.01 $10.02 $ 10.16 $10.18
======= ====== ======= ====== ======= ====== ======= ======
TOTAL RETURN............................. 6.68% 6.68%(5) 6.02% 5.91%(5) 5.36% 5.13%(5) 6.54%(4,6) 6.84%(4,5,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)... $71,888 $ 559 $61,031 $2,051 $66,918 $1,718 $60,467 $2,547
Ratio of Expenses to Average Net
Assets............................... 0.33%(1) 0.41%(2) .21%(1) .31%(2) .23%(1) .33%(2) .21%(1,4) .32%(2,4)
Ratio of Net Investment Income to
Average Net Assets................... 5.69%(1) 5.65%(2) 5.74%(1) 5.63%(2) 5.72%(1) 5.55%(2) 5.70%(1,4) 5.89%(2,4)
Portfolio Turnover Rate................ 135% 135% 225% 225% 98% 98% 36% 36%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the I class for the years ended May 31, 1998 and
May 31, 1997 would have been .69% and 5.33% and .66% and 5.29%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser and custodian for the I class for
the year ended May 31, 1996 would have been .70% and 5.25%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the adviser, administrator and custodian for the I class for the
period ended May 31, 1995 would have been .71% and 5.20%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the A class for the years ended May 31, 1998 and
May 31, 1997 would have been .80% and 5.26% and .75% and 5.18%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser and custodian for the A class for
the year ended May 31, 1996 would have been .80% and 5.08%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the adviser, administrator and custodian for the A class for the
period ended May 31, 1995 would have been .79% and 5.42%, respectively.
(3) I and A classes commenced operations on July 7, 1994 and September 9, 1994,
respectively.
(4) Annualized.
(5) Total return excludes sales charge.
(6) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the I and A
classes for the period were 5.87% and 4.92%, respectively.
(7) Calculated based upon average shares outstanding.
9
<PAGE> 56
FINANCIAL HIGHLIGHTS
The GNMA Fund and Bond Fund (formerly, the Intermediate Government Fund)
commenced operations on August 10, 1994 as separate investment portfolios (the
"Predecessor GNMA Fund" and the "Predecessor Bond Fund," respectively, and
collectively, the "Predecessor Funds") of Inventor Funds, Inc., which was
organized as a Maryland corporation. On September 9, 1996, the Funds were
reorganized as new portfolios of the Trust. Prior to the reorganization, the
Predecessor Funds offered and sold A shares that were similar to the Funds' A
shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Funds' A shares (the series
that are similar to the A shares of the GNMA and Bond Funds) for the fiscal
period from May 1, 1996 to May 31, 1996, the fiscal year ended April 30, 1996
and the fiscal period ended April 30, 1995. As part of the reorganization, the
fiscal year of the Predecessor Funds was changed to coincide with the Trust's
May 31 fiscal year. A one-month financial report representing the Predecessor
Funds' operations from May 1, 1996 through May 31, 1996 is being presented. The
information was audited by Coopers & Lybrand L.L.P., independent accountants for
the Predecessor Funds, whose reports thereon are contained in Inventor Funds'
Annual Reports to Shareholders for the fiscal year ended April 30, 1996 and the
period ended May 31, 1996. Such financial highlights should be read in
conjunction with the financial statements and notes thereto contained in
Inventor Funds' Annual Reports to Shareholders and incorporated by reference
into the Statement of Additional Information relating to the GNMA Fund and Bond
Fund. Additional information about the performance of the Predecessor Funds is
contained in Inventor Funds' Annual Reports to Shareholders, which may be
obtained without charge by contacting the Trust at its telephone number or
address provided on page 1.
The information presented below relating to the fiscal years ended May 31,
1998 and May 31, 1997 has been derived from financial statements audited by
Ernst & Young, LLP, independent auditors for the GNMA Fund and Bond Fund, whose
report is incorporated by reference in the Statement of Additional Information.
It should be read in conjunction with the financial statements and related notes
which are incorporated by reference in the Statement of Additional Information.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
10
<PAGE> 57
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
GNMA FUND
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD YEAR PERIOD
MAY 31, 1998 MAY 31, 1997(4) ENDED ENDED ENDED
------------------- ------------------- MAY 31, APRIL 30, APRIL 30,
I A(5) I A(5) 1996(4) 1996(4) 1995(4)
------- ------ ------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 10.15 $10.15 $ 10.03 $10.02 $ 10.12 $ 10.16 $ 10.00
------- ------ ------- ------ ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................. 0.61 0.58 0.65 0.45 0.05 0.66 0.48
Net Gain/(Loss)........................ 0.31 0.31 0.22 0.23 (0.09) 0.14 0.16
------- ------ ------- ------ ------- ------- -------
Total from Investment
Operations.................... 0.92 0.89 0.87 0.68 (0.04) 0.80 0.64
------- ------ ------- ------ ------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income... (0.61) (0.58) (0.65) (0.45) (0.05) (0.66) (0.48)
Dividends from Realized Capital
Gains................................ (0.10) (0.10) (0.01) (0.01) (0.00) (0.18) (0.00)
Dividends in Excess of Net Realized
Capital Gains........................ (0.00) (0.00) (0.09) (0.09) (0.00) (0.00) (0.00)
------- ------ ------- ------ ------- ------- -------
Total Distributions............. (0.71) (0.68) (0.75) (0.55) (0.05) (0.84) (0.48)
------- ------ ------- ------ ------- ------- -------
Net Asset Value, End of Period........... $ 10.36 $10.36 $ 10.15 $10.15 $ 10.03 $ 10.12 $ 10.16
======= ====== ======= ====== ======= ======= =======
TOTAL RETURN............................. 9.17% 8.90%(6) 9.03% 8.83%(6) (0.35)%(3,6) 7.97%(6) 6.61%(3,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)... $83,624 $ 549 $64,501 $ 128 $60,532 $62,161 $42,212
Ratio of Expenses to Average Net
Assets............................... 0.84% 1.09% .86%(1) 1.12%(2) .85%(1,2) .85%(1) .85%(1,2)
Ratio of Net Investment Income to
Average Net Assets................... 5.83% 5.54% 6.45%(1) 6.17%(2) 6.33%(1,2) 6.30%(1) 6.68%(1,2)
Portfolio Turnover Rate................ 291% 291% 57% 57% 1% 149% 226%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers for the I class and the Predecessor Fund for the year ended May 31,
1997, for the period ended May 31, 1996, for the year ended April 30, 1996,
and for the period ended April 30, 1995 would have been 1.01% and 6.30%,
1.28% and 5.90%, 1.29% and 5.86%, and 1.40% and 6.13%, respectively.
(2) Annualized
(3) Not annualized.
(4) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(5) A class commenced operations on September 11, 1996.
(6) Total return excludes sales charge.
11
<PAGE> 58
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
BOND FUND
(Formerly, Intermediate Government Fund)
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Intermediate Bond Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD YEAR PERIOD
MAY 31, 1998 MAY 31, 1997 ENDED ENDED ENDED
------------------------------ ---------------- MAY 31, APRIL 30, APRIL 30,
I A CLASS B(7) I A(3) 1996(4) 1996(4) 1995(4)
-------- ------ ---------- ------- ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 10.02 $10.02 $10.35 $ 9.97 $ 9.97 $ 10.04 $ 10.02 $ 10.00
-------- ------ ------ ------- ------ ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............... 0.59 0.56 0.47 .59 .41 .05 .64 .44
Net Gain/(Loss) on Securities
(Realized and Unrealized)......... 0.25 0.25 (0.09) .13 .13 (.07) .07 .02
-------- ------ ------ ------- ------ ------- ------- -------
Total from Investment Operations.... 0.84 0.81 0.38 .72 .54 (.02) .71 .46
-------- ------ ------ ------- ------ ------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income............................ (0.59) (0.56) (0.47) (.59) (.41) (.05) (.64) (.44)
Dividends from Net Realized Capital
Gains............................. (0.00) (0.00) (0.00) (.00) (.00) (.00) (.05) (.00)
Dividends in Excess of Net
Realized Capital Gains.......... (0.00) (0.00) (0.00) (.08) (.08) (.00) (.00) (.00)
-------- ------ ------ ------- ------ ------- ------- -------
Total Distributions............... (0.59) (0.56) (0.47) (.67) (.49) (.05) (.69) (.44)
-------- ------ ------ ------- ------ ------- ------- -------
Net Asset Value, End of Period.......... $ 10.27 $10.27 $10.26 $ 10.02 $10.02 $ 9.97 $ 10.04 $ 10.02
======== ====== ====== ======= ====== ======= ======= =======
TOTAL RETURN............................ 8.55% 8.29%(6) 8.36%(2,6) 7.41% 7.22%(6) (0.19)%(3,6) 7.09%(6) 4.75%(3,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)............................ $132,620 $ 161 $ 1 $91,161 $ 23 $88,829 $89,901 $53,316
Ratio of Expenses to Average Net
Assets............................ 0.80% 1.05% 1.74% 0.83%(1) 1.07%(2) 0.85%(1,2) 0.85%(1) 0.85%(1,2)
Ratio of Net Investment Income to
Average Net Assets................ 5.72% 5.52% 2.71% 5.83%(1) 5.64%(2) 5.88%(1,2) 6.20%(1) 6.17%(1,2)
Portfolio Turnover Rate............. 220% 220% 220% 96% 96% 2% 94% 172%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers and other service providers for the I class and the
Predecessor Fund for the year ended May 31, 1997, for the period ended May
31, 1996, for the year ended April 30, 1996 and for the period ended April
30, 1995 would have been .96% and 5.71%, 1.25% and 5.48%, 1.25% and 5.80%,
and 1.33% and 5.69%, respectively.
(2) Annualized
(3) Not annualized.
(4) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(5) A class commenced operations on September 11, 1996.
(6) Total return excludes sales charge.
(7) Class B Shares commenced operations January 6, 1998.
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<PAGE> 59
INVESTMENT OBJECTIVES AND POLICIES
A Fund's investment objective may be changed without a vote of
shareholders, although the Board of Trustees would only change a Fund's
objective upon 30 days' notice to shareholders. There can be no assurance that a
Fund will achieve its objective. See "Common Investment Policies of the Funds"
below and "Investment Objectives and Policies" in the Statement of Additional
Information for further information on the investments in which the Funds may
invest.
TOTAL RETURN ADVANTAGE FUND
The investment objective of the Total Return Advantage Fund is to provide a
total rate of return, income and price appreciation greater than that of popular
market indices with similar maturity and quality characteristics. One such index
is the Lehman Brothers Government/Corporate Bond Index which is composed of
government securities and investment grade corporate securities with an average
maturity of approximately ten years and an average rating in the highest rating
category assigned by Moody's, S&P, Fitch, Duff or IBCA (defined under "Ratings
Criteria"). The Fund will normally invest at least 80% of the value of its total
assets in debt securities of all types, although up to 20% of the value of its
total assets may be invested in preferred stocks and other investments. Under
normal market conditions, the Fund maintains an average dollar-weighted
portfolio maturity of two years above or below the average maturity of the
Lehman Brothers Government/Corporate Bond Index.
Although the Total Return Advantage Fund normally invests substantially all
of its assets in investment grade debt securities, it may invest up to 15% of
its net assets in non-rated securities and securities rated below investment
grade (commonly referred to as "junk bonds"). For a discussion of risk factors
relating to such securities, see "Risks Related to Lower Rated Securities."
INTERMEDIATE BOND FUND
The investment objective of the Intermediate Bond Fund is to provide as
high a level of current income as is consistent with prudent investment risk.
The Fund seeks to achieve its objective by investing substantially all of its
assets in a portfolio of investment grade fixed income securities. The Fund
normally invests at least 80% of the value of its total assets in debt
securities of all types, although up to 20% of the value of its total assets may
be invested in preferred stocks and other investments. Under normal market
conditions, the Fund maintains an average dollar-weighted portfolio maturity of
ten years or less. The Fund uses the Lehman Intermediate Government/Corporate
Bond Index as its performance benchmark.
ENHANCED INCOME FUND
The investment objective of the Enhanced Income Fund is to seek a total
rate of return greater than that of the Merrill Lynch 1-3 year Treasury Index.
The Fund will normally invest at least 80% of the value of its total assets in
investment grade debt securities of all types. However, up to 20% of the value
of its total assets may be invested in preferred stocks and other investments.
In making investment decisions, the Fund's adviser will focus on a number of
factors, including yield to maturity, maturity, quality and the outlook for
specific issuers and market sectors. Under normal market conditions, the Fund
intends to maintain an average dollar-weighted portfolio maturity for its debt
securities of from 1 1/2 to 4 years. The two components of total rate of return
are current income and change in the value of portfolio securities. The Merrill
Lynch 1-3 Year Treasury Index is composed of Treasury Securities that mature in
one to three years. The average dollar-weighted maturity of the Index is
generally from 2 1/2 to 3 years. The Index is unmanaged, and its total rate of
return does not reflect the expenses that a mutual fund normally incurs. The
Fund's objective refers to a return after deduction of Fund expenses.
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<PAGE> 60
GNMA FUND
The investment objective of the GNMA Fund is to provide the highest level
of current income consistent with preservation of capital and a high degree of
liquidity. The Fund seeks to achieve this objective by investing primarily (at
least 65% of its total assets under normal conditions) in mortgage pass-through
securities guaranteed by the Government National Mortgage Association ("GNMA").
Any remaining assets may consist of other investment grade fixed income
securities. GNMA was established as an instrumentality of the U.S. government to
supervise and finance certain types of activities. Under normal market
conditions, the estimated average life of the GNMA Fund's holdings of mortgage
pass-through and mortgage-backed securities will range between 4 and 10 years.
The Fund employs the Lehman GNMA Index as its performance benchmark.
BOND FUND
The investment objective of the Bond Fund is to preserve capital and
maintain a high degree of liquidity while providing current income. The Fund
seeks to achieve this objective by investing at least 65% of its total assets in
investment grade fixed-income securities. The Fund uses the Lehman Aggregate
Bond Index ("Lehman Aggregate") as its performance benchmark. The average
maturity of the Fund will range within 2 years above or below that of the Lehman
Aggregate.
COMMON INVESTMENT POLICIES OF THE FUNDS
Debt Securities
The Total Return Advantage, Intermediate Bond and Enhanced Income Funds may
invest in debt securities which may include: equipment lease and trust
certificates; corporate issues; collateralized mortgage obligations; state,
municipal and private activity bonds; obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities; securities of supranational
organizations such as the World Bank; participation certificates in pools of
mortgages, including mortgages issued or guaranteed by the U.S. government, its
agencies or instrumentalities; asset-backed securities such as mortgage backed
securities, Certificates of Automobile Receivables ("CARS") and Certificates of
Amortizing Revolving Debts ("CARDS"); private placements; and income
participation loans. The Bond Fund may invest in debt securities of private
corporations in addition to U.S. government securities. Each Fund normally
limits investments in asset-backed securities to under 50% of its net assets.
The Total Return Advantage Fund, Intermediate Bond Fund and Enhanced Income Fund
normally limit investments in income participation loans to under 10%, 5% and
20% of their respective net assets. Some of the securities in which the Funds
invest may have warrants or options attached. Recognizing the increasing
globalization of the securities markets, each Fund may also invest in foreign
securities, currencies, securities of domestic issuers denominated in foreign
currencies and related investments described below.
Fund appreciation may result from an improvement in the credit standing of
an issuer whose securities are held or a general decline in the level of
interest rates or a combination of both. An increase in the level of interest
rates generally reduces the value of the fixed rate debt instruments held by a
Fund; conversely, a decline in the level of interest rates generally increases
the value of such investments. An increase in the level of interest rates may
temporarily reduce the value of the floating rate debt instruments held by a
Fund; conversely, a decline in the level of interest rates may temporarily
increase the value of those investments.
Ratings Criteria
The Intermediate Bond Fund, Enhanced Income Fund and Bond Fund invest only
in, and the Total Return Advantage Fund invests substantially all of its assets
in, investment grade debt securities which are rated at the time of purchase
within the four highest rating groups assigned by Moody's (Aaa, Aa, A and Baa),
S&P (AAA, AA, A and BBB), Fitch (AAA, AA, A and BBB), Duff (AAA, AA, A and BBB),
or IBCA (AAA, AA, A
14
<PAGE> 61
and BBB), or, if unrated, which are determined by the Funds' adviser to be of
comparable quality pursuant to guidelines approved by the Trust's Board of
Trustees.
Each of the Total Return Advantage Fund and Enhanced Income Fund normally
maintains a minimum, dollar-weighted average quality rating for its portfolio of
securities within the two highest rating categories assigned by one or more
Rating Agencies. Debt securities rated in the lowest investment grade debt
category (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) may have
speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities.
In the event that subsequent to its purchase by a Fund, a rated security
ceases to be rated or its rating is reduced below investment grade, its adviser
will consider whether the Fund should continue to hold the security. The adviser
expects, however, to sell promptly any securities that are non-investment grade
as a result of such events that exceed 5% of a Fund's net assets where the
adviser has determined that such sale is in the best interest of the Fund.
Rating symbols are more fully described in Appendix A of the Statement of
Additional Information.
Risks Related to Lower Rated Securities Which May be Purchased by the Total
Return Advantage Fund
While any investment carries some risk, certain risks associated with lower
rated securities (commonly referred to as "junk bonds") are different than those
for investment grade securities. The risk of loss through default is greater
because lower rated securities are usually unsecured and are often subordinate
to an issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities may be quite volatile
and may result in wider fluctuations in the Total Return Advantage Fund's net
asset value per share.
In addition, an economic downturn or increase in interest rates could have
a negative impact on both the markets for lower rated securities (resulting in a
greater number of bond defaults) and the value of lower rated securities held by
the Total Return Advantage Fund. Current laws, such as those requiring federally
insured savings and loan associations to remove investments in lower rated
securities from their funds, as well as other pending proposals, may also have a
material adverse effect on the market for lower rated securities.
The economy and interest rates may affect lower rated securities
differently than other securities. For example, the prices of lower rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security held by the Total Return Advantage Fund
defaults, the Fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty would likely result in increased volatility for
the market prices of lower rated securities as well as the Fund's net asset
value. In general, both the prices and yields of lower rated securities will
fluctuate.
In certain circumstances it may be difficult to determine a security's fair
value due to a lack of reliable objective information. Such instances occur
where there is no established secondary market for the security or the security
is lightly traded. As a result, the Total Return Advantage Fund's valuation of a
security and the price it is actually able to obtain when it sells the security
could differ.
15
<PAGE> 62
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower rated
securities held by the Total Return Advantage Fund, especially in a thinly
traded market. Illiquid or restricted securities held by the Fund may involve
special registration responsibilities, liabilities and costs, and could involve
other liquidity and valuation difficulties.
The ratings of Moody's, S&P, Fitch, Duff and IBCA evaluate the safety of a
lower rated security's principal and interest payments, but do not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, the Sub-adviser performs its own analysis of the
issuers of lower rated securities purchased by the Fund. Because of this, the
Fund's performance may depend more on its own credit analysis than is the case
for mutual funds investing in higher rated securities.
The Sub-adviser continuously monitors the issuers of lower rated securities
held by the Total Return Advantage Fund for their ability to make required
principal and interest payments, as well as in an effort to control the
liquidity of the Fund so that it can meet redemption requests.
Mortgage-Backed Securities
The Funds may purchase securities that are secured or backed by mortgages
and are issued by entities such as GNMA, FNMA, Federal Home Loan Mortgage
Corporation ("FHLMC"), or private mortgage conduits.
Mortgage-backed securities represent an ownership interest in a pool of
mortgages, the interest and principal payments on which may be guaranteed by an
agency or instrumentality of the U.S. government, although not necessarily by
the U.S. government itself. Mortgage-backed securities include CMOs and mortgage
pass-through certificates.
Mortgage pass-through certificates, which represent interests in pools of
mortgage loans, provide the holder with a pro rata interest in the underlying
mortgages. One type of such certificate in which the Funds may invest is a GNMA
Certificate which is backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government. Another type is a FNMA
Certificate, the principal and interest of which are guaranteed only by FNMA
itself, not by the full faith and credit of the U.S. government. Another type is
a FHLMC Participation Certificate which is guaranteed by FHLMC as to timely
payment of principal and interest. However, like a FNMA security it is not
guaranteed by the full faith and credit of the U.S. government. Privately issued
mortgage backed securities will carry an investment grade rating at the time of
purchase by S&P or by Moody's or, if unrated, will be in the Adviser's (or
Sub-adviser's in the case of the Total Return Advantage Fund) opinion equivalent
in credit quality to such rating. Mortgage-backed securities issued by private
issuers, whether or not such obligations are subject to guarantees by the
private issuer, may entail greater risk than obligations directly or indirectly
guaranteed by the U.S. government.
The yield and average life characteristics of mortgage-backed securities
differ from traditional debt securities. A major difference is that the
principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, if a mortgage-backed security is purchased at a premium, a prepayment
rate that is faster than expected will reduce the expected yield to maturity and
average life, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and average life. Conversely, if
a mortgage-backed security is purchased at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will decrease,
the expected yield to maturity and average life. There can be no assurance that
the Trust's estimation of the duration of mortgage-backed securities it holds
will be accurate or that
16
<PAGE> 63
the duration of such instruments will always remain within the maximum target
duration. In calculating the average weighted maturity of the Funds, the
maturity of mortgage-backed securities will be based on estimates of average
life.
Prepayments on mortgage-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. Like other
fixed income securities, when interest rates rise, the value of mortgage-backed
securities generally will decline; however, when interest rates decline, the
value of mortgage-backed securities may not increase as much as that of other
similar duration fixed income securities, and, as noted above, changes in market
rates of interest may accelerate or retard prepayments and thus affect
maturities.
These characteristics may result in a higher level of price volatility for
these assets under certain market conditions. In addition, while the market for
Mortgage-Backed Securities is ordinarily quite liquid, in times of financial
stress the market for these securities can become restricted.
Asset-Backed Securities
The Funds may also invest in asset-backed securities including interests in
pools of receivables, such as motor vehicle installment purchase obligations and
credit card receivables. In general, the collateral supporting non-mortgage,
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Such securities may also be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Asset-backed securities
are not issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
Asset-backed securities involve certain risks that are not presented by
mortgage backed securities. Primarily, these securities may not have the benefit
of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws. Most issuers
of motor vehicle receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
motor vehicle receivables may not have an effective security interest in all of
the obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
Corporate Debt Obligations
Each Fund may invest in corporate debt obligations. In addition to
obligations of corporations, corporate debt obligations include securities
issued by banks and other financial institutions. Corporate debt obligations are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations.
Foreign Securities, American Depository Receipts ("ADRs") and Foreign
Currencies
The Total Return Advantage, Intermediate Bond and Enhanced Income Funds may
invest in foreign securities including ADRs, securities of domestic issuers
denominated in foreign currencies, securities of foreign issuers denominated in
either foreign currencies or U.S. dollars, and foreign currencies. ADRs are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by foreign issuers. ADRs may be listed on a
national securities exchange or may be traded in the over-the-counter market.
ADR prices are denominated in U.S. dollars; the underlying security may be
denominated in a foreign currency.
17
<PAGE> 64
Investments in foreign securities involve certain inherent risks, such as
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns, changes in exchange rates
of foreign currencies and the possibility of adverse changes in investment or
exchange control regulations. There may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets, or
diplomatic developments that could affect investment within those countries.
Because of these and other factors, securities of foreign companies acquired by
the Funds may be subject to greater fluctuation in price than securities of
domestic companies.
The conversion of the eleven member states of the European Union to a
common currency, the "euro", is scheduled to occur on January 1, 1999. As a
result of the conversion, securities issued by the member states will be subject
to certain risks, including competitive implications of increased price
transparency of European Union markets (including labor markets) resulting from
adoption of a common currency and issuers' plans for pricing their own products
and services in euro; an issuer's ability to make any required information
technology updates on a timely basis, and costs associated with the conversion
(including costs of dual currency operations through January 1, 2002); currency
exchange rate risk and derivatives exposure (including the disappearance of
price sources, such as certain interest rate indices); continuity of material
contracts and potential tax consequences. Other risks include whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2000 and beyond; whether the interest rate, tax and labor
regimes of participating European countries will converge over time; and whether
the conversion of the currencies of other EU countries such as the United
Kingdom, Denmark and Greece into the euro and the possible admission of other
non-EU countries such as Poland, Latvia and Lithuania as members of the EU may
have an impact on the euro. These or other factors, including political and
economic risks, could cause market disruptions before or after the introduction
of the euro, and could adversely affect the value of securities and foreign
currencies held by the Funds. Commissions on transactions in foreign securities
may be higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have been unable to keep pace
with the volume of securities transactions, thus making it difficult to conduct
such transactions.
Exchange Rate-Related Securities
The Total Return Advantage and Enhanced Income Funds may each invest in
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is denominated in U.S.
dollars and is not subject to foreign currency risk and, in most cases, is paid
at rates higher than most other similarly rated securities in recognition of the
foreign currency risk component of Exchange Rate-Related Securities.
Investments in Exchange Rate-Related Securities entail certain risks. There
is the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an
18
<PAGE> 65
Exchange Rate-Related Security is linked. In addition, there is no assurance
that sufficient trading interest to create a liquid secondary market will exist
for a particular Exchange Rate-Related Security due to conditions in the debt
and foreign currency markets. Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may, from time to time,
combine to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
Forward Currency Exchange Contracts
The Total Return Advantage and Enhanced Income Funds may enter into forward
currency exchange contracts in an effort to reduce the level of volatility
caused by changes in foreign currency exchange rates or where such transactions
are economically appropriate for the reduction of risks inherent in the ongoing
management of the Funds. The Funds may not enter into such contracts for
speculative purposes. A forward currency exchange contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of contract. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time, they tend to limit any potential gain that might be realized should the
value of such currency increase. Consequently, a Fund may choose to refrain from
entering into such contracts. In connection with forward currency exchange
contracts, the Funds will create a segregated account of liquid assets, such as
cash, U.S. government securities or other liquid high grade debt obligations, or
will otherwise cover their position in accordance with applicable requirements
of the SEC.
Interest Rate Swaps
In order to protect its value from interest rate fluctuations, each of the
Total Return Advantage, Enhanced Income and GNMA Funds may enter into interest
rate swaps. The Funds expect to enter into these hedging transactions primarily
to preserve a return or spread of a particular investment or portion of their
holdings and to protect against an increase in the price of securities the Funds
anticipate purchasing at a later date. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (i.e., an exchange of floating rate payments for fixed rate payments).
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of liquid assets, such as cash, U.S. government securities
or other liquid high grade debt securities, having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated account
by the Fund's custodian. A Fund will not enter into any interest rate swap
unless the unsecured commercial paper, senior debt, or claims paying ability of
the other party is rated, with respect to the Enhanced Income and Total Return
Advantage Funds, either "A" or "A-1" or better by S&P, Duff or Fitch, or "A" or
"P-1" or better by Moody's or, with respect to the GNMA Fund, the claims paying
ability of the other party is deemed creditworthy and any such obligation the
GNMA Fund may have under such an arrangement will be covered by setting aside
liquid high grade securities in a segregated account.
Futures Contracts and Related Options
The Total Return Advantage, Enhanced Income and Bond Funds may invest in
interest rate and bond index futures contracts and options on futures contracts
and the GNMA and Bond Funds may invest in futures contracts on U.S. Treasury
Obligations in order to offset an expected decrease in the value of their
respective portfolios that might otherwise result from a market decline. A Fund
may do so either to hedge the value of its portfolio securities as a whole, or
to protect against declines occurring prior to sales of securities in the value
of the securities to be sold. In addition, the Funds may utilize futures
contracts in anticipation of changes in
19
<PAGE> 66
the composition of its holdings for hedging purposes or to maintain liquidity.
Futures contracts obligate a Fund, at maturity, to take or make delivery of
certain securities or the cash value of a contract or securities index. When
interest rates are rising, futures contracts can offset a decline in value of
the securities held by a Fund. When rates are falling or prices of securities
are rising, these contracts can secure higher yields for securities a Fund
intends to purchase. In addition, a Fund may utilize futures contracts in
anticipation of changes in the composition of its portfolio holdings.
The Total Return Advantage and Enhanced Income Funds may purchase and sell
call and put options on futures contracts traded on an exchange or board of
trade. When a Fund purchases an option on a futures contract, it has the right
to assume a position as a purchaser or seller of a futures contract at a
specified exercise price at any time during the option period.
When a Fund sells an option on a futures contract, it becomes obligated to
purchase or sell a futures contract if the option is exercised. In anticipation
of a market advance, a Fund may purchase call options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Fund intends to purchase.
Similarly, if the value of a Fund's securities is expected to decline, the Fund
might purchase put options or sell call options on futures contracts rather than
sell futures contracts.
The Total Return Advantage, Enhanced Income, GNMA and Bond Funds intend to
comply with the regulations of the Commodity Futures Trading Commission ("CFTC")
exempting the Funds from registration as a "commodity pool operator." A Fund's
commodities transactions must constitute bona fide hedging or other permissible
transactions pursuant to such regulations. In addition, a Fund may not engage in
such transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired commodity options, other than for bona fide hedging
transactions, would exceed 5% of the liquidation value of its assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into. In connection with a Fund's position in a futures contract
or option thereon, the Fund will create a segregated account of liquid assets,
such as cash, U.S. government securities or other liquid high grade debt
obligations, or will otherwise cover its position in accordance with applicable
requirements of the SEC.
Risk Factors Associated with Futures and Related Options
To the extent the Total Return Advantage, Enhanced Income, GNMA and Bond
Funds are engaging in a futures transaction as a hedging device, due to the risk
of an imperfect correlation between securities in their funds that are the
subject of a hedging transaction and the futures contract used as a hedging
device, it is possible that the hedge will not be fully effective in that, for
example, losses on the portfolio securities may be in excess of gains on the
futures contract or losses on the futures contract may be in excess of gains on
the portfolio securities that were the subject of the hedge. In futures
contracts based on indices, the risk of imperfect correlation increases as the
composition of the Funds varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of futures contracts, the
Funds may buy or sell futures contracts in a greater or lesser dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect a Fund's
net investment results if market movements are not as anticipated when the hedge
is established.
Successful use of futures by the Funds also are subject to the Adviser's or
Sub-adviser's ability to predict correctly movements in the direction of
securities prices, interest rates and other economic factors. For example, if
the Funds have hedged against the possibility of a decline in the market
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adversely affecting the value of securities held in their funds and prices
increase instead, the Funds will lose part or all of the benefit of the
increased value of securities which they have hedged because they will have
offsetting losses in their futures positions. In addition, in such situations,
if a Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. The Funds
may have to sell securities at a time when it may be disadvantageous to do so.
Although the Total Return Advantage, Enhanced Income, GNMA and Bond Funds
intend to enter into futures contracts and the Total Return Advantage and
Enhanced Income Funds into options transactions only if there is an active
market for such investments, no assurance can be given that a liquid market will
exist for any particular contract or transaction at any particular time. See
"Illiquid Securities." Many futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular contract, no
trades may be made that day at a price beyond that limit or trading may be
suspended for specified periods during the trading day. Futures contracts prices
could move to the limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Funds to substantial losses. If it is not possible,
or a Fund determines not, to close a futures position in anticipation of adverse
price movements, it will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
Fund being hedged, if any, may offset partially or completely losses on the
futures contract.
The primary risks associated with the use of futures contracts and options
are:
(a) the imperfect correlation between the change in market value of the
securities held by a Fund and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures contract when desired;
(c) losses greater than the amount of the principal invested as initial
margin due to unanticipated market movements which are potentially unlimited;
and
(d) the Adviser's or Sub-adviser's, in the case of the Total Return
Advantage Fund, ability to predict correctly the direction of securities prices,
interest rates and other economic factors.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The Funds do not intend
to purchase when-issued securities for speculative purposes but only for the
purpose of acquiring portfolio securities. In when-issued and delayed delivery
transactions, a Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
attractive. One form of when-issued or delayed delivery security that the GNMA
and Bond Funds may purchase is a "to be announced" ("TBA") mortgage-backed
security. A TBA transaction arises when a mortgage-backed security, such as a
GNMA pass-through security, is purchased or sold with the specific pools that
will constitute that GNMA pass-through security to be announced on a future
settlement date. Each Fund expects that commitments to purchase when-issued
securities will not exceed 25% of the value of its total assets under normal
market conditions.
Variable and Floating Rate Obligations
The Funds may purchase rated and unrated variable and floating rate
instruments. These instruments may include variable amount master demand notes
and adjustable rate mortgages that permit the indebtedness thereunder to vary in
addition to providing for periodic adjustments in the interest rate.
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The absence of an active secondary market with respect to particular variable
and floating rate instruments could, however, make it difficult for the Funds to
dispose of instruments if the issuer defaulted on its payment obligation or
during periods that the Funds are not entitled to exercise their demand rights,
and the Funds could, for these or other reasons, suffer a loss with respect to
such instruments.
Short Term Obligations
The Funds may hold some short term obligations (with maturities of 18
months or less) such as domestic and foreign commercial paper, bankers'
acceptances, certificates of deposit and demand and time deposits of domestic
and foreign branches of U.S. banks and foreign banks, reverse repurchase
agreements, U.S. Treasury bills, money market funds, and guaranteed investment
contracts ("GICs").
Repurchase Agreements
Securities held by the Funds may be subject to repurchase agreements. Under
the terms of a repurchase agreement, a Fund purchases securities from financial
institutions such as banks and broker-dealers which the Adviser or Sub-adviser
deems creditworthy under guidelines approved by the Board of Trustees, subject
to the seller's agreement to repurchase such securities at a mutually agreed-
upon date and price. The repurchase price generally equals the price paid by the
Fund plus interest negotiated on the basis of current short term rates, which
may be more or less than the rate on the underlying fund securities. The seller
under a repurchase agreement will be required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).
If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying fund securities were less than
the repurchase price under the agreements, or to the extent that the disposition
of such securities by the Fund were delayed pending court action. Although there
is no controlling legal precedent confirming that a Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, the Board of Trustees of the Trust believes
that, under the regular procedures normally in effect for custody of a Trust's
securities subject to repurchase agreements and under federal laws, a court of
competent jurisdiction would rule in favor of the Trust if presented with the
question. Securities subject to repurchase agreements will be held by the
Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
Reverse Repurchase Agreements
Each Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with its investment restrictions. Pursuant
to such agreements, a Fund would sell its portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them at a
mutually agreed-upon date and price. The Funds intend to enter into reverse
repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time a Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account assets such as U.S. government securities or other liquid, high grade
debt securities consistent with the Fund's investment restrictions having a
value equal to the repurchase price (including accrued interest), and will
subsequently monitor the account to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by a Fund may decline below the price at which it is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act.
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The Funds may invest in reverse repurchase agreements in the form of Dollar
Rolls. Dollar Rolls are transactions in which securities are sold by the Fund
for delivery in the current month and the Fund simultaneously contracts to
repurchase substantially similar securities on a specified future date. Any
difference between the sale price and the purchase price is netted against the
interest income foregone on the securities sold to arrive at an implied
borrowing rate. Alternatively, the sale and purchase transactions can be
executed at the same price, with the Fund being paid a fee as consideration for
entering into the commitment to purchase. Dollar Rolls may be renewed prior to
cash settlement and initially may involve only a firm commitment agreement by
the Fund to buy a security. If the broker-dealer to which the Fund sells the
security becomes insolvent, the Fund's right to repurchase the security may be
restricted. Other risks involved in entering into Dollar Rolls include the risk
that the value of the security may change adversely over the term of the Dollar
Roll and that the security the Fund is required to repurchase may be worth less
than the security that the Fund originally held.
U.S. Treasury Obligations and Receipts
Each Fund may invest in U.S. Treasury obligations consisting of bills,
notes and bonds issued by the U.S. Treasury, and separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book-entry system known as STRIPS (Separately Traded Registered Interest
and Principal Securities).
The Funds may invest in separately traded interest and principal component
parts of the U.S. Treasury obligations that are issued by banks or brokerage
firms and are created by depositing U.S. Treasury obligations into a special
account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates of
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TR's"), "Treasury Investment Growth Receipts" ("TIGR's"),
"Liquid Yield Option Notes" ("LYON's"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). TIGR's, LYON's and CATS are interests in private
proprietary accounts while TR's are interests in accounts sponsored by the U.S.
Treasury.
Securities denominated as TR's, TIGR's, LYON's and CATS are sold as zero
coupon securities which means that they are sold at a substantial discount and
redeemed at face value at their maturity date without interim cash payments of
interest or principal. This discount is accreted over the life of the security,
and such accretion will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater interest rate volatility than interest paying Permitted
Investments.
U.S. Government Obligations
Each Fund may purchase obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Some of these obligations are
supported by the full faith and credit of the U.S. Treasury, such as obligations
issued by the GNMA. Others, such as those of the Export-Import Bank of the
United States, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given that
the U.S. government would provide financial support to U.S. government-sponsored
agencies or instrumentalities if it is not obligated to do so by law. The Funds
will invest in the obligations of such agencies or instrumentalities only when
the Adviser or Sub-adviser believes that the credit risk with respect thereto is
minimal.
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Short Sales
The GNMA Fund may engage in short sales of its securities. Selling
securities short involves selling securities the seller does not own (but has
borrowed) in anticipation of a decline in the market price of such securities.
To deliver the securities to the buyer, the seller must arrange through a broker
to borrow the securities and, in so doing, the seller becomes obligated to
replace the securities borrowed at their market price at the time of
replacement. In a short sale, the proceeds the seller receives from the sale are
retained by a broker until the seller replaces the borrowed securities. The
seller may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The GNMA Fund may only sell securities short "against the box." A short
sale is "against the box" if, at all times during which the short position is
open, the Fund owns at least an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issuer as the securities that are sold short.
Lending Portfolio Securities
In order to generate additional income, each Fund may, from time to time,
lend its portfolio securities to broker-dealers, banks or other institutional
borrowers. A Fund must receive 100% collateral in the form of cash or U.S.
government securities. This collateral must be valued daily by the Adviser or
Sub-adviser, and the borrower will be required to provide additional collateral
should the market value of the loaned securities increase. During the time
portfolio securities are on loan, the borrower pays the Fund involved any
dividends or interest paid on such securities. Loans are subject to termination
by the Funds or the borrower at any time. While a Fund does not have the right
to vote securities on loan, it intends to terminate the loan and regain the
right to vote if this is considered important with respect to the investment. A
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which its Adviser or Sub-adviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations, each Fund may invest in securities issued
by other investment companies which invest in high quality, short-term debt
securities and which determine their net asset value per share based on the
amortized cost or penny-rounding method. As a shareholder of another investment
company, a Fund would bear, along with other shareholders, its pro rata portion
of that company's expenses, including advisory fees. These expenses would be in
addition to the advisory and other expenses that a Fund bears directly in
connection with its own operations. Investment companies in which a Fund may
invest may also impose a sales or distribution charge in connection with the
purchase or redemption of their shares and other types of commissions or
charges. Such charges will be payable by the Fund and, therefore, will be borne
indirectly by its shareholders.
Illiquid Securities
The Funds will not knowingly invest more than 15% of their respective net
assets in securities that are illiquid. Illiquid securities would generally
include repurchase agreements, interest rate swaps and GICs with
notice/termination dates in excess of seven days and certain securities which
are subject to trading restrictions because they are not registered under the
Securities Act of 1933, as amended (the "1933 Act").
Each Fund may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long as it is determined by the Board of Trustees or the Adviser or
Sub-adviser, acting under guidelines approved and monitored by the Board, that
an adequate trading market exists for that security.
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This investment practice could have the effect of increasing the level of
illiquidity in a Fund during any period that qualified institutional buyers
become uninterested in purchasing these restricted securities.
Special Risk Factors Associated with Derivative Instruments
The Funds may purchase certain "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of different
securities, interest or currency exchange rates, or indices. The types of
derivative instruments that the Funds may purchase include (but are not limited
to) futures contracts, options, forward currency contracts and structured debt
obligations (including collateralized mortgage obligations, various floating
rate instruments and other types of securities).
Like all investments, derivative instruments involve several basic types of
risks which must be managed in order to meet investment objectives. The specific
risks presented by derivatives include, to varying degrees, market risk in the
form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
is based; liquidity risk that a Fund will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying securities, rates or
indices on which it is based; extension risk that the expected duration of an
instrument may increase or decrease; and operations risk that loss will occur as
a result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The Adviser or Sub-adviser in the case of the Total Return Advantage Fund
has determined that the risk features that most distinguish derivatives from
other investment instruments (and which heavily influence the market, volatility
and leveraging, liquidity, and pricing risks referred to above) can be described
generally as "structural risk." Structural risk refers to the contractual
features of an investment that can cause its total return to vary with changes
in interest rates or other variables. Structural risk is not unique to
derivatives, but because derivatives often are created through the intricate
division of the cash flows of the underlying security, they can (but do not
necessarily) present a high degree of structural risk. Structural risk can arise
from variations in coupon levels, principal, and/or average life.
The Adviser or Sub-adviser in the case of the Total Return Advantage Fund
has adopted the following internal policies concerning management of the
structural risk inherent in derivative instruments on behalf of the Funds. The
risk to the Funds due to the use of derivatives will be limited to the principal
invested in such instruments. When the GNMA Fund engages in short sales "against
the box," risk of loss will be limited to the value of the securities "in the
box." The Adviser or Sub-adviser will evaluate the risks presented by the
derivative instruments purchased by the Funds, and will determine, in connection
with its day-to-day management of the Funds, how they will be used in
furtherance of the Funds' investment objectives.
Intermediate Bond Fund. The Fund may invest in moderate structural risk
derivatives containing features which can modestly or moderately alter the
timing and/or amount of principal return and/or amount of income return. This
would include, for example, investments that are subject to normal prepayment
variances experienced in mortgage pass-through securities. Periodic occurrence
of this degree of structural risk would not be expected
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to materially impact overall Fund returns relative to its investment objective.
The Fund will not invest in high structural risk derivatives whose duration
(and hence return) can vary widely depending on moves in interest rates or other
contractual variables. Generally, these are instruments which are deemed to have
a high sensitivity to changes in interest rates, which could materially alter
the effective duration or coupon and return of the instruments.
The Fund may invest in mortgage-backed derivative securities, including
CMOs, provided that they are not identified by the advisers as "high risk
securities" by certain quantitative tests that are generally accepted standards
in the investment industry.
Other derivative instruments that are suitable for investment include:
asset-backed securities such as those backed by automobile loans or credit card
receivables. All such securities, however, must conform to the structural risk
standards stated above (i.e. not present high structural risk).
The Adviser does not presently intend to invest in the following types of
derivatives on behalf of the Fund:
- exchange rate-related securities
- forward currency exchange contracts
- interest rate swaps
- futures contracts and related options
- structured instruments, such as range notes, dual index notes, leveraged
or deleveraged bonds, inverse floaters, index amortizing notes and other
structured instruments having similar cash flow characteristics
Total Return Advantage Fund and Enhanced Income Fund. These Funds may
invest in derivative instruments having either moderate structural risk or high
structural risk characteristics (as described above in the section pertaining to
the Intermediate Bond Fund). There are no policy restrictions on specific types
of derivative instruments in which the Funds are permitted to invest. However,
structural risk is controlled by adherence to specific overall Fund parameters.
The Funds are managed in accordance with a policy goal that constrains the
potential variability of overall Fund duration and total return in relation to
specified investment performance benchmarks. Fund exposure to derivative
instruments having high structural risk characteristics is targeted at a maximum
of 5.0% of each Fund's net assets with no individual position greater than 1.0%
of each Fund. Variability in total Fund duration caused by these securities is
targeted not to exceed 0.1 years in any one calendar year.
GNMA Fund. The Adviser has adopted the following internal policy
concerning management of the structural risk inherent in derivative instruments
on behalf of the GNMA Fund:
The Adviser does not presently intend to invest in the following types of
derivatives on behalf of the GNMA Fund:
- exchange rate-related securities
- forward currency exchange contracts
- structured instruments, such as range notes, dual index notes, leveraged
or deleveraged bonds, inverse floaters, index amortizing notes and other
structured instruments having similar cash flow characteristics
Bond Fund. The Adviser does not presently intend to invest in the
following types of derivatives which are structured instruments, such as range
notes, dual index notes, leveraged or deleveraged bonds, inverse floaters, index
amortizing notes and other structured instruments having similar cash flow
characteristics.
Portfolio Turnover
Each Fund may engage in short-term trading and may sell securities which
have been held for periods ranging from several months to less than a day. The
object of such short-term trading is to increase the potential for capital
appreciation
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and/or income by making fund changes in anticipation of expected movements in
interest rates or fixed income security prices or in order to take advantage of
what the Adviser or Sub-adviser believes is a temporary disparity in the normal
yield relationship between two securities. Any such trading would increase a
Fund's turnover rate and its transaction costs. Higher portfolio turnover may
result in increased taxable gains to shareholders (see "Taxes" below) and
increased expenses paid by the Fund due to transaction costs.
Portfolio turnover will tend to rise during periods of economic turbulence
and decline during periods of stable growth. Each Fund's annual portfolio
turnover is not expected to exceed 100% under normal market conditions.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the Fund's
outstanding shares (as defined under "Miscellaneous"). (Other fundamental
investment limitations, as well as non-fundamental investment limitations, are
contained in the Statement of Additional Information under "Investment
Objectives and Policies.")
No Fund may:
1. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the securities of one
or more issuers conducting their principal business activities in the same
industry, provided that:
(a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. government, any state, territory or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, and repurchase
agreements secured by such instruments;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents;
(c) utilities will be divided according to their services, for
example, gas, gas transmission, electric and gas, electric, and telephone
will each be considered a separate industry; and
(d) personal credit and business credit businesses will be considered
separate industries.
2. Purchase securities of any one issuer, other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the outstanding voting
securities of the issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to such limitations.
3. Make loans, except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies and may lend portfolio securities in an amount not exceeding one-
third of its total assets.
4. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
For purposes of the above investment limitations, the Funds treat all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry.
In addition, a security is considered to be issued by the government entity
(or entities) whose assets and revenues back the security.
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Except for the Funds' policy on illiquid securities, if a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of a Fund's portfolio
securities will not constitute a violation of such limitation for purposes of
the 1940 Act.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders each Fund's yield and total return data for its A shares, B shares
and I shares. The "yield" quoted in advertisements refers to the income
generated by an investment in a class of shares of a Fund over a 30-day period
identified in the advertisement. This income is then "annualized." The amount of
income so generated by the investment during the 30-day period is assumed to be
earned and reinvested at a constant rate and compounded semi-annually; the
annualized income is then shown as a percentage of the investment.
The Funds calculate their total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by a Fund with
respect to a class during the period are reinvested in shares of that class.
When considering average total return figures for periods longer than one year,
it is important to note that the annual total return of a class for any one year
in the period might have been greater or less than the average for the entire
period. The Funds may also advertise, from time to time, the total returns of
one or more classes of shares on a year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules.
Investors may compare the performance of each class of shares of a Fund to
the performance of other mutual funds with comparable investment objectives, to
various mutual fund or market indices, respectively, and to data or rankings
prepared by independent services such as Lipper Analytical Services, Inc. or
other financial or industry publications that monitor the performance of mutual
funds. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar,
Incorporated and other publications of a local, regional or financial industry
nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in the net asset value of a class should be
considered in ascertaining the total return to shareholders for a given period.
Yield and total return data should also be considered in light of the risks
associated with a Fund's portfolio composition, quality, maturity, operating
expenses and market conditions. Any fees charged by financial institutions (as
described in "How to Purchase and Redeem Shares") are not included in the
computation of performance data but will reduce a shareholder's net return on an
investment in a Fund.
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Shareholders should note that the yields and total returns of A shares and
B shares will be lower than those of the I shares of a Fund because of the
different distribution and/or servicing fees. The yields and total returns of
the B shares will be lower than those of the A shares of a Fund due to the
different distribution fees of the classes. See "Distribution and Servicing
Arrangements."
Further information about the performance of the Funds is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain these
materials from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For processing purchase and redemption orders, the net asset value per
share of each Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined on each business day, except those
holidays which the Exchange observes (currently New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day) ("Business Day").
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
With respect to each Fund, investments in securities are valued at their
closing sales price if the principal market is an exchange. Other securities,
and temporary cash investments acquired more than 60 days from maturity, are
valued at the mean between quoted bid and asked prices. Such valuations are
provided by one or more independent pricing services when such valuations are
believed to reflect fair market value. When valuing securities, pricing services
consider institutional size trading in similar groups of securities and any
developments related to specific issues, among other things. Short-term
investments with maturities of 60 days or less are generally valued on the basis
of amortized cost, unless the Trust's Board of Trustees determines that this
does not represent fair value. The net asset value per share of each class of
shares will fluctuate as the value of its investment portfolio changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The Distributor, Adviser and/or their affiliates, at their own expense, may
provide compensation to dealers in connection with the sale and/or servicing of
shares of the funds of the Trust. Compensation may include financial assistance
to dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Trust, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell a significant amount of such
shares. Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to exotic locations within or outside of the
United States for meetings or seminars of a
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<PAGE> 76
business nature. Compensation may also include the following types of non-cash
items offered through sales contests: (1) vacation trips, including travel
arrangements and lodging at resorts; (2) tickets for entertainment events (such
as concerts, cruises and sporting events); and (3) merchandise (such as
clothing, trophies, clocks and pens). The Distributor, at its expense, currently
conducts sales contests for dealers in connection with their sales of shares of
the Funds. Dealers may not use sales of a Fund's shares to qualify for this
compensation to the extent such may be prohibited by the laws of any state or
any self-regulatory agency, such as the National Association of Securities
Dealers, Inc.
PURCHASE OF A SHARES AND B SHARES
A shares of the Funds are sold subject to a front-end sales charge. B
shares of the Funds are sold subject to a back-end sales charge. This back-end
sales charge declines over time and is known as a "contingent deferred sales
charge." Before choosing between A shares and B shares of the Funds, investors
should read "Characteristics of A and B Shares" and "Factors to Consider When
Selecting A Shares or B Shares" below.
A shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase A or B shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. Investors purchasing shares
of a Fund must specify at the time of investment whether they are purchasing A
shares or B shares.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. Investors may
be charged a fee if they effect transactions in fund shares through a broker or
agent. (For information on such fees, the Investor should review his or her
agreement with the institution or contact it directly.) For direct purchases of
shares, Investors should call 1-800-622-FUND(3863) or to speak with a NatCity
Investments professional, call 1-888-4NATCTY (462-8289).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact NatCity Investments, Inc., the Distributor
or their financial institutions for information as to applications and annual
fees. Investors should also consult their tax advisers to determine whether the
benefits of an IRA are available or appropriate.
The minimum investment is $500 for the initial purchase of A shares or B
shares in a Fund; there is no minimum for subsequent investments. All purchases
made by check should be in U.S. dollars. Please make the check payable to Armada
Funds (fund name), or, in the case of a retirement account, the custodian or
trustee for the account. The Trust will not accept third-party checks under any
circumstance. Investments made in A shares or B shares through the Planned
Investment Program ("PIP"), a savings program described below, are not subject
to the minimum initial investment requirements described under "Other Redemption
Information." Purchases for an IRA through the PIP will be considered as
contributions for the year in which the purchases are made.
Under a PIP, Investors may add to their investment in A shares or B shares
of a Fund, in a consistent manner each month or quarter, with a minimum amount
of $50. Monies may be automatically withdrawn from a checking or savings account
available through an Investor's financial institution and invested in additional
A shares at the Public Offering Price or B shares at the net asset value next
determined after an order is received by the Trust. An Investor may apply for
participation in a PIP by completing an application obtained through a financial
institution, such as banks, brokers, or dealers selling A shares or B shares of
the Funds, or by calling 1-800-622-FUND (3863). The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any time.
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<PAGE> 77
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The Public Offering Price for A shares of the Total Return Advantage Fund,
Intermediate Bond Fund, GNMA Fund and Bond Fund is the sum of the net asset
value of the shares being purchased plus any applicable sales charge per
account, per Fund, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $50,000.... 4.75 5.00 4.50
$50,000 but less than
$100,000........... 4.00 4.20 3.75
$100,000 but less
than $250,000...... 3.75 3.90 3.50
$250,000 but less
than $500,000...... 2.50 2.80 2.25
$500,000 but less
than $1,000,000.... 2.00 2.00 1.75
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
The Public Offering Price for A shares of the Enhanced Income Fund is the
sum of the net asset value of the shares being purchased plus any applicable
sales charge per account, per Fund, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000... 2.75 2.83 2.50
$100,000 but less
than $250,000...... 1.75 1.78 1.50
$250,000 but less
than $500,000...... 1.00 1.01 0.75
$500,000 but less
than $1,000,000.... 0.50 0.50 0.25
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
With respect to each of the above-mentioned Funds, a 1% sales charge will
be assessed against a shareholder's fund account if its value falls below
$1,000,000 due to a redemption by the shareholder within the first year
following the initial investment of $1,000,000 or more. With respect to
purchases of $1,000,000 of a Fund, the Adviser may pay from its own funds a fee
of 1.00%, or 0.25% in the case of the Enhanced Income Fund, of the amount
invested to the financial institution placing the purchase order.
Under the 1933 Act, the term "underwriter" includes persons who offer or
sell for an issuer in connection with the distribution of a security or have a
direct or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of A shares made by:
(a) trustees and officers of the Trust
(b) directors, employees and participants in employee benefit/retirement
plans (annuitants) of National City Corporation or any of its affiliates
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above
(d) individuals investing in a Fund by way of a direct transfer or a
rollover from a qualified plan distribution where affiliates of National City
Corporation are serving as a trustee or agent, or certain institutions having
relationships with affiliates of National City Corporation
(e) investors purchasing Fund shares through a payroll deduction plan
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services
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<PAGE> 78
(g) investors purchasing fund shares through "one-stop" mutual fund
networks
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, Investors have the
privilege of combining "concurrent purchases" of A shares of one or more of the
investment funds of the Trust that are sold with a sales charge (each a "load
fund"). The Investor's "concurrent purchases" described above shall include the
combined purchases of the Investor, the Investor's spouse and children under the
age of 21 and the Investor's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Investors must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This privilege, however, may be modified
or eliminated at any time or from time to time by the Trust without notice.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The applicable sales charge may be reduced on purchases of A shares of each
Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND (3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in A shares in determining
the applicable sales charge. An Investor's aggregate investment in A shares is
the total value (based on the higher of current net asset value or any Public
Offering Price originally paid) of:
(a) current purchases
(b) A shares that are already beneficially owned by the Investor for which
a sales charge has been paid
(c) A shares that are already beneficially owned by the Investor which were
purchased prior to July 22, 1990
(d) A shares purchased by dividends or capital gains that are reinvested
If, for example, an Investor beneficially owns A shares of the Intermediate
Bond Fund with an aggregate current value of $90,000 and subsequently purchases
A shares of that Fund having a current value of $10,000, the sales charge
applicable to the subsequent purchase would be reduced to 3.75% of the Public
Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. A Letter of Intent option is included on the account
application which may be obtained from the Investor's financial institution or
directly from the Trust by calling 1-800-622-FUND (3863). If an Investor so
elects, the 13-month period may begin up to 30 days prior to the Investor's
signing the Letter of Intent. The initial investment under the Letter of Intent
must be equal to at least 4.0% of the amount indicated in the Letter of Intent.
During the term of a Letter of Intent, the Transfer Agent will hold A shares
representing 4.0% of the amount indicated in the Letter of Intent in escrow for
payment of a higher sales charge if the entire amount is not purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire
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<PAGE> 79
amount is not purchased within the 13-month period or is redeemed within one
year from the time of fulfillment, the Investor will be required to pay an
amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge the Investor would have had to pay on the
aggregate purchases if the total of such purchases had been made at a single
time.
SALES CHARGES APPLICABLE TO PURCHASES OF B SHARES
B shares of each Fund are sold at their net asset value next determined
after a purchase order is received in good form by the Trust's Distributor.
Although Investors pay no front-end sales charge on purchases of B shares, such
shares are subject to a deferred sales charge at the rates set forth in the
chart below if they are redeemed within five years of purchase. Broker-dealers
and other organizations selling B shares to Investors will receive commissions
from the Distributor in connection with sales of B shares. These commissions may
be different than the reallowances or placement fees, if any, paid to dealers in
connection with sales of A shares.
The deferred sales charge on B shares is based on the lesser of the net
asset value of the shares on the redemption date or the original cost of the
shares being redeemed. As a result, no sales charge is charged on any increase
in the principal value of an Investor's shares. In addition, a contingent
deferred sales charge will not be assessed on B shares purchased through
reinvestment of dividends or capital gain distributions.
The amount of any contingent deferred sales charge an Investor must pay on
B shares depends on the number of years that elapse between the purchase date
and the date such B shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for an Investor's share purchase, all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
- -------------------------- ---------------------------
<S> <C>
Less than one............. 5.0%
More than one, but less
than two................ 5.0%
More than two, but less
than three.............. 4.0%
More than three, but less
than four............... 3.0%
More than four, but less
than five............... 2.0%
After five years,......... None
After eight years......... *
</TABLE>
- ---------------
* Conversion to A Shares
When an Investor redeems his or her B shares, the redemption order is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. B shares are redeemed first from those B shares that are not
subject to the deferred sales load (i.e., B shares that were acquired through
reinvestment of dividends or capital gain distributions) and thereafter, unless
otherwise designated by the shareholder, from the B shares that have been held
the longest.
For example, assume an Investor purchased 100 B shares at $10 a share (for
a total cost of $1,000), three years later the shares have a net asset value of
$12 per share and during that time the investor acquired 10 additional shares
through dividend reinvestment. If the Investor then makes one redemption of 50
shares (resulting in proceeds of $600, 50 shares x $12 per share), the first 10
shares redeemed will not be subject to the contingent deferred sales charge
because they were acquired through reinvestment of dividends. With respect to
the remaining 40 shares redeemed, the contingent deferred sales charge is
charged at $10 per share (because the original purchase price of $10 per share
is lower than the current net asset value of $12 per share). Therefore, only
$400 of the $600 such Investor received from selling his or her shares will be
subject to the contingent deferred sales charge, at a rate of 4.0% (the
applicable rate in the third year after purchase). The proceeds from the
contingent deferred sales charge that the Investor
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<PAGE> 80
may pay upon redemption go to the Distributor, which may use such amounts to
defray the expenses associated with the distribution-related services involved
in selling B shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with respect to B shares, enables those shares to be
purchased without the imposition of a front-end sales charge.
Exemptions From Contingent Deferred Sales Charge
The following types of redemptions qualify for an exemption from the
contingent deferred sales charge:
(a) exchanges described under "Exchange Privilege Applicable to A Shares
and B Shares" below
(b) redemptions in connection with required (or, in some cases,
discretionary) distributions to participants or beneficiaries of an employee
pension, profit-sharing or other trust or qualified retirement or Keogh plan,
individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Internal Revenue Code due to death, disability or the
attainment of a specified age
(c) redemptions effected pursuant to a Fund's right to liquidate a
shareholder's account if the aggregate net asset value of shares held in the
account is less than the minimum account size
(d) redemptions in connection with the death or disability of a shareholder
(e) redemptions by a settlor of a living trust
(f) redemptions resulting from a tax-free return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF A SHARES AND B SHARES
The primary difference between A shares and B shares lies in their sales
charge structures and distribution arrangements. An Investor should understand
that the purpose and function of the sales charge structures and distribution
arrangements for both A shares and B shares are the same.
A shares are sold at their net asset value plus a front-end sales charge.
This front-end sales charge may be reduced or waived in some cases. A and I
shares are subject to ongoing distribution fees at an annual rate of up to 0.10%
of the Fund's average daily net assets attributable to its A and I shares.
B shares are sold at net asset value without an initial sales charge.
Normally, however, a deferred sales charge is paid if the shares are redeemed
within five years of investment. B shares are subject to ongoing distribution
fees at an annual rate of up to .75% of the Fund's average daily net assets
attributable to its B shares. These ongoing fees, which are higher than those
charged on A shares, will cause B shares to have a higher expense ratio and pay
lower dividends than A shares.
B shares which have been outstanding for eight years after the end of the
month in which the shares were initially purchased will automatically convert to
A shares. The purpose of the conversion is to relieve a holder of B shares of
the higher ongoing expenses charged to those shares, after enough time has
passed to allow the Distributor to recover approximately the amount it would
have received if a front-end sales charge had been charged. The conversion from
B shares to A shares takes place at net asset value, as a result of which an
Investor receives dollar-for-dollar the same value of A shares as he or she had
of B shares. As a result of the conversion, the converted shares are relieved of
the distribution and service fees borne by B shares, although they are subject
to the distribution and service fees borne by A shares.
B shares acquired through a reinvestment of dividends or distributions are
also converted at the earlier of two dates -- eight years after the beginning of
the calendar month in which the reinvestment occurred or the date of conversion
of the most recently purchased B shares that were not acquired through
reinvestment of dividends or distributions. For example, if an Investor makes a
one-time purchase of B shares of the Fund, and subsequently
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<PAGE> 81
acquires additional B shares of the Fund only
through reinvestment of dividends and/or distributions, all of such Investor's B
shares in the Fund, including those acquired through reinvestment, will convert
to A shares of the Fund on the same date.
FACTORS TO CONSIDER WHEN SELECTING A SHARES OR B SHARES
Before purchasing shares of the Fund, Investors should consider whether,
during the anticipated life of their investment in the Fund, the accumulated
distribution fees and potential contingent deferred sales charges on B shares
prior to conversion would be less than the initial sales charge and accumulated
distribution fees on A shares purchased at the same time, and to what extent
such differential would be offset by the higher yield of A shares. In this
regard, to the extent that the sales charge for A shares is waived or reduced by
one of the methods described above, investments in A shares become more
desirable. The Trust will refuse all purchase orders for B shares of over
$250,000.
Although A shares are subject to a distribution fee, they are not subject
to the higher distribution fee applicable to B shares. For this reason, A shares
can be expected to pay correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, purchasers
of A shares that do not qualify for waivers of or reductions in the initial
sales charge would have less of their purchase price initially invested in the
Fund than purchasers of B shares of the Fund.
As described above, purchasers of B shares will have more of their initial
purchase price invested. Any positive investment return on this additional
invested amount would partially or wholly offset the expected higher annual
expenses borne by B shares. Because the Fund's future returns cannot be
predicted, there can be no assurance that this will be the case. Holders of B
shares would, however, own shares that are subject to higher annual expenses
and, for a five-year period, such shares would be subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this five-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
annual B shares' distribution fees to the cost of the initial sales charge and
distribution fees on the A shares. Over time, the expense of the annual
distribution fees on the B shares may equal or exceed the initial sales charge,
if any, and annual distribution fees applicable to A shares. For example, if net
asset value remains constant, the aggregate distribution fees with respect to B
shares of the Fund would equal or exceed the initial sales charge and aggregate
distribution fees of A shares of the Fund approximately eight years after the
purchase. In order to reduce such fees of Investors that hold B shares for more
than eight years, B shares will be automatically converted to A shares as
described above at the end of such eight-year period.
PURCHASE OF I SHARES
I shares are sold primarily to banks and trust companies which are
affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
registered investment advisers and financial planners affiliated with National
City Corporation ("Financial Advisers") who charge an advisory, consulting or
other fee for their services and buy shares for their own accounts or the
accounts of their clients ("Customers"). I shares are sold without a sales
charge imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks, NAM or Financial Advisers may
impose account charges such as account maintenance fees, compensating balance
requirements or other charges based upon account transactions, assets or income
which will have the effect of reducing the shareholder's net return on his or
her investment in a Fund. There is no minimum investment.
It is the responsibility of the Banks, NAM and Financial Advisers to
transmit their Customers' purchase orders to the Transfer Agent and to deliver
required funds on a timely basis, in accordance with
35
<PAGE> 82
the procedures stated above. I shares will normally be held of record by the
Banks, NAM or Financial Advisers. Confirmations of share purchases and
redemptions will be sent to the Banks, NAM and Financial Advisers. Beneficial
ownership of I shares will be recorded by the Banks, NAM or Financial Advisers
and reflected in the account statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Funds which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern Time) on any business day are processed at the
net asset value per share next determined after receipt of the order plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF A SHARES AND B SHARES
Redemption orders are effected at a Fund's net asset value per share next
determined after receipt of the order by the Fund. Proceeds from the redemptions
of B shares will be reduced by the amount of any applicable contingent deferred
sales charge. Redemption orders must be placed in writing or by telephone to the
same financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND (3863). Redemption
proceeds are paid by check or credited to the Investor's account with his or her
financial institution.
REDEMPTION OF I SHARES
Customers may redeem all or part of their I shares in accordance with
instructions and limitations pertaining to their accounts at the Banks, NAM or
Financial Advisers. It is the responsibility of the Banks, NAM or Financial
Advisers to transmit redemption orders to the Transfer Agent and credit their
Customers' accounts with the redemption proceeds on a timely basis. Redemption
orders are effected at the net asset value per share next determined after
receipt of the order by the Transfer Agent. No charge for wiring redemption
payments is imposed by the Trust, although Banks, NAM or Financial Advisers may
charge their Customers' accounts for services. Information relating to such
services and charges, if any, is available from the Banks, NAM or Financial
Advisers.
If a Customer has agreed with a particular Bank, NAM or Financial Adviser
to maintain a minimum balance in his or her account and the balance in such
account falls below that minimum, the Customer may be obliged to redeem all or
part of his or her I shares to the extent necessary to maintain the required
minimum balance. Customers who have instructed that automatic purchases and
redemptions be made for their accounts receive monthly confirmations of share
transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to the Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written
36
<PAGE> 83
request must be guaranteed by a commercial bank or trust company which is a
member of the Federal Reserve System or FDIC, a member firm of a national
securities exchange or a savings and loan association. A signature guaranteed by
a savings bank or notarized by a notary public is not acceptable. For a
redemption amount less than $10,000, no signature guarantee is needed. The Trust
may require additional supporting documents for redemptions made by
corporations, fiduciaries, executors, administrators, trustees, guardians and
institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or Armada Funds at the
address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is registered, the account number and recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to refuse a
telephone redemption if it believes it is advisable to do so. Procedures for
redeeming A shares or B shares by telephone may be modified or terminated at any
time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Transfer Agent's system. The
Plan allows the shareholder to have a fixed minimum sum of $100 distributed at
regular intervals. The shareholder's account must have a minimum value of $1,000
to be eligible for the Plan. Withdrawals will be reduced by any applicable
contingent deferred sales charge. Because automatic withdrawals of B shares will
be subject to the contingent deferred sales charge, it may not be in the best
interest of B shares shareholders to make systematic withdrawals. Additional
information regarding this service may be obtained from an Investor's financial
institution or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
When redeeming shares in a Fund, shareholders should indicate whether they
are redeeming A shares or B shares. In the event a redeeming shareholder owns
both A shares and B shares in a Fund, the A shares will be redeemed first unless
the shareholder indicates otherwise. Due to the relatively high cost of
maintaining small accounts, the Trust reserves the right to redeem, at net asset
value, any account maintained by a shareholder that has a value of less than
$500 due to redemptions (including exchanges as described below) where the
shareholder does not increase the amount in the account to at least $500 upon 60
days notice.
If any portion of the shares to be redeemed represents an investment made
by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to 15 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his or her investment should purchase shares by
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federal funds, bank wire, certified or cashier's check. Financial institutions
normally impose a charge in connection with the use of bank wires, as well as
certified checks, cashier's checks and federal funds.
The Trust may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of the
Trust's responsibilities under the 1940 Act. See "Additional Purchase and
Redemption Information" in the Statement of Additional Information.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO A SHARES AND B SHARES
Subject to the conditions described below, the Trust offers an exchange
program whereby Investors who have paid a front-end sales charge to purchase A
shares of one or more of the Funds or other investment funds offered by the
Trust or Parkstone which are sold with a front-end sales charge (each a "load
Fund") may exchange those A shares for A shares of another load Fund, or another
investment fund offered by the Trust or Parkstone without the imposition of a
front-end sales charge (each a "no load Fund"), at the net asset value per share
on the date of exchange. However, if a shareholder paid a sales charge on the
previously exchanged A shares that is less than the sales charge applicable to
the A shares sought to be acquired through the exchange, he or she must pay a
sales charge on the exchange equal to such difference. Shareholders may also
exchange A shares of a no load Fund for A shares of another no load Fund at the
net asset value per share without payment of a sales charge. In addition,
shareholders of a no load Fund may exchange A shares for A shares of a load Fund
subject to payment of the applicable sales charge. However, shareholders
exchanging A shares of a no load Fund which were received in a previous exchange
transaction involving A shares of a load Fund will not be required to pay an
additional sales charge upon the reinvestment of the equivalent amount into the
A shares of a load Fund except to the extent of any difference in the applicable
sales loads. Shareholders must notify the Trust that a sales charge was
previously paid.
Shareholders who have purchased B shares of one or more of the Funds or
another investment fund offered by the Trust or Parkstone (including shares
acquired through reinvestment of dividends or distributions on such shares) may
exchange those shares for B shares of another fund without the payment of any
contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemptions of B shares, the holding period of the B shares
originally held will be added to the holding period of the B shares acquired
through the exchange.
No exchange fee is imposed by the Trust. Shareholders contemplating an
exchange should carefully review the Prospectus of the fund into which the
exchange is being considered. An Armada Funds Prospectus may be obtained from
NatCity Investments, Inc., an Investor's financial institution or by calling
1-800-622-FUND(3863). A Parkstone Prospectus may be obtained by calling (800)
451-8377.
Any A shares or B shares exchanged must have a value at least equal to the
minimum initial investment required by the particular investment fund into which
the exchange is being made. Investors should make their exchange requests in
writing or by telephone to the financial institutions through which they
purchased their original A shares or B shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) will be processed as of the
close of business on the day of receipt; requests received by the Transfer Agent
after 4:00 p.m. (Eastern Time) will be processed on the next business day. The
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<PAGE> 85
Trust reserves the right to reject any exchange request. During periods of
unusual economic or market changes, telephone exchanges may be difficult to
implement. In such event, an Investor should mail the exchange request to his or
her financial institution, and an Investor who directly purchased shares from
the Trust should mail the exchange request to the Transfer Agent.
The exchange privilege is a convenient way to respond to changes in
investment goals or in market conditions. This privilege is not designed for
frequent trading in response to short-term market fluctuations. Management of
the Trust reserves the right to limit, amend, impose charges upon, terminate or
otherwise modify the exchange privilege upon 60 days' notice to shareholders.
Except for the Systematic Exchange Program described below, as of the date of
this Prospectus, an Investor is limited to one exchange every two months during
a given 12-month period beginning upon the date of the first exchange
transaction.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO A SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly or
quarterly deductions from a shareholder's account from any Armada Funds money
market fund. Under a systematic exchange program, a shareholder enters an
agreement to purchase shares of one or more specified funds over a specified
period of time, and initially purchases shares of one Armada money market fund
in an amount equal to the total amount of the investment. On a monthly or
quarterly basis, a specified dollar amount of shares of the Armada money market
fund is exchanged for shares of the Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the Planned
Investment Program described previously in this Prospectus. Because purchases of
A shares are subject to an initial sales charge, it may be beneficial for an
investor to execute a Letter of Intent indicating an intent to purchase A shares
in connection with the systematic exchange program. A shareholder may apply for
participation in this program through his or her financial institution or by
calling 1-800-622-FUND(3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement and Rule 12b-1 under the
1940 Act, the Trust adopted a Service and Distribution Plan for A and I Share
Classes ("A and I Plan") and a separate B shares Distribution and Servicing Plan
("B Shares Plan"). Under the A and I Plan, the Trust reimburses the Distributor
for direct and indirect costs and expenses incurred in connection with
advertising, marketing and other distribution services related to the A and I
shares of each of the Trust's investment funds and in preparing and distributing
such shares' prospectus. In the case of each such fund, such reimbursement shall
not exceed .10% per annum of the average aggregate net assets of its A and I
shares. Under the B shares Plan, the Trust pays the Distributor up to .75%
annually of the average daily net assets of each fund's B shares for the same
types of services provided and expenses assumed as in the A and I Shares Plan.
Such compensation is payable monthly and accrued daily by each fund's B shares
only.
Although B shares are sold without an initial sales charge, the Distributor
pays a sales commission equal to 4.25% of the amount invested (including a
prepaid service fee of 0.25% of the amount invested) to dealers who sell B
shares. These commissions are not paid on exchanges from other Armada funds or
on sales to investors exempt from the contingent deferred sales charge.
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<PAGE> 86
Under the Shareholder Services Plan relating to each Fund's A shares and
the B shares Plan, the Trust enters into shareholder servicing agreements with
certain financial institutions. Pursuant to these agreements the institutions
agree to render shareholder administrative services to their customers who are
the beneficial owners of A shares or B shares in consideration for the payment
of up to .25% (on an annualized basis), with respect to the Total Return
Advantage, Intermediate Bond, GNMA and Bond Funds, and up to .10% (on an
annualized basis), with respect to the Enhanced Income Fund, of such respective
shares' average daily net asset value. Persons entitled to receive compensation
for servicing A shares or B shares may receive different compensation with
respect to those shares than with respect to I shares in the same Fund.
Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Trust on
behalf of customers, providing information periodically to customers showing
their position in A shares or B shares, and providing sub-transfer agent
services or the information necessary for subaccounting, with respect to A
shares or B shares beneficially owned by customers. Since financial institutions
may charge their customers fees depending on the type of customer account the
Investor has established, beneficial owners of A shares or B shares should read
this Prospectus in light of the terms and fees governing their accounts with
financial institutions.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared daily
and paid monthly. With respect to each Fund, net income for dividend purposes
consists of dividends, distributions and other income on the Fund's assets, less
the accrued expenses of the Fund. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce a Fund's
net asset value per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class of any Armada Funds at the net
asset value of such shares on the ex-dividend date. Shareholders must make such
election, or any revocation thereof, in writing to their Banks or financial
institutions. The election will become effective with respect to dividends and
distributions paid after its receipt.
TAXES
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for federal income taxes to the
extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by a Fund will be taxable as ordinary income to its
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or to a qualified retirement plan are
deferred under the Code.) Since all of each Fund's net investment income is
expected to be derived from earned interest, it is
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<PAGE> 87
anticipated that no part of any distribution will be eligible for the dividends
received deduction for corporations.
Substantially all of each Fund's net realized long-term capital gains, if
any, will be distributed at least annually to Fund shareholders. A Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his or her
redemption, transfer or exchange of the Funds' shares depending upon the tax
basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received a distribution taxable as a long-term capital gain, then any
loss the shareholder might realize on the sale of those shares will be treated
as a long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his or her tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Fund within 90 days of the purchase and is able to reduce the sales
charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included (subject to this
limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
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INVESTMENT ADVISERS
IMC serves as investment adviser to the Funds. IMC is a registered
investment adviser and an indirect wholly-owned subsidiary of National City
Corporation ("NCC"). On June 30, 1998, IMC had approximately $18.73 billion in
assets under management. IMC has its principal offices at 1900 East Ninth
Street, Cleveland, Ohio 44114. Subject to the general supervision of the Trust's
Board of Trustees and in accordance with the Funds' investment policies, he
Adviser has agreed to manage the Funds, make decisions with respect to and place
order for all purchases and sales of such Funds' securities, and maintain
records relating to such purchases and sales. The Fixed Income Team of IMC makes
the investment decisions for the Funds. No individual person is primarily
responsible for making recommendations to the Fixed Income Team.
For the services provided and expenses assumed pursuant to the Advisory
Agreements relating to Funds, the Adviser is entitled to receive an advisory
fee, computed daily and payable monthly, at the annual rate of .55% of each
Fund's average net assets. The Adviser may from time to time waive all or a
portion of its advisory fees to increase the net income of the Funds available
for distribution as dividends.
SUB-ADVISER
NAM serves as sub-adviser to the Total Return Advantage Fund under a
sub-advisory agreement (the "Sub-Advisory Agreement") with IMC as the investment
adviser. NAM is a registered investment adviser providing investment advisory
and related services. As of June 30, 1998, NAM managed over $9.1 billion for a
diverse group of clients. NAM's principal offices are located at 101 South Fifth
Street, Louisville, KY 40202.
Pursuant to the Sub-Advisory Agreement and subject to the supervision of
the Adviser and of the Trust's Board of Trustees and in accordance with the
Total Return Advantage Fund's investment policies, the Sub-adviser has agreed to
assist the Adviser in providing a continuous investment program for the Total
Return Advantage Fund and in determining investments for the Fund. For the
services provided and expenses assumed pursuant to the Sub-Advisory Agreement,
the Sub-adviser is entitled to a sub-advisory fee, payable by the Adviser,
computed daily and payable monthly, at the annual rate of .16% of the average
daily net assets of the Fund.
The Total Return Advantage Fund is managed by the Investment Management
Group of NAM. The Investment Management Group makes the investment decisions for
the Total Return Advantage Fund. No individual person is primarily responsible
for making recommendations to the Investment Management Group.
YEAR 2000 RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Adviser and the Funds' other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurance that comparable steps are
being taken by the Funds' other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Funds or their shareholders as a result of the Year 2000
Problem.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SEI Fund Resources (the "Administrator"), located at One Freedom Valley
Drive, Oaks, Pennsylvania 19456, serves as the administrator to the Funds. SEI
Fund Resources is an indirect, wholly-owned subsidiary of SEI Investments
Company ("SEI").
Under its Administration Agreement with the Trust relating to the Funds,
SEI provides the Funds
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<PAGE> 89
with administrative services, including fund accounting, regulatory reporting,
necessary office space, equipment, personnel and facilities. The Administrator
also acts as shareholder servicing agent of the Funds. SEI is entitled to
receive with respect to the Funds an administrative fee, computed daily and paid
monthly, at the annual rate of .07% of the aggregate average daily net assets of
all of the investment funds of Armada up to the first $18 billion, and .06% of
the aggregate average daily net assets over $18 billion, and is entitled to be
reimbursed for its out-of-pocket expenses incurred on behalf of the Funds.
IMC serves as sub-administrator for each Fund and provides certain services
as may be requested by the Administrator from time to time. For its services as
Sub-Administrator, IMC receives, from the Administrator, pursuant to its
Sub-Administration Agreement with the Administrator, a fee, computed daily and
paid monthly, at the annual rate of .01% of the aggregate average daily net
assets of all of the investment funds of Armada up to the first $15 billion, and
.015% of the aggregate average daily net assets over $15 billion.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue the separate classes or
series of shares of beneficial interest ("shares") mentioned below. Fifteen of
these classes or series, which represent interests in the Intermediate Bond Fund
(Class I, Class I -- Special Series 1 and Class I -- Special Series 2), Enhanced
Income Fund (Class O, Class O -- Special Series 1 and Class O -- Special Series
2), Total Return Advantage Fund (Class P, Class P -- Special Series 1 and Class
P -- Special Series 2), Bond Fund (Class R, Class R -- Special Series 1 and
Class R -- Special Series 2) and GNMA Fund (Class S, Class S -- Special Series 1
and Class S -- Special Series 2) are described in this Prospectus. Class I,
Class O, Class P, Class R and Class S shares constitute the I class or series of
shares; Class I -- Special Series 1, Class O -- Special Series 1, Class P --
Special Series 1, Class R -- Special Series 1 and Class S Special Series 1
shares constitute the A class or series of shares; and Class I -- Special Series
2, Class O -- Special Series 2, Class P -- Special Series 2, Class R -- Special
Series 2 and Class S -- Special Series 2 constitute the B class or series of
shares. The other Funds of the Trust are:
Money Market Fund
(Class A, Class A -- Special Series 1 and
Class A -- Special Series 2)
Government Money Market Fund
(Class B and Class B -- Special Series 1)
Treasury Money Market Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Money Market Fund
(Class D, Class D -- Special Series 1 and Class D -- Special Series 2)
Ohio Municipal Money Market Fund
(Class BB and Class BB -- Special Series 1)
Equity Growth Fund
(Class H, Class H -- Special Series 1 and Class H -- Special Series 2)
Ohio Tax Exempt Fund
(Class K, Class K -- Special Series 1 and Class K -- Special Series 2)
National Tax Exempt Fund
(Class L, Class L -- Special Series 1 and Class L -- Special Series 2)
Equity Income Fund
(Class M, Class M -- Special Series 1 and Class M -- Special Series 2)
Small Cap Value Fund
(Class N, Class N -- Special Series 1 and Class N -- Special Series 2)
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<PAGE> 90
Pennsylvania Tax Exempt Money Market Fund
(Class Q and Class Q -- Special Series 1)
Pennsylvania Municipal Fund
(Class T, Class T -- Special Series 1 and Class T -- Special Series 2)
International Equity Fund
(Class U, Class U -- Special Series 1 and Class U -- Special Series 2)
Equity Index Fund
(Class V and Class V -- Special Series 1)
Core Equity Fund
(Class W, Class W -- Special Series 1 and Class W -- Special Series 2)
Small Cap Growth Fund
(Class X, Class X -- Special Series 1 and Class X -- Special Series 2)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Tax Managed Equity Fund
(Class Z, Class Z -- Special Series 1 and Class Z -- Special Series 2)
Balanced Allocation Fund
(Class AA, Class AA -- Special
Series 1 and Class AA -- Special Series 2)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Shareholder
Services Plan and B Shares Plan, only the holders of A shares or B shares in an
investment fund are, or would be entitled to vote on matters submitted to a vote
of shareholders (if any) concerning their respective plans. Voting rights are
not cumulative, and accordingly, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the trustees irrespective of the vote of
the other shareholders.
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Trust provides for indemnification out of
the trust property for any shareholder held personally liable solely by reason
of his or her being or having been a shareholder and not because of his or her
acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
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<PAGE> 91
As of September 3, 1998, IMC's bank affiliates held beneficially or of
record approximately 97.68% of the outstanding I shares of the Total Return
Advantage Fund; approximately 89.82% of the outstanding I shares of the
Intermediate Bond Fund; approximately 93.06% of the outstanding I shares of the
Enhanced Income Fund; approximately 98.43% of the outstanding I shares of the
Bond Fund; and approximately 99.33% of the outstanding I shares of the GNMA
Fund. Neither IMC nor its affiliates have any economic interest in such shares
which are held solely for the benefit of their customers, but may be deemed to
be a controlling person of the Funds within the meaning of the 1940 Act by
reason of its record ownership of such shares. The names of IMC beneficial
owners and record owners who are controlling shareholders under the 1940 Act may
be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank, an affiliate of IMC, serves as the custodian of the
Trust's assets. With respect to each Fund, the Trust pays National City Bank an
annual custody fee, calculated daily and paid monthly, of .02% of each Fund's
first $100 million of average daily net assets, .01% of each Fund's next $650
million of average daily net assets and .008% of the average daily net assets of
each Fund which exceed $750 million, exclusive of out-of-pocket expenses and
transaction charges. The Trust reimburses the custodian for its out-of-pocket
expenses including, but not limited to, postage, telephone, telex, interest
claim fee ($50.00 per claim), transfer and registration fees, federal express
charges, Federal Reserve and wire fees, as well as its out-of-pocket costs in
providing any foreign custody services and/or precious metal custody services.
The transaction charges are a bundled fee which will not exceed .25% of the
total monthly asset based fee payable by the Trust.
State Street Bank and Trust Company serves as the Trust's transfer and
dividend disbursing agent. Communications to the Transfer Agent should be
directed to P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by
the Trust for these services are described in the Statement of Additional
Information.
EXPENSES
Except as noted below, the Adviser bears all expenses in connection with
the performance of its services. Each Fund of the Trust bears its own expenses
incurred in its operations including: taxes; interest; fees (including fees paid
to its trustees and officers); SEC fees; state securities qualification fees;
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders; expenses related to the distribution and
servicing plans; advisory fees; administration fees and expenses; charges of the
custodian and Transfer Agent; certain insurance premiums; outside auditing and
legal expenses; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
in connection with the purchase of its portfolio securities.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, since National City Bank serves the Trust as its
custodian and is affiliated with IMC, the Trust's investment adviser, a
procedure has been established requiring three
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<PAGE> 92
annual verifications, two of which are to be unannounced, of all investments
held pursuant to the Custodian Services Agreement, to be conducted by the
Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
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<PAGE> 93
LOGO ARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
HERBERT R. MARTENS, JR.
President
Executive Vice President,
National City Corporation
Chairman, President and Chief Executive
Officer, NatCity Investments, Inc.
LEIGH CARTER
Retired President and Chief Operating
Officer B.F. Goodrich Company
Director:
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
ROBERT J. FARLING
Retired Chairman, President and
Chief Executive Officer, Centerior Energy
Director:
Republic Engineered Steels
RICHARD W. FURST, DEAN
Professor of Finance and Dean
Carol Martin Gatton College of Business
and Economics, University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
GERALD L. GHERLEIN
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 94
ARMADA FUNDS
INVESTMENT ADVISER
AN AFFILIATE OF NATIONAL
CITY CORPORATION
- --------------------------------------------------------------------------------
National City Investment Management Company
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 95
CROSS REFERENCE SHEET
---------------------
International Equity Fund
Small Cap Growth Fund
Small Cap Value Fund
Equity Growth Fund
Tax Managed Equity Fund
Core Equity Fund
Equity Income Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
1. Cover Page....................................... Cover Page
2. Synopsis......................................... Expense Table
3. Condensed Financial
Information...................................... Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant....................................... Risk Factors, Investment
Objectives and Policies;
Investment Limitations;
Description of the Trust and Its
Shares
5. Management of the Trust.......................... Management of the Trust; Custodian
and Transfer Agent
6. Capital Stock and Other
Securities....................................... How to Purchase and Redeem Shares;
Dividends and Distributions;
Taxes; Description of the Trust
and Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered.................................... Pricing of Shares; How to Purchase
and Redeem Shares; Distribution
Agreement
8. Redemption Repurchase............................ How to Purchase and Redeem Shares
9. Pending Legal Proceedings........................ Inapplicable
</TABLE>
<PAGE> 96
ARMADA FUNDS
----------------------
PROSPECTUS
----------------------
SEPTEMBER 18, 1998
SMALL CAP VALUE FUND
EQUITY GROWTH FUND
EQUITY INCOME FUND
SMALL CAP GROWTH FUND
INTERNATIONAL EQUITY FUND
CORE EQUITY FUND
EQUITY INDEX FUND
TAX MANAGED EQUITY FUND
<PAGE> 97
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ 2
Expense Table............................................... 3
Financial Highlights........................................ 7
Investment Objectives and Policies.......................... 14
Investment Limitations...................................... 26
Yield and Performance Information........................... 27
Pricing of Shares........................................... 29
How to Purchase and Redeem Shares........................... 29
Distribution and Servicing Arrangements..................... 40
Dividends and Distributions................................. 41
Taxes....................................................... 41
Management of the Trust..................................... 42
Description of the Trust and Its Shares..................... 44
Custodian and Transfer Agent................................ 46
Expenses.................................................... 46
Miscellaneous............................................... 46
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT MANAGEMENT
COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES OR ANY BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Investment Management Company serves as investment adviser to
Armada Funds for which it receives an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 98
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
One Freedom Valley Drive If you purchased your shares through NatCity Investments,
Oaks, Pennsylvania 19456 Inc. or any other broker-dealer, please call your Financial
Consultant for information.
For current performance, fund information, account
redemption information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following eight investment funds
(the "Funds") of Armada Funds (the "Trust"), each having its own investment
objective and policies:
SMALL CAP VALUE FUND'S investment objective is to seek capital appreciation
by investing in a diversified portfolio of publicly traded equity securities.
The Fund will normally invest at least 65% of its total assets in equity
securities of companies with stock market capitalizations ranging from $100
million to $2 billion. The Fund was formerly named the "Mid Cap Regional Fund."
EQUITY GROWTH FUND'S investment objective is to seek a high level of total
return arising primarily out of capital appreciation. The Fund invests in common
stocks and securities convertible into common stocks.
EQUITY INCOME FUND'S investment objective is to seek a competitive total
rate of return through investments in equity and equity equivalent securities
which, in the aggregate, provide a premium current yield.
SMALL CAP GROWTH FUND'S investment objective is to seek long term capital
appreciation. The Fund will normally invest at least 80% of its total assets in
securities of companies with stock market capitalizations of under $1.5 billion
at the time of purchase.
INTERNATIONAL EQUITY FUND'S investment objective is to seek capital growth
consistent with reasonable investment risk. The Fund will normally invest at
least 80% of its total assets in equity securities of foreign issuers.
CORE EQUITY FUND'S investment objective is to seek a total rate of return,
before Fund expenses, greater than that of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"). The Fund invests in a diversified portfolio
of domestic common stocks of issuers with large capitalizations.
EQUITY INDEX FUND'S investment objective is to seek investment results that,
before Fund expenses, approximate the aggregate price and dividend performance
of the securities included in the S&P 500 by investing in securities comprising
the S&P 500.
TAX MANAGED EQUITY FUND'S investment objective is to seek a high level of
return arising out of capital appreciation while minimizing the impact of taxes
on shareholders' returns. The Fund invests primarily in common stocks. The Tax
Managed Equity Fund is not a tax-exempt fund, and it expects to distribute
taxable dividends and capital gains to its shareholders from time to time.
The net asset value per share of each Fund will fluctuate as the value of
its investment portfolio changes in response to changing market prices and other
factors.
National City Investment Management Company ("IMC" or the "Adviser") serves
as investment adviser to the Funds. National Asset Management Corporation
("NAM") serves as investment sub-adviser to the Core Equity Fund (the "Sub-
adviser").
SEI Investments Distribution Co. (the "Distributor") serves as the Trust's
sponsor and distributor. Each Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT MANAGEMENT
COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
September 18, 1998
<PAGE> 99
INTRODUCTION
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund consists
of a separate pool of assets with separate investment objectives and policies as
described below under "Investment Objectives and Policies." Each Fund is
classified as a diversified investment fund under the 1940 Act.
Shares of each Fund (with the exception of Equity Index Fund) have been
classified into three separate classes -- A shares (formerly, Retail shares), B
shares and I shares (formerly, Institutional shares). Shares of the Equity Index
Fund have been classified into two separate classes -- A shares and I shares. A
shares, B shares and I shares represent equal pro rata interests in the
investments held in a Fund and are identical in all respects, except that shares
of each class bear separate distribution and/or shareholder administrative
servicing fees and enjoy certain exclusive voting rights on matters relating to
these fees. See "Distribution and Servicing Arrangements," "Dividends and
Distributions" and "Description of the Trust and Its Shares." Except as provided
below, A shares and B shares are sold through selected broker-dealers and other
financial intermediaries to individual or institutional customers. A shares are
sold subject to a front-end sales charge. B shares are sold with a contingent
deferred sales charge (back-end charge) imposed on a sliding schedule when such
shares are redeemed.
2
<PAGE> 100
EXPENSE TABLE
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP SMALL CAP EQUITY EQUITY EQUITY EQUITY
VALUE VALUE VALUE GROWTH GROWTH GROWTH INCOME
A SHARES(1) B SHARES(1) I SHARES A SHARES(1) B SHARES(1) I SHARES A SHARES(1)
----------- ----------- --------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(2).................. 5.50% None None 5.50% None None 5.50%
Sales Charge Imposed on
Reinvested Dividends.......... None None None None None None None
Deferred Sales Charge(3)........ None 5.00% None None 5.00% None None
Redemption Fee.................. None None None None None None None
Exchange Fee.................... None None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees............... 1.00% 1.00% 1.00% .75% .75% .75% .75%
12b-1 Fees(4,5)............... .04% .75% .04% .04% .75% .04% .04%
Other Expenses................ .42% .42% .17% .44% .44% .19% .49%
---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)........ 1.46% 2.17% 1.21% 1.23% 1.94% .98% 1.28%
==== ==== ==== ==== ==== ==== ====
<CAPTION>
EQUITY EQUITY EQUITY EQUITY
INCOME INCOME INDEX INDEX
B SHARES(1) I SHARES A SHARES(1,6) I SHARES(6)
----------- -------- ------------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(2).................. None None 3.75% None
Sales Charge Imposed on
Reinvested Dividends.......... None None None None
Deferred Sales Charge(3)........ 5.00% None None None
Redemption Fee.................. None None None None
Exchange Fee.................... None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees............... .75% .75% 0.00% 0.00%
12b-1 Fees(4,5)............... .75% .04% 0.00% 0.00%
Other Expenses................ .49% .24% .49% .24%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)........ 1.99% 1.03% .49% .24%
==== ==== ==== ====
</TABLE>
- ---------------
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to A shares and B shares of each Fund. Pursuant to such plans, the
Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own A shares or B shares in
consideration for the payment of up to .25% (on an annualized basis) of the
net asset value of such A shares or and B shares of the Funds. For further
information concerning these plans, see "Distribution and Servicing
Arrangements."
(2) A reduced sales charge may be available. A contingent deferred sales charge
of 1% may be imposed on certain redemptions of A shares purchased without an
initial sales charge as part of an investment of $1 million or more. See
"How to Purchase and Redeem Shares -- Sales Charges Applicable to Purchases
of A Shares."
(3) This amount applies to redemptions during the first and second years. The
deferred sales charge decreases in subsequent years. For more information,
see "How to Purchase and Redeem Shares -- Sales Charges Applicable to
Purchases of B Shares."
(4) The expense information in the table relating to each Fund has been restated
to reflect current fees. Without fee waivers during the current fiscal year
by the Adviser, Management Fees and Total Fund Operating Expenses would be
0.35% and 0.84%, respectively, for the A shares and 0.35% and 0.59%
respectively, for the I shares of the Equity Index Fund. The Adviser is
entitled to receive an advisory fee, computed daily and payable monthly, at
an annual rate of .35% of the average daily net assets of the Equity Index
Fund pursuant to its Advisory Agreement with the Trust.
(5) The Funds have in effect a 12b-1 Plan for the A and I classes of shares
pursuant to which each Fund's A and I shares may bear fees up to .10% per
annum of such classes' average net assets. A separate 12b-1 Plan exists with
respect to each Fund's B class of shares, pursuant to which each Fund's B
shares may bear fees in an amount of up to .75% of average daily net assets.
As a result of the payment of sales charges and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum sales
charges permitted by the National Association of Securities Dealers, Inc.
("NASD"). The NASD has adopted rules which generally limit the aggregate
sales charges and payments under the Trust's 12b-1 Plans to a certain
percentage of total new gross share sales, plus interest. The Trust would
stop accruing 12b-1 and related fees if, to the extent, and for as long as,
such limit would otherwise be exceeded.
(6) Since the Fund commenced investment operations on July 10, 1998, the Other
Expenses for this Fund are estimates only.
(7) Since the Fund commenced investment operations on April 9, 1998, the Other
Expenses for this Fund are estimates only.
3
<PAGE> 101
EXPENSE TABLE
<TABLE>
<CAPTION>
SMALL SMALL SMALL
CAP CAP CAP INTERNATIONAL INTERNATIONAL INTERNATIONAL CORE
GROWTH A GROWTH B GROWTH I EQUITY A EQUITY B EQUITY I EQUITY A
SHARES(1) SHARES(1) SHARES SHARES(1) SHARES(1) SHARES SHARES(1)
--------- --------- -------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge Imposed
on Purchases(2)........... 5.50% None None 5.50% None None 5.50%
Sales Charge Imposed on
Reinvested Dividends...... None None None None None None None
Deferred Sales Charge(3).... None 5.00% None None 5.00% None None
Redemption Fee.............. None None None None None None None
Exchange Fee................ None None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees............. 1.00% 1.00% 1.00% 1.15% 1.15% 1.15% .75%
12b-1 Fees(4,5)............. .04% .75% .04% .04% .75% .04% .04%
Other Expenses.............. .42% .42% .17% .55% .55% .30% .42%
---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)...... 1.46% 2.17% 1.21% 1.74% 2.43% 1.49% 1.21%
==== ==== ==== ==== ==== ==== ====
<CAPTION>
TAX TAX TAX
CORE CORE MANAGED MANAGED MANAGED
EQUITY B EQUITY I EQUITY A EQUITY B EQUITY I
SHARES(1) SHARES SHARES(1,6) SHARES(1,7) SHARES(7)
--------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge Imposed
on Purchases(2)........... None None 5.50% None None
Sales Charge Imposed on
Reinvested Dividends...... None None None None None
Deferred Sales Charge(3).... 5.00% None None 5.00% None
Redemption Fee.............. None None None None None
Exchange Fee................ None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees............. .75% .75% .75% .75% .75%
12b-1 Fees(4,5)............. .75% .04% .04% .75% .04%
Other Expenses.............. .42% .17% .48% .48% .23%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)...... 1.92% 0.96% 1.27% 1.98% 1.02%
==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to A shares and B shares of each Fund. Pursuant to such plans, the
Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own A shares or B shares in
consideration for the payment of up to .25% (on an annualized basis) of the
net asset value of such A shares or and B shares of the Funds. For further
information concerning these plans, see "Distribution and Servicing
Arrangements."
(2) A reduced sales charge may be available. A contingent deferred sales charge
of 1% may be imposed on certain redemptions of A shares purchased without an
initial sales charge as part of an investment of $1 million or more. See
"How to Purchase and Redeem Shares -- Sales Charges Applicable to Purchases
of A Shares."
(3) This amount applies to redemptions during the first and second years. The
deferred sales charge decreases in subsequent years. For more information,
see "How to Purchase and Redeem Shares -- Sales Charges Applicable to
Purchases of B Shares."
(4) The expense information in the table relating to each Fund has been restated
to reflect current fees. Without fee waivers during the current fiscal year
by the Adviser, Management Fees and Total Fund Operating Expenses would be
0.35% and 0.84%, respectively, for the A shares and 0.35% and 0.59%
respectively, for the I shares of the Equity Index Fund. The Adviser is
entitled to receive an advisory fee, computed daily and payable monthly, at
an annual rate of .35% of the average daily net assets of the Equity Index
Fund pursuant to its Advisory Agreement with the Trust.
(5) The Funds have in effect a 12b-1 Plan for the A and I classes of shares
pursuant to which each Fund's A and I shares may bear fees up to .10% per
annum of such classes' average net assets. A separate 12b-1 Plan exists with
respect to each Fund's B class of shares, pursuant to which each Fund's B
shares may bear fees in an amount of up to .75% of average daily net assets.
As a result of the payment of sales charges and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum sales
charges permitted by the National Association of Securities Dealers, Inc.
("NASD"). The NASD has adopted rules which generally limit the aggregate
sales charges and payments under the Trust's 12b-1 Plans to a certain
percentage of total new gross share sales, plus interest. The Trust would
stop accruing 12b-1 and related fees if, to the extent, and for as long as,
such limit would otherwise be exceeded.
(6) Since the Fund commenced investment operations on July 10, 1998, the Other
Expenses for this Fund are estimates only.
(7) Since the Fund commenced investment operations on April 9, 1998, the Other
Expenses for this Fund are estimates only.
4
<PAGE> 102
- ---------------
EXAMPLE
The following illustrates the expenses that you would pay on a hypothetical
$1,000 investment, assuming: (i) a 5% annual return; and (ii) the redemption of
your investment at the end of the following time periods (none of the Funds
charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Small Cap Value A Shares(1)................................. $69 $ 99 $130 $220
Small Cap Value A Shares(2)................................. $25 $ 46 $ 80 $175
Small Cap Value B Shares(3)................................. $72 $108 $136 $232(4)
Small Cap Value B Shares(5)................................. $22 $ 68 $116 $232
Small Cap Value I Shares.................................... $12 $ 38 $ 66 $147
Equity Growth A Shares(1)................................... $67 $ 92 $119 $196
Equity Growth A Shares(2)................................... $23 $ 39 $ 68 $149
Equity Growth B Shares(3)................................... $70 $101 $125 $208(4)
Equity Growth B Shares(5)................................... $20 $ 61 $105 $208
Equity Growth I Shares...................................... $10 $ 31 $ 54 $120
Equity Income A Shares(1)................................... $67 $ 93 $121 $201
Equity Income A Shares(2)................................... $23 $ 41 $ 70 $155
Equity Income B Shares(3)................................... $70 $102 $127 $213(4)
Equity Income B Shares(5)................................... $20 $ 62 $107 $213
Equity Income I Shares...................................... $11 $ 33 $ 57 $126
Small Cap Growth A Shares(1)................................ $69 $ 99 $130 $220
Small Cap Growth A Shares(2)................................ $25 $ 46 $ 80 $175
Small Cap Growth B Shares(3)................................ $72 $108 $136 $232(4)
Small Cap Growth B Shares(5)................................ $22 $ 68 $116 $232
Small Cap Growth I Shares................................... $12 $ 38 $ 66 $147
International Equity A Shares(1)............................ $72 $107 $144 $249
International Equity A Shares(2)............................ $28 $ 55 $ 94 $205
International Equity B Shares(3)............................ $75 $116 $150 $260(4)
International Equity B Shares(5)............................ $25 $ 76 $130 $260
International Equity I Shares............................... $15 $ 47 $ 81 $178
Core Equity A Shares(1)..................................... $67 $ 91 $118 $194
Core Equity A Shares(2)..................................... $22 $ 38 $ 66 $147
Core Equity B Shares(3)..................................... $69 $100 $124 $206
Core Equity B Shares(5)..................................... $19 $ 60 $104 $206
Core Equity I Shares........................................ $10 $ 31 $ 53 $118
Equity Index A Shares(1).................................... $42 $ 53 N/A N/A
Equity Index A Shares(2).................................... $15 $ 16 N/A N/A
Equity Index I Shares....................................... $ 2 $ 8 N/A N/A
Tax Managed Equity A Shares(1).............................. $67 $ 93 N/A N/A
Tax Managed Equity A Shares(2).............................. $23 $ 40 N/A N/A
Tax Managed Equity B Shares................................. $70 $102 N/A N/A
</TABLE>
5
<PAGE> 103
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Tax Managed Equity B Shares(3).............................. $20 $ 62 N/A N/A
Tax Managed Equity B Shares(5).............................. $20 $ 62 $107 $212
Tax Managed Equity A Shares................................. $10 $ 32 N/A N/A
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes no front end sales charge but the maximum deferred sales charge at 1
year.
(3) Assumes deduction of maximum applicable contingent deferred sales charge.
(4) Based on conversion of B shares to A shares after eight years.
(5) Assumes no redemption.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution Agreement"
in this Prospectus and the financial statements and related notes incorporated
by reference into the Statement of Additional Information for the Funds. Any
fees that are charged by affiliates of the Adviser or other institutions
directly to their customer accounts for services related to investments in
shares of the Funds are in addition to and not reflected in the fees and
expenses described above.
6
<PAGE> 104
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
SMALL CAP VALUE FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Small Cap Value Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ------------------ -------------------
I A CLASS B(6) I A I A
-------- ------- ---------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 15.15 $ 14.95 $15.28 $ 13.10 $12.94 $ 11.38 $11.26
-------- ------- ------ -------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.06 0.01 0.00 0.09 0.08 0.08 0.06
Net Gain/(Loss) on Securities
(Realized and Unrealized)..... 2.87 2.84 0.14 2.90 2.83 2.41 2.37
-------- ------- ------ -------- ------ ------- ------
Total from Investment
Operations.............. 2.93 2.85 0.14 2.99 2.91 2.49 2.43
-------- ------- ------ -------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (0.07) (0.04) (0.00) (0.09) (0.05) (0.08) (0.06)
Dividends in Excess of Net
Investment Income............. (0.00) (0.00) (0.00) (0.00) (0.00) (0.02) (0.02)
Distributions from Net Realized
Capital Gains................. (2.29) (2.29) (0.00) (0.85) (0.85) (0.67) (0.67)
-------- ------- ------ -------- ------ ------- ------
Total Distributions....... (2.36) (2.33) (0.00) (0.94) (0.90) (0.77) (0.75)
-------- ------- ------ -------- ------ ------- ------
Net Asset Value, End of Period.... $ 15.72 $ 15.47 $15.42 $ 15.15 $14.95 $ 13.10 $12.94
======== ======= ====== ======== ====== ======= ======
TOTAL RETURN...................... 19.82% 19.51%(5) 19.12%(4,5) 23.61% 23.26%(5) 22.64% 22.28%(5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)........................ $284,295 $10,634 $ 61 $199,311 $4,929 $99,294 $4,702
Ratio of Expenses to Average Net
Assets........................ 0.98% 1.23% 1.92%(4) 0.97% 1.22% 1.05%(1) 1.30%(2)
Ratio of Net Investment Income/
(Loss) to Average Net
Assets........................ 0.43% 0.19% (0.48)%(4) 0.83% 0.57% 0.83%(1) 0.58%(2)
Portfolio Turnover Rate......... 89% 89% 89% 64% 64% 106% 106%
Average Commission Rate......... $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.06 $ 0.06
<CAPTION>
FOR THE PERIOD
ENDED MAY 31,
1995
---------------------
I(3) A(3)
------- ------
<S> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 10.00 $10.16
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.10 0.07
Net Gain/(Loss) on Securities
(Realized and Unrealized)..... 1.36 1.11
------- ------
Total from Investment
Operations.............. 1.46 1.18
------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income........................ (0.04) (0.04)
Dividends in Excess of Net
Investment Income............. (0.00) (0.00)
Distributions from Net Realized
Capital Gains................. (0.04) (0.04)
------- ------
Total Distributions....... (0.08) (0.08)
------- ------
Net Asset Value, End of Period.... $ 11.38 $11.26
======= ======
TOTAL RETURN...................... 17.42%(4) 14.80%(4,5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)........................ $50,993 $3,567
Ratio of Expenses to Average Net
Assets........................ 1.01%(1,4) 1.34%(2,4)
Ratio of Net Investment Income/
(Loss) to Average Net
Assets........................ 1.31%(1,4) 1.09%(2,4)
Portfolio Turnover Rate......... 69% 69%
Average Commission Rate......... N/A N/A
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the I Class for the year ended May 31, 1996,
would have been 1.06% and .82%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the Investment
Adviser, Administrator and Custodian for the I Class for the period ended
May 31, 1995, would have been 1.15% and 1.17%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the A Class for the year ended May 31, 1996
would have been 1.32% and .56%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the Investment
Adviser, Administrator and Custodian for the A Class for the period ended
May 31, 1995, would have been 1.38% and 1.05%, respectively.
(3) I and A Classes commenced operations on July 26, 1994, and August 15, 1994,
respectively.
(4) Annualized.
(5) Total Return excludes sales charge.
(6) Class B commenced operations on January 6, 1998.
7
<PAGE> 105
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
EQUITY GROWTH FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Equity Growth Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1. As
of the date of this Prospectus, "Institutional shares" are renamed "I shares,"
and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996
------------------------------- ----------------- ------------------
I A CLASS B(5) I A I A
-------- ------- ---------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $ 18.63 $ 18.67 $19.44 $ 18.02 $18.05 $ 14.77 $14.79
-------- ------- ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/(Loss)...................... 0.00 (0.04) (0.24) 0.09 0.05 0.14 0.10
Net Gain on Securities (Realized and
Unrealized)..................................... 5.00 4.99 2.08 4.66 4.66 3.46 3.47
-------- ------- ------ -------- ------ -------- ------
Total from Investment Operations.................. 5.00 4.95 1.84 4.75 4.71 3.60 3.57
-------- ------- ------ -------- ------ -------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.............. (0.01) (0.00) (0.00) (0.09) (0.05) (0.14) (0.10)
Dividends in Excess of Net Investment Income...... (0.00) (0.00) (0.00) (0.02) (0.01) (0.02) (0.02)
Distributions from Net Realized Capital Gains..... (2.27) (2.27) (0.00) (4.03) (4.03) (0.19) (0.19)
Distributions in Excess of Net Realized Capital
Gains........................................... (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
-------- ------- ------ -------- ------ -------- ------
Total Distributions............................... (2.28) (2.27) (0.00) (4.14) (4.09) (0.35) (0.31)
-------- ------- ------ -------- ------ -------- ------
Net Asset Value, End of Period..................... $ 21.35 $ 21.35 $21.28 $ 18.63 $18.67 $ 18.02 $18.05
======== ======= ====== ======== ====== ======== ======
TOTAL RETURN....................................... 28.65% 28.32%(3) 27.90%(3,4) 29.57% 29.24%(3) 24.61% 24.34%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's).............. $352,413 $12,380 $ 24 $255,594 $6,931 $166,671 $6,013
Ratio of Expenses to Average Net Assets........... 0.98% 1.23% 1.92%(4) 0.97% 1.22% 1.01%(1) 1.26%(2)
Ratio of Net Investment Income/(Loss) to Average
Net Assets...................................... (0.01)% (0.26)% (0.92)%(4) 0.49% 0.25% 0.85%(1) 0.60%(2)
Portfolio Turnover Rate........................... 260% 260% 260% 197% 197% 74% 74%
Average Commission Rate........................... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------
1995 1994
------------------- ----------------
I A I A
-------- ------ ------- ------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $ 13.66 $13.68 $ 13.78 $13.80
-------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/(Loss)...................... 0.21 0.18 0.18 0.15
Net Gain on Securities (Realized and
Unrealized)..................................... 1.21 1.21 0.01 0.00
-------- ------ ------- ------
Total from Investment Operations.................. 1.42 1.39 0.19 0.15
-------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.............. (0.20) (0.17) (0.18) (0.15)
Dividends in Excess of Net Investment Income...... (0.00) (0.00) (0.01) (0.00)
Distributions from Net Realized Capital Gains..... (0.00) (0.00) (0.11) (0.11)
Distributions in Excess of Net Realized Capital
Gains........................................... (0.11) (0.11) (0.01) (0.01)
-------- ------ ------- ------
Total Distributions............................... (0.31) (0.28) (0.31) (0.27)
-------- ------ ------- ------
Net Asset Value, End of Period..................... $ 14.77 $14.79 $ 13.66 $13.68
======== ====== ======= ======
TOTAL RETURN....................................... 10.62% 10.35%(3) 1.41% 1.12%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's).............. $119,634 $5,974 $90,446 $7,521
Ratio of Expenses to Average Net Assets........... 1.01%(1) 1.27%(2) 1.07% 1.32%
Ratio of Net Investment Income/(Loss) to Average
Net Assets...................................... 1.53%(1) 1.23%(2) 1.33% 1.08%
Portfolio Turnover Rate........................... 17% 17% 15% 15%
Average Commission Rate........................... N/A N/A N/A N/A
</TABLE>
- ------------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the I Class for the year ended May 31, 1996,
and 1995 would have been 1.03% and .83%, and 1.02%,and 1.51%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser for the I Class for the year May 31, 1993,
would have been 1.01% and 1.46%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the A Class for the years ended May 31, 1996
and 1995 would have been 1.28% and .58%, and 1.28%, and 1.22% ,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the Investment Advises for the A Class for the
period ended May 31, 1993, would have been 1.26% and 1.21%, respectively.
(3) Total return excludes sales charge.
(4) Annualized.
(5) Class B commenced operations on January 6, 1998.
8
<PAGE> 106
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
EQUITY INCOME FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Equity Income Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1. As
of the date of this Prospectus, "Institutional shares" are renamed "I shares,"
and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, FOR THE PERIOD
---------------------------------------------------------------------- ENDED MAY 31,
1998 1997 1996 1995
------------------------------- ----------------- ---------------- -----------------
I A CLASS B(6) I A I A I(3) A(3)
-------- ------ ---------- -------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 14.87 $14.86 $16.28 $ 12.66 $12.65 $ 11.01 $11.01 $ 10.00 $10.26
-------- ------ ------ -------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/(Loss)... 0.27 0.26 0.46 0.30 0.31 0.34 0.33 0.34 0.26
Net Gain on Securities
(Realized and Unrealized).... 3.44 3.41 0.86 2.73 2.68 1.79 1.77 0.94 0.75
-------- ------ ------ -------- ------ ------- ------ ------- ------
Total from Investment
Operations................... 3.71 3.67 1.32 3.03 2.99 2.13 2.10 1.28 1.01
-------- ------ ------ -------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income....................... (0.32) (0.29) (0.06) (0.31) (0.27) (0.34) (0.32) (0.27) (0.26)
Distributions from Net Realized
Capital Gains................ (0.73) (0.73) (0.00) (0.51) (0.51) (0.14) (0.14) (0.00) (0.00)
-------- ------ ------ -------- ------ ------- ------ ------- ------
Total Distributions...... (1.05) (1.02) (0.06) (0.82) (0.78) (0.48) (0.46) (0.27) (0.26)
-------- ------ ------ -------- ------ ------- ------ ------- ------
Net Asset Value, End of Period... $ 17.53 $17.51 $17.54 $ 14.87 $14.86 $ 12.66 $12.65 $ 11.01 $11.01
======== ====== ====== ======== ====== ======= ====== ======= ======
TOTAL RETURN..................... 25.69% 25.41%(5) 25.58%(4,5) 24.62% 24.33%(5) 19.72% 19.37%(5) 14.34%(4) 13.18%(4,5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)....................... $193,923 $2,151 $ 3 $127,130 $ 410 $61,978 $ 263 $36,194 $ 125
Ratio of Expenses to Average
Net Assets................... 0.92% 1.17% 1.86% 1.01% 1.26% 1.06%(1) 1.31%(2) 99%(1,4) 1.41%(2,4)
Ratio of Net Investment Income
to Average Net Assets........ 1.80% 1.62% 0.68% 2.44% 2.17% 3.02%(1) 2.75%(2) 3.87%(1,4) 3.45%(2,4)
Portfolio Turnover Rate........ 18% 18% 18% 35% 35% 53% 53% 12% 12%
Average Commission Rate........ $ 0.06 $ 0.06 $ 0.06 $ 0.05 $ 0.05 $ 0.07 $ 0.07 N/A N/A
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the I Class for the year ended May 31, 1996,
would have been 1.08 and 3.00%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the Investment
Advisers, Administrator and Custodian for the I Class for the period ended
May 31, 1995, would have been 1.21% and 3.66%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the Custodian for the A Class for the year ended May 31, 1996
would have been 1.32% and 2.74%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the Investment
Advisers, Administrator, and Custodian for the A Class for the period ended
May 31, 1995, would have been 1.45% and 3.40%, respectively.
(3) I and A Classes commenced operations on July 1, 1994, and August 22, 1994,
respectively.
(4) Annualized.
(5) Total return excludes sales charge.
(6) Class B commenced operations on January 6, 1998.
9
<PAGE> 107
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
SMALL CAP GROWTH FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Small Cap Growth Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED MAY 31, 1998
-------------------------------------
I(6) A(6) CLASS B(7)
------- ------ ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.00 $10.00 $10.64
------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................... 0.01 0.01 (0.01)
Net Gain/(Loss) on Securities (Realized and Unrealized)... 1.72 1.71 1.03
------- ------ ------
Total from Investment Operations.......................... 1.73 1.72 1.02
------- ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income...................... (0.01) (0.01) (0.00)
Distributions from Net Realized Capital Gains............. (0.03) (0.03) (0.00)
------- ------ ------
Total Distributions............................... (0.04) (0.04) (0.00)
======= ====== ======
Net Asset Value, End of Period.............................. $ 11.69 $11.68 $11.66(4,5)
======= ====== ======
TOTAL RETURN................................................ 17.35%(5) 17.18%(4,5) 9.59%(4,5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)...................... $54,476 $ 331 $ 1
Ratio of Expenses to Average Net Assets................... 0.98%(1,8) 1.23%(2,8) 1.92%(3,8)
Ratio of Net Investment Income/(Loss) to Average Net
Assets................................................. 0.14%(1,8) (0.32)%(2,8) (0.87)%(3,8)
Portfolio Turnover Rate................................... 31% 31% 31%
Average Commission Rate................................... $ 0.04 $ 0.04 $ 0.04
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Administrator for the I Class for the period ended May 31,
1998 would have been 1.09% and 0.03%, respectively.
(2) The operating expense ratio and the net investment income/(loss) ratio
before fee waivers by the Administrator for the A Class for the period ended
May 31, 1998 would have been 1.34% and (0.43)%, respectively.
(3) The operating expense ratio and the net investment income/loss ratio before
fee waivers by the Administrator for the Class B for the period ended May
31, 1998 would have been 3.06% and (2.01)%, respectively.
(4) Total return excludes sales charge.
(5) Returns are for the period indicated and have not been annualized.
(6) I and A Classes both commenced operations on August 1, 1997.
(7) Class B commenced operations on January 6, 1998.
(8) Annualized.
10
<PAGE> 108
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
INTERNATIONAL EQUITY FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the International Equity Fund is contained
in the Trust's Annual Report to Shareholders, which may be obtained without
charge by contacting the Trust at its telephone number or address provided on
page 1. As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED MAY 31, 1998
--------------------------------------
I(5) A(5) CLASS B(6)
-------- ------ ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.00 $10.00 $ 9.30
-------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................... 0.08 0.04 0.05
Net Gain on Securities (Realized and Unrealized).......... 0.79 0.79 1.48
-------- ------ ------
Total from Investment Operations.................. 0.87 0.83 1.53
-------- ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income...................... (0.01) (0.01) --
-------- ------ ------
Total Distributions............................... (0.01) (0.01) (0.00)
-------- ------ ------
Net Asset Value, End of Period.............................. $ 10.86 $10.82 $10.83
======== ====== ======
TOTAL RETURN................................................ 8.76%(7) 8.28%(4,7) 16.45%(4,7)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)...................... $135,942 $ 276 $ 1
Ratio of Expenses to Average Net Assets................... 1.09%(1,8) 1.39%(2,8) 2.08%(3,8)
Ratio of Net Investment Income to Average Net Assets...... 1.19%(1,8) 1.49%(2,8) 0.59%(3,8)
Portfolio Turnover Rate................................... 28% 28% 28%
Average Commission Rate................................... $ 0.03 $ 0.03 $ 0.03
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Administrator for the I Class for the
period ended May 31, 1998 would have been 1.24% and 1.04%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Administrator for the A Class for the
period ended May 31, 1998 would have been 1.47% and 1.41%, respectively.
(3) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Administrator for the Class B for the
period ended May 31, 1998 would have been 2.14% and 0.53%, respectively.
(4) Total return excludes sales charge.
(5) I and A Classes both commenced operations on August 1, 1997.
(6) Class B commenced operations on January 6, 1998.
(7) Returns are for the period indicated and have not been annualized.
(8) Annualized.
11
<PAGE> 109
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
CORE EQUITY FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Core Equity Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1. As
of the date of this Prospectus, "Institutional shares" are renamed "I shares,"
and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
MAY 31, 1998
--------------------------------------
I(6) A(6) CLASS B(7)
-------- ------ ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.00 $10.00 $10.25
-------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................... 0.05 0.04 0.00
Net Gain on Securities (Realized and Unrealized).......... 1.35 1.34 1.08
-------- ------ ------
Total from Investment Operations.......................... 1.40 1.38 1.08
-------- ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income...................... (0.05) (0.04) (0.00)
Total Distributions............................... (0.05) (0.04) (0.00)
-------- ------ ------
Net Asset Value, End of Period.............................. $ 11.35 $11.34 $11.33
======== ====== ======
TOTAL RETURN................................................ 14.03%(5) 13.85%(4,5) 10.54%(4,5)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)...................... $110,504 $ 408 $ 2
Ratio of Expenses to Average Net Assets................... 0.89(1,8) 1.14%(2,8) 1.83%(3,8)
Ratio of Net Investment Income/(Loss) to Average Net
Assets................................................. 0.61%(1,8) 0.14%(2,8) (0.51)%(3,8)
Portfolio Turnover Rate................................... 60% 60% 60%
Average Commission Rate................................... $ 0.04 $ 0.04 $ 0.04
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Administrator for the I Class for the
period ended May 31, 1998 would have been 1.06% and 0.44%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser and Administrator for the A Class for the
period ended May 31, 1998 would have been 1.30% and 0.04%, respectively.
(3) The operating expense ratio and the net investment income/(loss) ratio
before fee waivers by the Investment Adviser and Administrator for the Class
B for the period ended May 31, 1998 would have been 2.00% and (0.50)%,
respectively.
(4) Total return excludes sales charge.
(5) Returns are for the period indicated and have not been annualized.
(6) I and A Classes both commenced operations on August 1, 1997.
(7) Class B commenced operations on January 6, 1998.
(8) Annualized.
12
<PAGE> 110
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
TAX MANAGED EQUITY FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Tax Managed Equity Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I
shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
MAY 31, 1998
---------------------------------------
I(5) A(6) CLASS B(7)
-------- ------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.00 $ 10.10 $ 10.21
-------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................... 0.00 0.00 0.00
Net Gain on Securities (Realized and Unrealized).......... (0.07) (0.17) (0.28)
-------- ------- -------
Total from Investment Operations.......................... (0.07) (0.17) (0.28)
-------- ------- -------
LESS DISTRIBUTIONS
Net Investment Income..................................... (0.00) (0.00) (0.00)
Total Distributions............................... (0.00) (0.00) (0.00)
-------- ------- -------
Net Asset Value, End of Period.............................. $ 9.93 $ 9.93 $ 9.93
======== ======= =======
TOTAL RETURN................................................ (4.81)%(8) (23.63)%(8) (32.24)%(8)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)...................... $158,867 $ 10 $ 85
Ratio of Expenses to Average Net Assets................... 0.29%(1,8) 0.54%(2,8) 1.23%(3,8)
Ratio of Net Investment Income to Average Net Assets...... 0.91%(1,8) 0.63%(2,8) 0.43%(3,8)
Portfolio Turnover Rate................................... 0% 0% 0%
Average Commission Rate................................... $ 0.00 $ 0.00 $ 0.00
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser for the I Class for the period ended May
31, 1998 would have been 1.02% and 0.18%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser for the A Class for the period ended May
31, 1998 would have been 1.24% and (0.07)%, respectively.
(3) The operating expense ratio and the net investment income ratio before fee
waivers by the Investment Adviser for Class B for the period ended May 31,
1998 would have been 1.98% and 1.18%, respectively.
(4) Total return excludes sales charge.
(5) I Class commenced operations on April 9, 1998.
(6) A Class commenced operations on May 11, 1998.
(7) Class B commenced operations on May 4, 1998.
(8) Annualized.
13
<PAGE> 111
INVESTMENT OBJECTIVES AND POLICIES
A Fund's investment objective may be changed without a vote of
shareholders, although the Board of Trustees would only change a Fund's
objective upon 30 days' notice to shareholders. There can be no assurance that a
Fund will achieve its objective. See "Common Investment Policies of the Funds"
below and "Investment Objectives and Policies" in the Statement of Additional
Information for further information on the investments in which the Funds may
invest.
SMALL CAP VALUE FUND
The investment objective of the Small Cap Value Fund is to seek capital
appreciation by investing in a diversified portfolio of publicly traded equity
securities. Under normal conditions, at least 65% of the value of the Fund's
total assets will be invested in equity securities of companies with market
capitalizations ranging from $100 million to $2 billion. The Fund will be
managed with a value approach, exhibiting aggregate valuation characteristics
such as price/earnings, price/book, and price cash/flow ratios which are at a
discount to the market averages. Additional factors such as private market
value, balance sheet strength, and long term earnings potential are also
considered in stock selection. See "Special Risk Factors -- Small Capitalization
Stocks" below.
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek a high level
of total return arising primarily out of capital appreciation. Under normal
conditions, at least 80% of the Fund's total assets will be invested in a
diversified portfolio of common stocks and securities convertible into common
stocks. The Fund's Adviser selects common stocks based on a number of factors,
including historical and projected earnings growth, earnings quality and
liquidity, each in relation to the market price of the stock. Stocks purchased
for the Fund generally will be listed on a national securities exchange or will
be unlisted securities with an established over-the-counter market.
EQUITY INCOME FUND
The investment objective of the Equity Income Fund is to seek a competitive
total rate of return through investments in equity and equity equivalent
securities which, in the aggregate, provide a premium current yield. Under
normal conditions, at least 65% of the value of the Fund's total assets will be
invested in income-producing common stocks and securities convertible into
common stocks assigned a rating of Ba/BB or higher by Moody's Investors Service,
Standard & Poor's Ratings Group ("S&P"), Fitch Investor Inc. ("Fitch"), Duff &
Phelps ("Duff") or IBCA Inc. ("IBCA"). The Fund's Adviser will generally attempt
to select securities that provide a higher yield than that of the general market
and will generally dispose of securities whose yields approach a market yield or
that otherwise fail to satisfy investment criteria.
SMALL CAP GROWTH FUND
The investment objective of the Small Cap Growth Fund is to provide long
term capital appreciation. The Fund will normally invest at least 80% of its
total assets in equity securities of companies with stock market capitalizations
of under $1.5 billion at the time of purchase. The Adviser will seek companies
with above-average growth prospects. Factors considered in selecting such
issuers include participation in a fast growing industry, a strategic niche
position in a specialized market, and fundamental value. The Adviser will also
consider the relationship between price and book value, and other factors such
as trading volume and bid-ask spreads in an effort to allow the Fund to achieve
diversification. See "Special Risk Factors -- Small Capitalization Stocks"
below.
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SPECIAL RISK FACTORS -- SMALL CAPITALIZATION STOCKS
Securities held by the Small Cap Value and Small Cap Growth Funds generally
will be issued by public companies with small capitalizations relative to those
which predominate the major market indices, such as the S&P's 500 or the Dow
Jones Industrial Average. Securities of these small companies may at times yield
greater returns on investment than stocks of larger, more established companies
as a result of inefficiencies in the marketplace. Small capitalization companies
are generally not as well-known to investors and have less of an investor
following than larger companies.
However, the positions of small capitalization companies in the market may
be more tenuous because they typically are subject to a greater degree of change
in earnings and business prospects than larger, more established companies. In
addition, securities of small capitalization companies are traded in lower
volume than those of larger companies and may be more volatile. As a result, the
Funds may be subject to greater price volatility than a fund consisting of large
capitalization stocks. By maintaining a broadly diversified portfolio, the sub-
adviser will attempt to reduce this volatility.
INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is to provide
capital growth consistent with reasonable investment risk. The Fund seeks to
achieve its investment objective by investing, under normal market conditions,
at least 80% of its total assets in equity securities of foreign issuers. The
Fund's assets normally will be invested in the securities of issuers located in
at least three foreign countries. Foreign investments may also include debt
obligations issued or guaranteed by foreign governments or their agencies,
authorities, instrumentalities or political subdivisions, including a foreign
state, province or municipality. The Adviser does not presently intend to invest
in common stock of domestic companies.
The Fund will invest primarily in equity securities, including common and
preferred stocks, rights, warrants, securities convertible into common stocks
and American Depository Receipts ("ADRs") of companies included in the Morgan
Stanley Capital International Europe, Australia, Far East ("EAFE") Index, a
broadly diversified international index consisting of more than 1,000 equity
securities of companies located in Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the
United Kingdom. The Fund, however, is not an "index" fund, and is neither
sponsored by nor affiliated with Morgan Stanley Capital International. The Fund
does not anticipate making investments in markets where, in the judgment of the
Adviser, property rights are not defined and supported by adequate legal
infrastructure.
More than 25% of the Fund's assets may be invested in the securities of
issuers located in the same country. Investment in a particular country of 25%
or more of the Fund's total assets will make the Fund's performance more
dependent upon the political and economic circumstances of that country than a
mutual fund more widely diversified among issuers in different countries.
Criteria for determining the appropriate distribution of investments among
countries may include relative valuation, growth prospects, and fiscal,
monetary, and regulatory government policies. See "Special Risk Factors --
Foreign Securities and Currencies" below.
SPECIAL RISK FACTORS -- FOREIGN SECURITIES AND CURRENCIES
The International Equity Fund may invest in securities issued by foreign
issuers either directly or indirectly through investments in American, European
or Global Depository Receipts (see "American, European and Global Depository
Receipts" below). Such securities may or may not be listed on foreign or
domestic stock exchanges.
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Investments in foreign securities involve certain inherent risks, such as
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns, changes in exchange rates
of foreign currencies and the possibility of adverse changes in investment or
exchange control regulations. There may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
Further, foreign stock markets are generally not as developed or efficient as
those in the U.S., and in most foreign markets, volume and liquidity are less
than in the U.S. Fixed commissions on foreign stock exchanges are generally
higher than the negotiated commissions on U.S. exchanges, and there is generally
less government supervision and regulation of foreign stock exchanges, brokers
and companies than in the U.S.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets, or diplomatic developments that could affect investment within
those countries. Because of these and other factors, securities of foreign
companies acquired by the Fund may be subject to greater fluctuation in price
than securities of domestic companies.
Since the Fund will invest substantially in securities denominated in or
quoted in currencies other than the U.S. dollar, changes in currency exchange
rates (as well as changes in market values) will affect the value in U.S.
dollars of securities held by the Fund. Foreign exchange rates are influenced by
trade and investment flows, policy decisions of governments, and investor
sentiment about these and other issues. In addition, costs are incurred in
connection with conversions between various currencies.
The conversion of the eleven member states of the European Union to a
common currency, the "euro", is scheduled to occur on January 1, 1999. As a
result of the conversion, securities issued by the member states will be subject
to certain risks, including competitive implications of increased price
transparency of European Union markets (including labor markets) resulting from
adoption of a common currency and issuers' plans for pricing their own products
and services in euro; an issuer's ability to make any required information
technology updates on a timely basis, and costs associated with the conversion
(including costs of dual currency operations through January 1, 2002); currency
exchange rate risk and derivatives exposure (including the disappearance of
price sources, such as certain interest rate indices); continuity of material
contracts and potential tax consequences. Other risks include whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2000 and beyond; whether the interest rate, tax and labor
regimes of participating European countries will converge over time; and whether
the conversion of the currencies of other EU countries such as the United
Kingdom, Denmark and Greece into the euro and the possible admission of other
non-EU countries such as Poland, Latvia and Lithuania as members of the EU may
have an impact on the euro. These or other factors, including political and
economic risks, could cause market disruptions before or after the introduction
of the euro, and could adversely affect the value of securities and foreign
currencies held by the Funds. Commissions on transactions in foreign securities
may be higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have been unable to keep pace
with
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the volume of securities transactions, thus making it difficult to conduct such
transactions.
The expense ratio of the Fund can be expected to be higher than that of
funds investing in domestic securities. The costs of investing abroad are
generally higher for several reasons, including the cost of investment research,
increased costs of custody for foreign securities, higher commissions paid for
comparable transactions involving foreign securities, and costs arising from
delays in settlements of transactions involving foreign securities.
Interest and dividends payable on the Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by tax credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the return to the Fund's shareholders.
CORE EQUITY FUND
The investment objective of the Core Equity Fund is to seek a total rate of
return greater than that of the S&P 500. The two components of total rate of
return are current income and change in the value of portfolio securities. The
Fund seeks to achieve its objective by investing in a diversified portfolio of
common stocks of issuers with large capitalizations. The Fund normally invests
in three types of equity securities: (i) growth securities, defined as common
stocks having a five-year annual earnings-per-share growth rate of 10% or more,
with no decline in the annual earnings-per-share rate during the last five
years; (ii) securities with low price-to-earnings ratios (i.e., at least 20%
below the average of the companies included in the S&P 500); and (iii)
securities that pay high dividend yields (i.e., at least 20% above such
average). Under normal market conditions the Fund will invest 20% to 50% of its
total assets in each of these three types of equity securities. The Fund is
fully invested at all times.
The S&P 500 is an index composed of approximately 500 common stocks, most
of which are listed on the New York Stock Exchange (the "NYSE"). The Sub-adviser
believes that the S&P 500 is an appropriate benchmark for the Fund because it is
diversified, familiar to many investors and widely accepted as a reference for
common stock investments.
Standard & Poor's Ratings Group is not a sponsor of, or in any way
affiliated with, the Fund.
EQUITY INDEX FUND
The investment objective of the Equity Index Fund is to seek investment
results that, before Fund expenses, approximate the aggregate price and dividend
performance of the securities included in the S&P 500 by investing in securities
comprising the S&P 500.
The S&P 500 is composed of approximately 500 common stocks, most of which
are listed on the NYSE. S&P selects the stocks for the S&P 500 on a statistical
basis. As of May 31, 1998, the stocks in the S&P 500 had an average market
capitalization of $63.7 billion and the total market capitalization of all U.S.
common stocks was $8.58 trillion. "Market capitalization" of a company is the
market price per share of stock multiplied by the number of shares outstanding.
The Adviser believes that the S&P 500 is an appropriate benchmark for the Fund
because it is diversified, familiar to many investors and widely accepted as a
reference for common stock investments.
Under normal circumstances, the Fund will invest substantially all of its
total assets in the stocks that comprise the S&P 500 in approximately the same
percentages as the stocks represent in the index. The Fund may also acquire
derivative instruments designed to replicate the performance of the S&P 500,
such as S&P 500 stock index futures contracts or Standard & Poor's Depository
Receipts. The Fund may invest in all the approximately 500 stocks comprising the
S&P 500, or it may use a statistical sampling technique by selecting
approximately 90% of the stocks listed in the index. The Fund will only purchase
a security that is included in the S&P 500 at the time of such purchase. The
Fund, may, however, temporarily continue to hold a security that has been
deleted from the S&P 500
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pending the rebalancing of the Fund's portfolio. The Fund is not required to buy
or sell securities solely because the percentage of its assets invested in index
stocks changes when the market value of its holdings increases or decreases. In
addition, the Fund may omit or remove an index stock from its portfolio if the
Adviser believes the stock to be insufficiently liquid or believes the merit of
the investment has been substantially impaired by extraordinary events or
financial conditions. With respect to the remaining portion of its net assets,
the Fund may hold temporary cash balances which may be invested in U.S.
government obligations and money market investments. In extraordinary
circumstances, the Fund may exclude a stock listed on the index from its
holdings or include a similar stock in its place if it believes that doing so
will help achieve its investment objective. The Fund also may enter into
repurchase agreements, reverse repurchase agreements, and lend its portfolio
securities.
While there can be no guarantee that the Fund's investment results will
precisely match the results of the S&P 500, the Adviser believes that, before
deduction of operating expenses, there will be a very high correlation between
the returns generated by the Fund and the S&P 500. The Fund will attempt to
achieve a correlation between the performance of its asset portfolio and that of
the S&P 500 of at least 95% before deduction of operating expenses. A
correlation of 100% would indicate perfect correlation, which would be achieved
when the Fund's net asset value, including the value of its dividend and capital
gains distributions, increases or decreases in exact proportion to changes in
the index. The Fund's ability to correlate its performance with the S&P 500,
however, may be affected by, among other things, changes in securities markets,
the manner in which S&P calculates its index, and the timing of purchases and
redemptions. The Adviser monitors the correlation of the performance of the Fund
in relation to the index under the supervision of the Board of Trustees. The
Fund intends to actively rebalance its portfolio to achieve high correlation of
performance with the S&P 500. To reduce transaction costs and minimize
shareholders' current capital gains liability, the Fund's investment portfolio
will not be automatically rebalanced to reflect changes in the S&P 500. In the
unlikely event that a high correlation is not achieved, the Board of Trustees
will take appropriate steps based on the reasons for the lower than expected
correlation.
THE INDEXING APPROACH
The Fund is not managed in a traditional sense, that is, by making
discretionary judgments based on analysis of economic, financial and market
conditions. Under ordinary circumstances, stocks will only be eliminated from or
added to the Fund to reflect additions to or deletions from the S&P 500
(including mergers or changes in the composition of the index), to raise cash to
meet withdrawals, or to invest cash contributions. Accordingly, sales may result
in losses that may not have been realized if the Fund were actively managed and
purchases may be made that would not have been made if the Fund were actively
managed. Adverse events, such as reported losses, dividend cuts or omissions,
legal proceedings and defaults will not normally result in the sale of a common
stock. The Fund will remain substantially fully invested in common stocks and
equity derivative instruments whether stock prices are rising or falling.
The Adviser believes that the indexing approach should involve less
portfolio turnover, notwithstanding periodic additions to and deletions from the
S&P 500, and thus lower brokerage costs, transfer taxes and operating expenses,
than in more traditionally managed funds, although there is no assurance that
this will be the case. The costs and other expenses incurred in securities
transactions, apart from any difference between the investment results of the
Fund and those of the S&P 500, may cause the return of the Fund to be lower than
the return of the index.
The inclusion of a security in the S&P 500 in no way implies an opinion by
S&P as to its attractiveness as an investment. S&P is not a sponsor of, or in
any way affiliated with, the Fund.
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The common stock of National City Corporation, the parent company of the
Adviser, is included in the S&P 500. Like the other stocks in the S&P 500, the
Fund will invest in the common stock of National City Corporation in
approximately the same proportion as the percentage National City Corporation
common stock represents in the S&P 500. As of May 31, 1998, National City
Corporation common stock represented 0.25% of the index.
TAX MANAGED EQUITY FUND
The investment objective of the Tax Managed Equity Fund is to seek a high
level of return arising out of capital appreciation while minimizing the impact
of taxes on shareholders' returns. The Fund invests primarily in common stocks.
The Fund will use several methods to reduce the impact of federal and state
income taxes on investment income and realized capital gains distributed by the
Fund.
The Fund will seek to distribute relatively low levels of taxable
investment income by investing in stocks with low dividend yields.
The Fund will endeavor to hold taxes on realized capital gains to a minimum
by investing primarily in the securities of companies with above average
earnings predictability and stability which the Fund expects to hold for several
years. The Fund will generally seek to avoid realizing short-term capital gains,
and expects to have a relatively low overall portfolio turnover rate. When the
Fund sells appreciated securities, it will attempt to select the share lots with
the highest cost basis in order to hold realized capital gains to a minimum. The
Fund may, when consistent with its overall investment approach, sell depreciated
securities to offset realized capital gains.
Although the Fund expects to use some or all of the foregoing methods in
seeking to reduce the impact of federal and state income taxes on the Fund's
dividends and distributions, portfolio management decisions will also be based
on non-tax considerations when appropriate. Certain equity and other securities
held by the Fund will produce ordinary taxable income on a regular basis. The
Fund may also sell a particular security, even though it may realize a
short-term capital gain, if the value of that security is believed to have
reached its peak or is expected to decline before the Fund would have held it
for the long-term holding period. The Fund may also be required to sell
securities in order to generate cash to pay expenses or satisfy shareholder
redemptions.
Accordingly, while the Fund seeks to minimize the effect of taxes on its
dividends and distributions, the Fund is not a tax-exempt fund, and may be
expected to distribute taxable income and realize capital gains from time to
time.
Under normal conditions, at least 80% of the Fund's total assets will be
invested in common stocks and other equity securities. The Fund's Adviser
selects common stocks based on a number of factors, including historical and
projected long-term earnings growth, earnings quality and liquidity, each in
relation to the market price of the stock. Stocks purchased for the Fund
generally will be listed on a national securities exchange or will be unlisted
securities with an established over-the-counter market. The Fund may invest up
to 5% of its net assets in each of the following types of equity securities:
preferred stocks; securities convertible into common stocks; rights; and
warrants.
The Fund's long-term investment horizon is reflected in its low portfolio
turnover investment approach. The portfolio turnover rate reflects the frequency
with which securities are purchased and sold within the Fund's portfolio. The
Fund's annual portfolio turnover is not expected to exceed 25% under normal
market conditions. (A rate of turnover of 100% could occur, for example, if all
the securities held by the Fund are replaced within a period of one year.) When
a Fund sells securities realizing gains, tax laws require that such gains be
distributed to investors every year. As a result, such investors are taxed on
their pro-rata shares of the gains. By attempting to minimize portfolio
turnover, the Fund will generally have a low turnover rate. It is impossible to
predict the impact of such a strategy on the realization of gains or losses for
the Fund.
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For example, the Fund may forego the opportunity to realize gains or reduce
losses as a result of this policy.
The Fund may be appropriate for investors who seek capital appreciation and
whose tax status under federal and state regulations increase the importance of
such strategies.
COMMON INVESTMENT POLICIES OF THE FUNDS
Futures Contracts and Related Options
Each Fund (other than the Core Equity Fund) may invest in stock index
futures contracts and options on futures contracts in attempting to hedge
against changes in the value of securities that it holds or intends to purchase
or to maintain liquidity. The International Equity Fund may also invest in
foreign currency futures contracts and options in anticipation of changes in
currency exchange rates.
Futures contracts obligate the Funds, at maturity, to take or make delivery
of certain securities or the cash value of a securities index or, in the case of
the International Equity Fund, to take or make delivery of the cash value of a
stated amount of a foreign currency. A Fund may sell a futures contract in order
to offset a decrease in the market value of its portfolio securities that might
otherwise result from a market decline. The Funds may do so either to hedge the
value of their portfolios of securities as a whole or to protect against
declines occurring prior to sales of securities in the value of the securities
to be sold. Conversely, a Fund may purchase a futures contract in anticipation
of purchases of securities. In addition, the Funds may utilize futures contracts
in anticipation of changes in the composition of their holdings.
Each Fund may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price at any time during the
option period. When a Fund sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised. In
anticipation of a market advance, a Fund may purchase call options on futures
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Fund intends to
purchase. Similarly, if the value of a Fund's securities is expected to decline,
the Fund might purchase put options or sell call options on futures contracts
rather than sell futures contracts.
Each Fund intends to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC") exempting it from registration as a "commodity pool
operator." The Funds' commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to such regulations. In addition, the
Funds may not engage in such transactions if the sum of the amount of initial
margin deposits and premiums paid for unexpired commodity options, other than
for bona fide hedging transactions, would exceed 5% of the liquidation value of
their assets, after taking into account unrealized profits and unrealized losses
on such contracts they have entered into; provided, however, that in the case of
an option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the percentage limitation. In connection with a
Fund's position in a futures contract or option thereon, it will create a
segregated account of liquid assets, such as cash, U.S. government securities or
other liquid high grade debt obligations, or will otherwise cover its position
in accordance with applicable requirements of the SEC.
The primary risks associated with the use of futures contracts and options
are:
(i) an imperfect correlation between the change in market value of the
securities held by the Funds and the price of the futures contracts and
options;
(ii) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired;
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(iii) losses greater than the amount of the principal invested as
initial margin due to unanticipated market movements which are potentially
unlimited; and
(iv) the Adviser's ability to predict correctly the direction of
securities prices, interest rates and other economic factors.
Options
Each Fund (other than the Equity Index Fund) may write covered call
options, buy put options, buy call options and sell or "write" secured put
options on a national securities exchange and issued by the Options Clearing
Corporation for hedging purposes. Such transactions may be effected on a
principal basis with primary reporting dealers in U.S. government securities in
an amount not exceeding 5% of a Fund's net assets. Such options may relate to
particular securities, stock or bond indices, financial instruments or foreign
currencies. Purchasing options is a specialized investment technique which
entails a substantial risk of a complete loss of the amounts paid as premiums to
the writer of the option.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is the consideration for undertaking the obligations under the option contract.
A put option for a particular security gives the purchaser the right to sell the
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
In contrast to an option on a particular security, an option on a securities
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option.
Each Fund may purchase and sell put options on portfolio securities at or
about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits its risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of and yield otherwise available from the underlying security, however,
will be partially offset by the amount of the premium paid for the put option
and any related transaction costs. Call options may be purchased by a Fund in
order to acquire the underlying security at a later date at a price that avoids
any additional cost that would result from an increase in the market value of
the security. Each Fund may also purchase call options to increase its return to
investors at a time when the call is expected to increase in value due to
anticipated appreciation of the underlying security. Prior to its expiration, a
purchased put or call option may be sold in a closing sale transaction (a sale
by a Fund, prior to the exercise of an option that it has purchased, of an
option of the same series), and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the option
plus the related transaction costs.
In addition, each Fund may write covered call and secured put options. A
covered call option means that the Fund owns or has the right to acquire the
underlying security subject to call at all times during the option period. A
secured put option means that a Fund maintains in a segregated account with its
custodian cash or U.S. government securities in an amount not less than the
exercise price of the option at all times during the option period. Such options
will be listed on a national securities exchange and issued by the Options
Clearing Corporation and may be effected on a principal basis with primary
reporting dealers in the U.S.
The aggregate value of the securities subject to options written by a Fund
will not exceed 25% of the value of its net assets. In order to close out an
option position prior to maturity, a Fund may enter into a "closing purchase
transaction" by purchasing a call or put option (depending upon the position
being closed out) on the same security with the same exercise price and
expiration date as the option which it previously wrote.
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Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, it will not be able to
sell the underlying security until the covered call option expires or is
exercised or the Fund closes out the option. In writing a secured put option, a
Fund assumes the risk that the market value of the security will decline below
the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of the Funds.
Foreign Securities
Each of the Funds (other than the Equity Index Fund) may invest up to 20%
(100% in the case of the International Equity Fund) of its total assets at the
time of purchase in securities issued by foreign entities and ADRs, EDRs and
GDRs (defined below). See "Special Risk Factors -- Foreign Securities and
Currencies" above.
American, Standard & Poor's, MidCap Standard & Poor's, European and Global
Depository Receipts
Each Fund may invest in American Depository Receipts ("ADRs") and Standard
& Poor's Depository Receipts ("SPDRs"). The Small Cap Value and Tax Managed
Equity Funds may invest in MidCap Standard & Poor's Depository Receipts ("MidCap
SPDRs"). The International Equity and Tax Managed Equity Funds may invest in
both sponsored and unsponsored ADRs, European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and other similar global instruments. ADRs
are receipts issued in registered form by a U.S. bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities exchange or may be traded in the
over-the-counter markets. ADR prices are denominated in U.S. dollars although
the underlying securities may be denominated in a foreign currency. SPDRs are
receipts designed to replicate the performance of the S&P 500. MidCap SPDRs
represent ownership in the MidCap SPDR Trust, a unit investment trust which
holds a portfolio of common stocks that closely tracks the price performance and
dividend yield of the S&P MidCap 400 Index. EDRs, which are sometimes referred
to as Continental Depository Receipts, are receipts issued in Europe typically
by non-U.S. banks or trust companies and foreign branches of U.S. banks that
evidence ownership of foreign or U.S. securities. EDRs are designed for use in
European exchange and over-the-counter markets. GDRs are receipts structured
similarly to EDRs and are marketed globally. GDRs are designed for trading in
non-U.S. securities markets. Investments in ADRs, EDRs and GDRs involve risks
similar to those accompanying direct investments in foreign securities, but
those that are traded in the over-the-counter market which do not have an active
or substantial secondary market will be considered illiquid and, therefore, will
be subject to a Fund's limitation with respect to illiquid securities.
The principal difference between sponsored and unsponsored ADR, EDR and GDR
programs is that unsponsored ones are organized independently and without the
cooperation of the issuer of the underlying securities. Consequently, available
information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more
volatile.
Forward Currency Exchange Contracts
The Equity Income and International Equity Funds may enter into forward
currency exchange contracts in an effort to reduce the level of volatility
caused by changes in foreign currency exchange rates or where such transactions
are deemed economically appropriate for the reduction of risks inherent in the
ongoing management of the Funds. The Funds may not enter into such contracts for
speculative purposes. A forward currency exchange
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contract is an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of contract. Although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain that
might be realized should the value of such currency increase. Consequently, a
Fund may choose to refrain from entering into such contracts. In connection with
forward currency exchange contracts, a Fund will create a segregated account of
liquid assets.
Exchange Rate-Related Securities
The Equity Income and International Equity Funds may invest in debt
securities for which the principal due at maturity, while paid in U.S. dollars,
is determined by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries ("Exchange Rate-Related Securities").
The interest payable on these securities is also denominated in U.S. dollars and
is not subject to foreign currency risk and, in most cases, is paid at rates
higher than most other similarly rated securities in recognition of the risks
associated with these securities. There is the possibility of significant
changes in rates of exchange between the U.S. dollar and any foreign currency to
which an Exchange Rate-Related Security is linked. In addition, there is no
assurance that sufficient trading interest to create a liquid secondary market
will exist for a particular Exchange Rate-Related Security due to conditions in
the debt and foreign currency markets. Illiquidity in the forward foreign
exchange market and the high volatility of the foreign exchange market may, from
time to time, combine to make it difficult to sell an Exchange Rate-Related
Security prior to maturity without incurring a significant price loss.
When-Issued Securities
Each Fund (other than the Equity Index Fund) may purchase securities on a
"when-issued" or delayed delivery basis. These transactions are arrangements in
which a Fund purchases securities with payment and delivery scheduled for a
future time. Each Fund expects that commitments to purchase when-issued
securities will not exceed 25% of the value of its total assets under normal
market conditions. The Funds do not intend to purchase when-issued securities
for speculative purposes but only for the purpose of acquiring portfolio
securities. In when-issued and delayed delivery transactions, a Fund relies on
the seller to complete the transaction; its failure to do so may cause the Fund
to miss a price or yield considered to be attractive.
Short-Term Obligations
Except as otherwise noted, each Fund may hold temporary cash balances which
may be invested in various short-term obligations (with maturities of 18 months
or less) such as domestic and foreign commercial paper, bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, U.S. government securities, repurchase
agreements, reverse repurchase agreements and guaranteed investment contracts
("GICs"). The Equity Index Fund cannot invest in foreign commercial paper and
GICs. A Fund may invest no more than 5% of its net assets in variable and
floating rate obligations. During temporary defensive periods, each Fund may
hold up to 100% of its total assets in these types of obligations.
In the case of repurchase agreements, default or bankruptcy of the seller
may expose a Fund to possible loss because of adverse market action or delays
connected with the disposition of the underlying obligations. Further, it is
uncertain whether a Fund would be entitled, as against a claim by such seller or
its receiver or trustee in bankruptcy, to retain the underlying securities.
Reverse repurchase agreements involve the risk that the market value of the
securities held by a Fund may decline below the price of the securities it is
obligated to repurchase.
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<PAGE> 121
Lending Portfolio Securities
In order to generate additional income, each Fund may, from time to time,
lend its portfolio securities to broker-dealers, banks or other institutional
borrowers. A Fund must receive 100% collateral in the form of cash or U.S.
government securities. This collateral must be valued daily by the Fund's
Adviser or Sub-adviser and the borrower will be required to provide additional
collateral should the market value of the loaned securities increase. During the
time portfolio securities are on loan, the borrower pays the Fund involved any
dividends or interest paid on such securities. Loans are subject to termination
by the Fund or the borrower at any time. While a Fund does not have the right to
vote securities on loan, it intends to terminate the loan and regain the right
to vote if this is considered important with respect to the investment. A Fund
will only enter into loan arrangements with broker-dealers, banks or other
institutions which its Adviser or Sub-adviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each Fund may invest in securities issued by other investment
companies which invest in high quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method.
In addition, the International Equity Fund may purchase shares of
investment companies investing primarily in foreign securities, including
"country funds" which have portfolios consisting exclusively of securities of
issuers located in one foreign country. Such "country funds" may be either
open-end or closed-end investment companies, and may include a portfolio or
portfolios of The CountryBaskets Index Fund, Inc. ("CountryBaskets"), a
registered, open-end management investment company that, through its portfolios,
seeks to provide investment results that substantially correspond to the price
and yield performance of a broad-based index of publicly traded equity
securities in a particular country, geographic region or industry sector.
The International Equity Fund may also purchase World Equity Benchmark
Shares issued by The Foreign Fund, Inc. ("WEBS") and similar securities of other
issuers. WEBS are shares of an investment company that invests substantially all
of its assets in securities included in the Morgan Stanley Capital International
indices for specific countries. Because the expense associated with an
investment in WEBS can be substantially lower than the expense of small
investments directly in the securities comprising the indices it seeks to track,
the Adviser believes that investments in WEBS of countries that are included in
the EAFE Index can provide a cost-effective means of diversifying the Fund's
assets across a broader range of equity securities.
WEBS are listed on the American Stock Exchange (the "AMEX"), and were
initially offered to the public in 1996. The market prices of WEBS are expected
to fluctuate in accordance with both changes in the net asset values of their
underlying indices and supply and demand of WEBS on the AMEX. To date, WEBS have
traded at relatively modest discounts and premiums to their net asset values.
However, WEBS have a limited operating history, and information is lacking
regarding the actual performance and trading liquidity of WEBS for extended
periods or over complete market cycles. In addition, there is no assurance that
the requirements of the AMEX necessary to maintain the listing of WEBS will
continue to be met or will remain unchanged.
In the event substantial market or other disruptions affecting WEBS or
CountryBaskets should occur in the future, the liquidity and value of the
International Equity Fund's shares could also be substantially and adversely
affected, and the Fund's ability to provide investment results approximating the
performance of securities in the EAFE could be impaired. If such disruptions
were to occur, the Fund could be required to reconsider the use of
24
<PAGE> 122
WEBS, CountryBaskets or other "country funds" as part of its investment
strategy.
As a shareholder of another investment company, a Fund would bear, along
with other shareholders, its pro rata portion of that company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that the Fund bears directly in connection with its own
operations. Investment companies in which a Fund may invest may also impose a
sales or distribution charge in connection with the purchase or redemption of
their shares and other types of commissions or charges. Such charges will be
payable by the Fund and, therefore, will be borne indirectly by its
shareholders.
Illiquid Securities
The Small Cap Value, Equity Growth, Equity Income, Small Cap Growth,
International Equity, Core Equity, Equity Index and Tax Managed Funds will not
invest more than 15% of their respective net assets in securities that are
illiquid. Illiquid securities would generally include repurchase agreements and
GICs with notice/termination dates in excess of seven days and certain
securities which are subject to trading restrictions because they are not
registered under the Securities Act of 1933, as amended (the "1933 Act").
Each Fund may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long as it is determined by the Board of Trustees or the Fund's Adviser or
Sub-adviser, acting under guidelines approved and monitored by the Board, that
an adequate trading market exists for that security. This investment practice
could have the effect of increasing the level of illiquidity in a Fund during
any period that qualified institutional buyers become uninterested in purchasing
these restricted securities.
Special Risk Factors Associated with Derivative Instruments
The Funds may purchase certain "derivative" instruments. Derivative
instruments are instruments that derive value from the performance of underlying
securities, interest or currency exchange rates, or indices, and include (but
are not limited to) futures contracts.
Like all investments, derivative instruments involve several basic types of
risks which must be managed in order to meet investment objectives. The specific
risks presented by derivatives include, to varying degrees, market risk in the
form of underperformance of the underlying securities, exchange rates or
indices; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the securities, rates or indices on which it
is based; liquidity risk that the Funds will be unable to sell a derivative
instrument when they want because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option) will
not correlate exactly to the value of the underlying securities, rates or
indices on which it is based; extension risk that the expected duration of an
instrument may increase or decrease; and operations risk that loss will occur as
a result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The risk to each Fund due to the use of derivatives will be limited to 10%
of the total value of the Fund's assets at the time of the derivatives
transaction. The Adviser or Sub-adviser will evaluate the risks presented by the
derivative instruments purchased by the Funds, and will determine, in connection
with their day-to-day management of the Funds, how they will be used in
furtherance of the Funds' investment objectives.
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<PAGE> 123
Portfolio Turnover
Portfolio turnover will tend to rise during periods of economic turbulence
and decline during periods of stable growth. The Small Cap Value, Equity Growth,
Equity Income, Small Cap Growth, International Equity and Core Equity Funds'
annual portfolio turnover is not expected to exceed 100% under normal market
conditions. The Equity Index and Tax Managed Equity Fund's annual portfolio
turnover is not expected to exceed 10% and 25%, respectively, under normal
market conditions. Higher portfolio turnover may result in increased taxable
gains to shareholders (see "Taxes" below) and increased expenses paid by the
Fund due to transaction costs.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the Fund's
outstanding shares (as defined under "Miscellaneous"). (Other fundamental
investment limitations, as well as non-fundamental investment limitations, are
contained in the Statement of Additional Information under "Investment
Objectives and Policies.")
No Fund may:
1. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the securities of one
or more issuers conducting their principal business activities in the same
industry, provided that:
(a) there is no limitation with respect to obligations issued or guaranteed
by the U.S. government, (any state, territory or possession of the United
States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions) and repurchase agreements secured
by such obligations;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents;
(c) utilities will be divided according to their services, for example,
gas, gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry; and
(d) personal credit and business credit businesses will be considered
separate industries.
2. Purchase securities of any one issuer, other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities or, in
the case of the International Equity Fund, securities issued or guaranteed by
any foreign government, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of any class of securities of the issuer or more than
10% of the outstanding voting securities of the issuer, except that up to 25% of
the value of the Fund's total assets may be invested without regard to such
limitations.
3. Make loans, except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies and may lend portfolio securities in an amount not exceeding
one-third of its total assets.
4. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
For purposes of the above investment limitations, the Funds treat all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry. In addition, a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
26
<PAGE> 124
Except for the Funds' policy on illiquid securities, if a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of a Fund's portfolio
securities will not constitute a violation of such limitation for purposes of
the 1940 Act.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders each Fund's total return data for its A shares, B shares and I
shares. The Funds calculate their total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
"aggregate total return" basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period.
Both methods of calculating total return reflect changes in the price of
the shares and assume that any dividends and capital gain distributions made by
a Fund with respect to a class during the period are reinvested in shares of
that class. When considering average total return figures for periods longer
than one year, it is important to note that the annual total return of a class
for any one year in the period might have been greater or less than the average
for the entire period. The Funds may also advertise, from time to time, the
total returns of one or more classes of shares on a year-by-year or other basis
for various specified periods by means of quotations, charts, graphs or
schedules.
The "yield" quoted in advertisements of the Equity Income Fund refers to
the income generated by an investment in a class of shares of over a 30-day
period identified in the advertisement. This income is then "annualized." The
amount of income so generated by the investment during the 30-day period is
assumed to be earned and reinvested at a constant rate and compounded semi-
annually; the annualized income is then shown as a percentage of the investment.
Investors may compare the performance of each class of shares of a Fund to
the performance of other mutual funds with comparable investment objectives, to
various mutual fund or market indices, such as the S&P 500, and to data or
rankings prepared by independent services such as Lipper Analytical Services,
Inc. or other financial or industry publications that monitor the performance of
mutual funds. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, U.S.A. Today, CDA/ Weisenberger, The American Banker,
Morningstar, Incorporated and other publications of a local, regional or
financial industry nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in net asset value of a class should be
considered in ascertaining the total return to shareholders for a given period.
Yield and total return data should also be considered in light of the risks
associated with a Fund's composition, quality, maturity, operating expenses and
market conditions. Any fees charged by financial institutions (as described in
"How to Purchase and Redeem Shares") are not included in the computation of
performance data but will reduce a shareholder's net return on an investment in
a Fund.
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<PAGE> 125
Shareholders should note that the yields and total returns of A shares and
B shares will be lower than those of the I shares of a Fund because of the
different distribution and/or servicing fees. The yields and total returns of
the B shares will be lower than those of the A shares of a Fund due to the
different distribution fees of the classes. See "Distribution and Servicing
Arrangements."
Further information about the performance of the Funds is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain these
materials from the Trust free of charge by calling 1-800-622-FUND(3863).
The Tax Managed Equity Fund is the successor to a common trust fund,
previously managed by National City Bank, an affiliate of the Adviser. All of
the assets of this predecessor common trust fund were transferred to the Fund
(as indicated below) on April 9, 1998. Set forth below are certain performance
data for the predecessor fund which were calculated using the same method the
Fund utilizes to calculate its average annual total returns with certain
adjustments, as noted below. This performance information is deemed relevant
because the common trust fund was managed using the same investment objective,
policies and restrictions, and portfolio manager as those being used by the
Fund. However, these performance data are not necessarily indicative of the
future performance of the Fund. In addition, the predecessor fund was not
subject to the diversification requirements and other restrictions of the 1940
Act and Subchapter M of the Internal Revenue Code of 1986, as amended ("Code");
if such requirements and restrictions had been applicable, they may have
adversely affected performance.
PREDECESSOR
COMMON TRUST FUND
AVERAGE ANNUAL TOTAL RETURNS FOR
VARIOUS PERIODS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR TO THE
PREDECESSOR TO THE PREDECESSOR TO THE TAX MANAGED PREDECESSOR TO THE
TAX MANAGED TAX MANAGED EQUITY FUND TAX MANAGED
EQUITY FUND EQUITY FUND B SHARES EQUITY FUND
A SHARES A SHARES (WITH MAXIMUM B SHARES
(ASSUMING SALES (ASSUMING NO DEFERRED SALES (WITHOUT DEFERRED
CHARGES)(1) SALES CHARGES)(2) CHARGES)(3) SALES CHARGES)(4)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PERIOD ENDED 5-31-98
Six Months................. 9.02% 15.32% 10.32% 15.32%
PERIODS ENDED 5-31-98
One Year................... 26.50% 33.92% 28.92% 33.92%
Three Years................ 27.03% 29.44% 28.64% 29.44%
Five Years................. 18.39% 19.74% 19.55% 19.74%
Ten Years.................. 16.48% 17.13% 17.13% 17.13%
<CAPTION>
PREDECESSOR TO THE
TAX MANAGED
EQUITY FUND
I SHARES(5)
------------------
<S> <C>
PERIOD ENDED 5-31-98
Six Months................. 15.32%
PERIODS ENDED 5-31-98
One Year................... 33.92%
Three Years................ 29.44%
Five Years................. 19.74%
Ten Years.................. 17.13%
</TABLE>
- ------------
(1) The predecessor common trust fund is the Equity Fund #2. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.29% of assets and assuming the maximum front-end sales charge
of 5.50%.
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<PAGE> 126
(2) The predecessor common trust fund is the Equity Fund #2. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.29% of assets and assuming full waiver of the maximum
front-end sales charge.
(3) The predecessor common trust fund is the Equity Fund #2. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.98% of assets and assuming the maximum contingent deferred
sales charge.
(4) The predecessor common trust fund is the Equity Fund #2. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.98% of assets and assuming a full waiver of the maximum
contingent deferred sales charge.
(5) The predecessor common trust fund is the Equity Fund #2. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.04% of assets. Institutional shares are sold without a sales
charge.
PRICING OF SHARES
For processing purchase and redemption orders, the net asset value per
share of each Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined on each business day, except those
holidays which the Exchange observes (currently New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day) ("Business Day").
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
With respect to each Fund, investments in securities traded on an exchange
are valued at the last quoted sale price for a given day, or if a sale is not
reported for that day, at the mean between the most recent quoted bid and asked
prices. Unlisted securities and securities traded on a national securities
market for which market quotations are readily available are valued at the mean
between the most recent bid and asked prices. Securities and other assets for
which no quotations are readily available are valued at their fair value under
procedures approved by the Board of Trustees. Absent unusual circumstances,
short-term investments having maturities of 60 days or less are valued on the
basis of amortized cost unless the Trust's Board of Trustees determines that
this does not represent fair value. The net asset value per share of each class
of shares of each Fund will fluctuate as the value of its portfolio changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The Distributor, Adviser and/or their affiliates, at their own expense, may
provide compensation to dealers in connection with the sale and/or servicing of
shares of any of the funds of the Trust. Compensation may include financial
assistance to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public,
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<PAGE> 127
advertising campaigns regarding one or more Funds of the Trust, and/or other
dealer-sponsored special events. In some instances, this compensation may be
made available only to certain dealers whose representatives have sold or are
expected to sell a significant amount of such shares. Compensation may include
payment for travel expenses, including lodging, incurred in connection with
trips taken by invited registered representatives and members of their families
to exotic locations within or outside of the United States for meetings or
seminars of a business nature. Compensation may also include the following types
of non-cash items offered through sales contests: (1) vacation trips, including
travel arrangements and lodging at resorts; (2) tickets for entertainment events
(such as concerts, cruises and sporting events); and (3) merchandise (such as
clothing, trophies, clocks and pens). The Distributor, at its expense, currently
conducts sales contests for dealers in connection with their sales of shares of
the Funds. Dealers may not use sales of a Fund's shares to qualify for this
compensation to the extent such may be prohibited by the laws of any state or
any self-regulatory agency, such as the National Association of Securities
Dealers, Inc.
PURCHASE OF A SHARES AND B SHARES
A shares of the Funds are sold subject to a front-end sales charge. B
shares of the Funds are sold subject to a back-end sales charge. This back-end
sales charge declines over time and is known as a "contingent deferred sales
charge." Before choosing between A shares and B shares of the Funds, investors
should read "Characteristics of A Shares and B Shares" and "Factors to Consider
When Selecting A Shares or B Shares" below.
A shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase A or B shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. Investors purchasing shares
of a Fund must specify at the time of investment whether they are purchasing A
shares or B shares.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. Investors may
be charged a fee if they effect transactions in fund shares through a broker or
agent. (For information on such fees, the Investor should review his or her
agreement with the institution or contact it directly.) For direct purchases of
shares, Investors should call 1-800-622-FUND(3863) or to speak with a NatCity
Investments professional, call 1-888-4NATCTY (462-8289).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact NatCity Investments, Inc., the Distributor
or their financial institutions for information as to applications and annual
fees. Investors should also consult their tax advisers to determine whether the
benefits of an IRA are available or appropriate.
The minimum investment is $500 for the initial purchase of A shares or B
shares in a Fund; there is no minimum for subsequent investments. All purchases
made by check should be in U.S. dollars. Please make the check payable to Armada
Funds (fund name), or, in the case of a retirement account, the custodian or
trustee for the account. The Trust will not accept third-party checks under any
circumstance. Investments made in A shares or B shares through the Planned
Investment Program ("PIP"), a savings program described below, are not subject
to the minimum initial and subsequent investment requirements or any minimum
account balance requirements described under "Other Redemption Information."
Purchases for an IRA through the PIP will be considered as contributions for the
year in which the purchases are made.
Under a PIP, Investors may add to their investment in A shares or B shares
of a Fund, in a consistent manner each month or quarter, with a minimum amount
of $50. Monies may be automatically withdrawn from a shareholder's checking or
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<PAGE> 128
savings account available through an Investor's
financial institution and invested in additional A shares at the Public Offering
Price or B shares at the net asset value next determined after an order is
received by the Trust. An Investor may apply for participation in a PIP by
completing an application obtained through a financial institution, such as
banks, brokers, or dealers selling A shares or B shares of the Funds, or by
calling 1-800-622-FUND(3863). The program may be modified or terminated by an
Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The Public Offering Price for A shares of each Fund is the sum of the net
asset value of the shares being purchased plus any applicable sales charge per
account, per Fund.
The sales charge for the Small Cap Value, Equity Growth, Equity Income,
Small Cap Growth, International Equity, and Core Equity Funds is assessed as
follows:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $25,000.... 5.50 5.80 5.25
$25,000 but less than
$50,000............ 5.25 5.50 5.00
$50,000 but less than
$100,000........... 4.75 5.00 4.50
$100,000 but less
than $250,000...... 3.75 3.90 3.50
$250,000 but less
than $500,000...... 3.00 3.10 2.75
$500,000 but
less than
$1,000,000......... 2.00 2.00 1.75
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
The sales charge for the Equity Index Fund is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000... 3.75 3.90 3.50
$100,000 but less
than $250,000...... 2.75 2.83 2.50
$250,000 but less
than $500,000...... 2.00 2.04 1.75
$500,000 but
less than
$1,000,000......... 1.25 1.27 1.00
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
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<PAGE> 129
The sales charge for the Tax Managed Equity Fund is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than $25,000.... 5.50 5.80 5.25
$25,000 but less than
$50,000............ 5.25 5.50 5.00
$50,000 but less than
$100,000........... 4.75 5.00 4.50
$100,000 but less
than $250,000...... 3.75 3.90 3.50
$250,000 but less
than $500,000...... 3.00 3.10 2.75
$500,000 but
less than
$1,000,000......... 2.00 2.00 1.75
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
With respect to each of the above mentioned Funds, a 1% sales charge will
be assessed against a shareholder's fund account if its value falls below
$1,000,000 due to a redemption by the shareholder within the first year
following the initial investment of $1,000,000 or more.
With respect to purchases of $1,000,000 or more of a Fund, the Adviser may
pay from its own funds a fee of 1.00% of the amount invested to the financial
institution placing the purchase order.
Under the 1933 Act, the term "underwriter" includes persons who offer or
sell for an issuer in connection with the distribution of a security or have a
direct or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of A shares made by:
(a) trustees and officers of the Trust;
(b) directors, employees and participants in employee benefit/retirement
plans (annuitants) of National City Corporation or any of its affiliates;
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above;
(d) individuals investing in a Fund by way of a direct transfer or a
rollover from a qualified plan distribution where affiliates of National City
Corporation are serving as a trustee or agent, or certain institutions having
relationships with affiliates of National City Corporation;
(e) investors purchasing Fund shares through a payroll deduction plan;
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services; and
(g) investors purchasing fund shares through "one-stop" mutual fund
networks.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, Investors have the
privilege of combining "concurrent purchases" of A shares of one or more of the
investment funds of the Trust that are sold with a sales charge (each a "load
fund"). The Investor's "concurrent purchases" described above shall include the
combined purchases of the Investor, the Investor's spouse and children under the
age of 21 and the Investor's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Investors must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This privilege, however, may be modified
or eliminated at any time or from time to time by the Trust without notice.
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REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The applicable sales charge may be reduced on purchases of A shares of each
Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND(3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in A shares in determining
the applicable sales charge. An Investor's aggregate investment in A shares is
the total value (based on the higher of current net asset value or any Public
Offering Price originally paid) of:
(a) current purchases
(b) A shares that are already beneficially owned by the Investor for which
a sales charge has been paid
(c) A shares that are already beneficially owned by the Investor which were
purchased prior to July 22, 1990
(d) A shares purchased by dividends or capital gains that are reinvested
If, for example, an Investor beneficially owns A shares of a Fund with an
aggregate current value of $90,000 and subsequently purchases A shares of that
Fund having a current value of $10,000, the sales charge applicable to the
subsequent purchase would be reduced to 3.75% of the Public Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. The Letter of Intent option is included on the
account application which may be obtained from the Investor's financial
institution or directly from the Trust by calling 1-800-622-FUND(3863). If an
Investor so elects, the 13 month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the Letter
of Intent must be equal to at least 4.0% of the amount indicated in the Letter
of Intent. During the term of a Letter of Intent, the Transfer Agent will hold A
shares representing 4.0% of the amount indicated in the Letter of Intent in
escrow for payment of a higher sales charge if the entire amount is not
purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13 month period or is redeemed within one year from the
time of fulfillment, the Investor will be required to pay an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge the Investor would have had to pay on the aggregate purchases if
the total of such purchases had been made at a single time.
SALES CHARGES APPLICABLE TO PURCHASES OF B SHARES
B shares of each Fund are sold at their net asset value next determined
after a purchase order is received in good form by the Trust's Distributor.
Although Investors pay no front-end sales charge on purchases of B shares, such
shares are subject to a deferred sales charge at the rates set forth in the
chart below if they are redeemed within five years of purchase. Broker-dealers
and other organizations selling B shares to Investors will receive commissions
from the Distributor in connection with sales of B shares. These commissions may
be different than the reallowances or placement fees, if any, paid to dealers in
connection with sales of A shares.
The deferred sales charge on B shares is based on the lesser of the net
asset value of the shares on the redemption date or the original cost of the
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shares being redeemed. As a result, no sales charge is charged on any increase
in the principal value of an Investor's shares. In addition, a contingent
deferred sales charge will not be assessed on B shares purchased through
reinvestment of dividends or capital gain distributions.
The amount of any contingent deferred sales charge an Investor must pay on
B shares depends on the number of years that elapse between the purchase date
and the date such B shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for an Investor's share purchase, all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
The contingent deferred sales charge for the Small Cap Value, Equity
Growth, Equity Income, Small Cap Growth, International Equity, Core Equity, and
Tax Managed Equity Funds is assessed as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
- ----------------------------- ---------------------------
<S> <C>
Less than one................ 5.0%
More than one, but less than
two........................ 5.0%
More than two, but less than
three...................... 4.0%
More than three, but less
than four.................. 3.0%
More than four, but less than
five......................... 2.0%
After five years............. None
After eight years............ *
</TABLE>
- ------------
* Conversion to A shares.
When an Investor redeems his or her B shares, the redemption order is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. B shares are redeemed first from those B shares that are not
subject to the deferred sales load (i.e., B shares that were acquired through
reinvestment of dividends or capital gain distributions) and thereafter, unless
otherwise designated by the shareholder, from the B shares that have been held
the longest.
For example, assume an Investor purchased 100 B shares at $10 a share (for
a total cost of $1,000), three years later the shares have a net asset value of
$12 per share and during that time the investor acquired 10 additional shares
through dividend reinvestment. If the Investor then makes one redemption of 50
shares (resulting in proceeds of $600, 50 shares x $12 per share), the first 10
shares redeemed will not be subject to the contingent deferred sales charge
because they were acquired through reinvestment of dividends. With respect to
the remaining 40 shares redeemed, the contingent deferred sales charge is
charged at $10 per share (because the original purchase price of $10 per share
is lower than the current net asset value of $12 per share). Therefore, only
$400 of the $600 such Investor received from selling his or her shares will be
subject to the contingent deferred sales charge, at a rate of 4.0% (the
applicable rate in the third year after purchase). The proceeds from the
contingent deferred sales charge that the Investor may pay upon redemption go to
the Distributor, which may use such amounts to defray the expenses associated
with the distribution-related services involved in selling B shares. The
contingent deferred sales charge, along with ongoing distribution fees paid with
respect to B shares, enables those shares to be purchased without the imposition
of a front-end sales charge.
Exemptions From Contingent Deferred Sales Charge
The following types of redemptions qualify for an exemption from the
contingent deferred sales charge:
(a) exchanges described under "Exchange Privilege Applicable to A Shares
and B Shares" below
(b) redemptions in connection with required (or, in some cases,
discretionary) distributions to participants or beneficiaries of an employee
pension, profit-sharing or other trust or qualified retirement or Keogh plan,
individual retirement account or custodial account maintained pursuant to
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<PAGE> 132
Section 403(b)(7) of the Internal Revenue Code
due to death, disability or the attainment of a specified age
(c) redemptions effected pursuant to a Fund's right to liquidate a
shareholder's account if the aggregate net asset value of shares held in the
account is less than the minimum account size
(d) redemptions in connection with the death or disability of a shareholder
(e) redemptions by a settlor of a living trust
(f) redemptions resulting from a tax-free return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF A SHARES AND B SHARES
The primary difference between A shares and B shares lies in their sales
charge structures and distribution arrangements. An Investor should understand
that the purpose and function of the sales charge structures and distribution
arrangements for both A shares and B shares are the same.
A shares are sold at their net asset value plus a front-end sales charge.
This front-end sales charge may be reduced or waived in some cases. A and I
shares are subject to ongoing distribution fees at an annual rate of up to 0.10%
of the Fund's average daily net assets attributable to its A and I shares.
B shares are sold at net asset value without an initial sales charge.
Normally, however, a deferred sales charge is paid if the shares are redeemed
within five years of investment. B shares are subject to ongoing distribution
fees at an annual rate of up to .75% of the Fund's average daily net assets
attributable to its B shares. These ongoing fees, which are higher than those
charged on A shares, will cause B shares to have a higher expense ratio and pay
lower dividends than A shares.
B shares which have been outstanding for eight years after the end of the
month in which the shares were initially purchased will automatically convert to
A shares. The purpose of the conversion is to relieve a holder of B shares of
the higher ongoing expenses charged to those shares, after enough time has
passed to allow the Distributor to recover approximately the amount it would
have received if a front-end sales charge had been charged. The conversion from
B shares to A shares takes place at net asset value, as a result of which an
Investor receives dollar-for-dollar the same value of A shares as he or she had
of B shares. As a result of the conversion, the converted shares are relieved of
the distribution and service fees borne by B shares, although they are subject
to the distribution and service fees borne by A shares.
B shares acquired through a reinvestment of dividends or distributions are
also converted at the earlier of two dates -- eight years after the beginning of
the calendar month in which the reinvestment occurred or the date of conversion
of the most recently purchased B shares that were not acquired through
reinvestment of dividends or distributions. For example, if an Investor makes a
one-time purchase of B shares of the Fund, and subsequently acquires additional
B shares of the Fund only through reinvestment of dividends and/or
distributions, all of such Investor's B shares in the Fund, including those
acquired through reinvestment, will convert to A shares of the Fund on the same
date.
FACTORS TO CONSIDER WHEN SELECTING A SHARES OR B SHARES
Before purchasing Shares of the Fund, Investors should consider whether,
during the anticipated life of their investment in the Fund, the accumulated
distribution fees and potential contingent deferred sales charges on B shares
prior to conversion would be less than the initial sales charge and accumulated
distribution fees on A shares purchased at the same time, and to what extent
such differential would be offset by the higher yield of A shares. In this
regard, to the extent that the sales charge for A shares is waived or reduced by
one of the methods described above, investments in A shares become more
desirable. The Trust will refuse all purchase orders for B shares of over
$250,000.
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<PAGE> 133
Although A shares are subject to a distribution fee, they are not subject
to the higher distribution fee applicable to B shares. For this reason, A shares
can be expected to pay correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, purchasers
of A shares that do not qualify for waivers of or reductions in the initial
sales charge would have less of their purchase price initially invested in the
Fund than purchasers of B shares of the Fund.
As described above, purchasers of B shares will have more of their initial
purchase price invested. Any positive investment return on this additional
invested amount would partially or wholly offset the expected higher annual
expenses borne by B shares. Because the Fund's future returns cannot be
predicted, there can be no assurance that this will be the case. Holders of B
shares would, however, own shares that are subject to higher annual expenses
and, for a five-year period, such shares would be subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this five-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
annual B shares' distribution fees to the cost of the initial sales charge and
distribution fees on the A shares. Over time, the expense of the annual
distribution fees on the B shares may equal or exceed the initial sales charge,
if any, and annual distribution fees applicable to A shares. For example, if net
asset value remains constant, the aggregate distribution fees with respect to B
shares of the Fund would equal or exceed the initial sales charge and aggregate
distribution fees of A shares of the Fund approximately eight years after the
purchase. In order to reduce such fees of Investors that hold B shares for more
than eight years, B shares will be automatically converted to A shares as
described above at the end of such eight-year period.
PURCHASE OF I SHARES
I shares are sold primarily to banks and trust companies which are
affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
registered investment advisers and financial planners affiliated with National
City Corporation ("Financial Advisers") who charge an advisory, consulting or
other fee for their services and buy shares for their own accounts or the
accounts of their clients ("Customers"). I shares are sold without a sales
charge imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks, NAM or Financial Advisers may
impose account charges such as account maintenance fees, compensating balance
requirements or other charges based upon account transactions, assets or income
which will have the effect of reducing the shareholder's net return on his or
her investment in a Fund.
It is the responsibility of the Banks, NAM and Financial Advisers to
transmit their Customers' purchase orders to the Transfer Agent and to deliver
required funds on a timely basis, in accordance with the procedures stated
above. I shares will normally be held of record by the Banks, NAM or Financial
Advisers. Confirmations of share purchases and redemptions will be sent to the
Banks and, NAM Financial Advisers. Beneficial ownership of I shares will be
recorded by the Banks, NAM or Financial Advisers and reflected in the account
statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Funds which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern Time) on any business day are priced according
to the net asset value per share next determined after receipt of the order plus
any applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice
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<PAGE> 134
thereof will be given to the Bank or financial institution placing the order.
Purchase orders for which payment has not been received or accepted will be
returned after prompt inquiry to the sending Bank or institution.
REDEMPTION OF A SHARES AND B SHARES
Redemption orders are effected at a Fund's net asset value per share next
determined after receipt of the order by the Fund. Proceeds from the redemptions
of B shares will be reduced by the amount of any applicable contingent deferred
sales charge. Redemption orders must be placed in writing or by telephone to the
same financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND(3863). Redemption proceeds
are paid by check or credited to the Investor's account with his or her
financial institution.
REDEMPTION OF I SHARES
Customers may redeem all or part of their I shares in accordance with
instructions and limitations pertaining to their accounts at the Banks, NAM or
Financial Advisers. It is the responsibility of the Banks, NAM or Financial
Advisers to transmit redemption orders to the Transfer Agent and credit their
Customers' accounts with the redemption proceeds on a timely basis. Redemption
orders are effected at the net asset value per share next determined after
receipt of the order by the Transfer Agent. No charge for wiring redemption
payments is imposed by the Trust, although the Banks, NAM or Financial Advisers
may charge their Customers' accounts for services. Information relating to such
services and charges, if any, is available from the Banks, NAM or Financial
Advisers.
If a Customer has agreed with a particular Bank, NAM or Financial Adviser
to maintain a minimum balance in his or her account and the balance in such
account falls below that minimum, the Customer may be obliged to redeem all or
part of his or her I shares to the extent necessary to maintain the required
minimum balance. Customers who have instructed that automatic purchases and
redemptions be made for their accounts receive monthly confirmations of share
transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $10,000, no
signature guarantee is needed. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or Armada Funds at the
address shown above.
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<PAGE> 135
Neither the Trust nor its Transfer Agent will be responsible for the
authenticity of instructions received by telephone that are reasonably believed
to be genuine. In attempting to confirm that telephone instructions are genuine,
the Trust and its Transfer Agent will use such procedures as are considered
reasonable, including recording those instructions and requesting information as
to account registration (such as the name in which an account is registered, the
account number and recent transactions in the account). To the extent that the
Trust and its Transfer Agent fail to use reasonable procedures to verify the
genuineness of telephone instructions, they may be liable for such instructions
that prove to be fraudulent and unauthorized. In all other cases, shareholders
will bear the risk of loss for fraudulent telephone transactions. The Trust
reserves the right to refuse a telephone redemption if it believes it is
advisable to do so. Procedures for redeeming A shares or B shares by telephone
may be modified or terminated at any time by the Trust or the Transfer Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Transfer Agent's system. The
Plan allows the shareholder to have a fixed minimum sum of $250 distributed at
regular intervals. The shareholder's account must have a minimum value of $5,000
to be eligible for the Plan. Withdrawals will be reduced by any applicable
contingent deferred sales charge. Because automatic withdrawals of B shares will
be subject to the contingent deferred sales charge, it may not be in the best
interest of B shares shareholders to make systematic withdrawals. Additional
information regarding this service may be obtained from an Investor's financial
institution or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A FUND, SHAREHOLDERS SHOULD INDICATE WHETHER THEY
ARE REDEEMING A SHARES OR B SHARES. In the event a redeeming shareholder owns
both A shares and B shares in a Fund, the A shares will be redeemed first unless
the shareholder indicates otherwise. Due to the relatively high cost of
maintaining small accounts, the Trust reserves the right to redeem, at net asset
value, any account maintained by a shareholder that has a value of less than
$500 due to redemptions (including exchanges as described below) where the
shareholder does not increase the amount in the account to at least $500 upon 60
days notice.
If any portion of the shares to be redeemed represents an investment made
by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to 15 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his or her investment should purchase shares by federal funds, bank wire,
certified or cashier's check. Financial institutions normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and federal funds.
The Trust may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of the
Trust's responsibilities under the 1940 Act. See "Additional Purchase and
Redemption Information" in the Statement of Additional Information.
Payment to Shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO A SHARES AND B SHARES
Subject to the conditions described below, the Trust offers an exchange
program whereby Investors who have paid a front-end sales charge to purchase A
shares of one or more of the Funds or other investment funds offered by the
Trust or Parkstone which are sold with a front-end sales charge (each a "load
Fund") may exchange those A shares for A shares of another load Fund, or
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<PAGE> 136
another investment fund offered by the Trust or Parkstone without the imposition
of a front-end sales charge (each a "no load Fund"), at the net asset value per
share on the date of exchange. However, if a shareholder paid a sales charge on
the previously exchanged A shares that is less than the sales charge applicable
to the A shares sought to be acquired through the exchange, he or she must pay a
sales charge on the exchange equal to such difference. Shareholders may also
exchange A shares of a no load Fund for A shares of another no load Fund at the
net asset value per share without payment of a sales charge. In addition,
shareholders of a no load Fund may exchange A shares for A shares of a load Fund
subject to payment of the applicable sales charge. However, shareholders
exchanging A shares of a no load Fund which were received in a previous exchange
transaction involving A shares of a load Fund will not be required to pay an
additional sales charge upon the reinvestment of the equivalent amount into the
A shares of a load Fund except to the extent of any difference in the applicable
sales loads. Shareholders must notify the Trust that a sales charge was
previously paid.
Shareholders who have purchased B shares of one or more of the Funds or
another investment fund offered by the Trust or Parkstone (including shares
acquired through reinvestment of dividends or distributions on such shares) may
exchange those shares for B shares of another fund without the payment of any
contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemptions of B shares, the holding period of the B shares
originally held will be added to the holding period of the B shares acquired
through the exchange.
No exchange fee is imposed by the Trust. Shareholders contemplating an
exchange should carefully review the Prospectus of the fund into which the
exchange is being considered. An Armada Funds Prospectus may be obtained from
NatCity Investments, Inc., an Investor's financial institution or by calling
1-800-622-FUND(3863). A Parkstone Prospectus may be obtained by calling (800)
451-8377.
Any A shares or B shares exchanged must have a value at least equal to the
minimum initial investment required by the particular investment fund into which
the exchange is being made. Investors should make their exchange requests in
writing or by telephone to the financial institutions through which they
purchased their original A shares or B shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) will be processed as of the
close of business on the day of receipt; requests received by the Transfer Agent
after 4:00 p.m. (Eastern Time) will be processed on the next Business Day. The
Trust reserves the right to reject any exchange request. During periods of
unusual economic or market changes, telephone exchanges may be difficult to
implement. In such event, an Investor should mail the exchange request to his or
her financial institution, and an Investor who directly purchased shares from
the Trust should mail the exchange request to the Transfer Agent.
The exchange privilege is a convenient way to respond to changes in
investment goals or in market conditions. This privilege is not designed for
frequent trading in response to short-term market fluctuations. Management of
the Trust reserves the right to limit, amend, impose charges upon, terminate or
otherwise modify the exchange privilege upon 60 days' notice to shareholders.
Except for the Systematic Exchange Program described below, as of the date of
this Prospectus, an Investor is limited to one exchange every two months during
a given 12-month period beginning upon the date of the first exchange
transaction.
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<PAGE> 137
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO A SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly or
quarterly deductions from a shareholder's account from any Armada money market
fund. Under a systematic exchange program, a shareholder enters an agreement to
purchase shares of one or more specified funds over a specified period of time,
and initially purchases shares of one Armada money market fund in an amount
equal to the total amount of the investment. On a monthly or quarterly basis, a
specified dollar amount of shares of the Armada money market fund is exchanged
for shares of the Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the Planned
Investment Program described previously in this Prospectus. Because purchases of
A shares are subject to an initial sales charge, it may be beneficial for an
investor to execute a Letter of Intent in indicating an intent to purchase A
shares in connection with the systematic exchange program. A shareholder may
apply for participation in this program through his or her financial institution
or by calling 1-800-622-FUND(3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement and Rule 12b-1 under the
1940 Act, the Trust adopted a Service and Distribution Plan for A and I Share
Classes ("A and I Shares Plan") and a separate B Shares Distribution and
Servicing Plan ("B Shares Plan"). Under the A and I Shares Plan, the Trust
reimburses the Distributor for direct and indirect costs and expenses incurred
in connection with advertising, marketing and other distribution services
related to the A and I shares of each of the Trust's investment funds and in
preparing and distributing such shares' prospectus. In the case of each Fund,
such reimbursement shall not exceed .10% per annum of the average aggregate net
assets of its A and I shares. Under the B Shares Plan, the Trust pays the
Distributor up to .75% annually of the average daily net assets of each fund's B
shares for the same types of services provided and expenses assumed as in the A
and I Shares Plan. Such compensation is payable monthly and accrued daily by
each fund's B shares only.
Although B shares are sold without an initial sales charge, the Distributor
pays a sales commission equal to 4.25% of the amount invested (including a
prepaid service fee of 0.25% of the amount invested) to dealers who sell B
shares. These commissions are not paid on exchanges from other Armada funds or
on sales to investors exempt from the contingent deferred sales charge.
Under the Shareholder Services Plan relating to each Fund's A shares and
the B Shares Plan, the Trust enters into shareholder servicing agreements with
certain financial institutions. Pursuant to these agreements, the institutions
agree to render shareholder administrative services to their customers who are
the beneficial owners of A or B shares in consideration for the payment of up to
.25% (on an annualized basis) of the average daily net asset value of such
shares. Persons entitled to receive compensation for servicing A or B shares may
receive different compensation with respect to those shares than with respect to
I shares in the same Fund. Shareholder administrative services may include
aggregating and processing purchase and redemption orders, processing dividend
payments from the Fund on behalf of customers, providing information
periodically to customers showing their position in A or B shares, and providing
sub-transfer agent services or the information necessary for sub-transfer agent
services, with respect to A or B shares beneficially owned by customers. Since
financial institutions may charge their customers fees depending on the type of
customer account the Investor has established, beneficial owners of A or B
shares should read this Prospectus in light of the terms and fees governing
their accounts with financial institutions.
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DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Small Cap Value, Small Cap
Growth and International Equity Funds are declared and paid annually; dividends
from the net investment income of the Equity Growth, Equity Income, Core Equity,
Equity Index and Tax Managed Equity Funds are declared and paid quarterly. With
respect to each Fund, net income for dividend purposes consists of dividends,
distributions and other income on the Fund's assets, less the accrued expenses
of the Fund. Any net realized capital gains will be distributed at least
annually. Dividends and distributions will reduce the Funds' net asset value per
share by the per share amount thereof.
Shareholders of the Funds may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class of any Armada Funds
at the net asset value of such shares on the ex-dividend date. Shareholders must
make such election, or any revocation thereof, in writing to their Banks or
financial institutions. The election will become effective with respect to
dividends and distributions paid after its receipt.
TAXES
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally relieves a Fund of liability for federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by the Funds will be taxable as ordinary income to their
respective shareholders who are not currently exempt from federal income taxes,
whether such income is received in cash or reinvested in additional shares.
(Federal income taxes for distributions to an IRA or to a qualified retirement
plan are deferred under the Code.) For corporate shareholders, the dividends
received deduction will apply to such distributions to the extent of the gross
amount of qualifying dividends received by the distributing Fund from domestic
corporations for the taxable year.
Substantially all of each Fund's net realized long-term capital gains, if
any, will be distributed at least annually to Fund shareholders. A Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share
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<PAGE> 139
amount of the dividend or distribution. All or a portion of such dividend or
distribution, although in effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his or her
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his or her tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Fund within 90 days of the purchase and is able to reduce the sales
charge applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included (subject to this
limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations, and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISER
IMC serves as investment adviser to the Funds. IMC is a registered
investment adviser and an indirect wholly-owned subsidiary of National City
Corporation ("NCC"). On June 30, 1998, IMC had approximately $18.73 billion in
assets under management. IMC has its principal offices at 1900 East Ninth
Street, Cleveland, Ohio 44114. Subject to the general supervision of the Trust's
Board of Trustees and in accordance with the Funds' investment policies, the
Adviser has agreed to manage the Funds, make decisions with respect to and place
orders for all purchases and sales of such Funds' securities, and maintain
records relating to such purchases and sales.
- - Lawrence E. Baumgartner, CFA, is the person primarily responsible for the day
to day management of the Small Cap Value Fund. Mr. Baumgartner, employed by
National City Bank as President of Broad Street Asset Management Co. since
July 1994, had been managing assets for The State Teachers Retirement System
of Ohio since 1987 and has been the Manager of the Small Cap Value Fund since
its inception.
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<PAGE> 140
- - The Equity Growth Team of IMC makes the investment decisions for the Equity
Growth and Tax Managed Equity Funds. No individual person is responsible for
making recommendations to the Equity Growth Team.
- - The Equity Income and Equity Index Funds are managed by the Equity Value Team
of IMC. No single person is responsible for making recommendations to the
Equity Value Team.
- - The International Equity Fund is managed by the International Equity Team of
IMC. No single person is responsible for making recommendations to the
International Equity Team.
For the services provided and expenses assumed pursuant to the Advisory
Agreements relating to Funds, the Adviser is entitled to receive an advisory
fee, computed daily and payable monthly at the following annual rates: the
Equity Growth, Equity Income, Core Equity, Equity Index and Tax Managed Equity
Funds pay advisory fees at the annual rate of .75% of each Fund's average net
assets; the Small Cap Value and Small Cap Growth Funds pay advisory fees at the
annual rate of 1.00% of each Fund's average net assets; and the International
Equity Fund pays advisory fees at the annual rate of 1.15%. Shareholders should
note that these fees are higher than those payable by other investment
companies. However, the Trust believes that the fees are within the range of
fees payable by investment funds with comparable investment objectives and
policies. The Adviser may from time to time waive all or a portion of their
advisory fees to increase the net income of the Funds available for distribution
as dividends.
SUB-ADVISER
NAM serves as sub-adviser to the Core Equity Fund under a sub-advisory
agreement (the "Sub-Advisory Agreement") with IMC as the investment adviser. NAM
is a registered investment adviser providing investment advisory and related
services. As of June 30, 1998, NAM managed over $9.1 billion for a diverse group
of clients. NAM's principal offices are located at 101 South Fifth Street,
Louisville, KY 40202.
Pursuant to the Sub-Advisory Agreement and subject to the supervision of
the Adviser and of the Trust's Board of Trustees and in accordance with the Core
Equity Fund's investment policies, the Sub-adviser has agreed to assist the
Adviser in providing a continuous investment program for the Core Equity Fund
and in determining investments for the Fund. For the services provided and
expenses assumed pursuant to the Sub-Advisory Agreement, the Sub-adviser is
entitled to a Sub-advisory fee, payable by the Adviser, computed daily and
payable monthly, at the annual rate of .32% of the average daily net assets of
the Fund.
The Core Equity Fund is managed by the Investment Management Group of NAM.
The Investment Management Group makes the investment decisions for the Core
Equity Fund. No individual person is primarily responsible for making
recommendations to the Investment Management Group.
YEAR 2000 RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Adviser and the Funds' other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurance that comparable steps are
being taken by the Funds' other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Funds as a result of the Year 2000 Problem.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SEI Fund Resources (the "Administrator"), located at One Freedom Valley
Drive, Oaks, Penn-
43
<PAGE> 141
sylvania 19456, serves as the administrator to the Funds. SEI Fund Resources is
an indirect, wholly-owned subsidiary of SEI Investments Company ("SEI").
Under its Administration Agreement with the Trust relating to the Funds,
SEI provides the Funds with administrative services, including fund accounting,
regulatory reporting, necessary office space, equipment, personnel and
facilities. The Administrator also acts as shareholder servicing agent of the
Funds. SEI is entitled to receive with respect to the Funds an administrative
fee, computed daily and paid monthly, at the annual rate of .07% of the
aggregate average daily net assets of all of the investment funds of Armada up
to the first $18 billion, and .06% of the aggregate average daily net assets
over $18 billion, and is entitled to be reimbursed for its out-of-pocket
expenses incurred on behalf of the Funds.
IMC serves as sub-administrator for each Fund and provides certain services
as may be requested by the Administrator from time to time. For its services as
Sub-Administrator, IMC receives, from the Administrator, pursuant to its
Sub-Administration Agreement with the Administrator, a fee, computed daily and
paid monthly, at the annual rate of .01% of the aggregate average daily net
assets of all of the investment funds of Armada up to the first $15 billion, and
.015% of the aggregate average daily net assets over $15 billion.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue the separate classes or
series of shares of beneficial interest ("shares") mentioned below. Twenty-three
of these classes or series, which represent interests in the Equity Growth Fund
(Class H, Class H -- Special Series 1 and Class H -- Special Series 2), Equity
Income Fund (Class M, Class M -- Special Series 1 and Class M -- Special Series
2), Small Cap Value Fund (Class N, Class N -- Special Series 1 and Class
N -- Special Series 2), International Equity Fund (Class U, Class U -- Special
Series 1 and Class U -- Special Series 2), Core Equity Fund (Class W, Class
W -- Special Series 1 and Class W -- Special Series 2), Small Cap Growth Fund
(Class X, Class X -- Special Series 1 and Class X -- Special Series 2), Equity
Index Fund (Class V and Class V -- Special Series 1) and Tax Managed Equity Fund
(Class Z, Class Z -- Special Series 1 and Class Z -- Special Series 2) are
described in this Prospectus. Class H, Class M, Class N, Class U, Class V, Class
W, Class X and Class Z shares constitute the I class or series of shares; Class
H -- Special Series 1, Class M -- Special Series 1, Class N -- Special Series 1,
Class U -- Special Series 1, Class V -- Special Series 1 shares, Class
W -- Special Series 1, Class X -- Special Series 1 shares and Class Z -- Special
Series 1 shares constitute the A class or series of shares; and Class
H -- Special Series 2, Class M -- Special Series 2, Class N -- Special Series 2,
Class U -- Special Series 2, Class W -- Special Series 2, Class X -- Special
Series 2 and Class Z -- Special Series 2 shares constitute the B class or series
of shares. The other Funds of the Trust are:
Money Market Fund
(Class A, Class A -- Special Series 1 and Class A -- Special Series 2)
Government Money Market Fund
(Class B and Class B -- Special Series 1)
Treasury Money Market Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Money Market Fund
(Class D, Class D -- Special Series 1 and Class D -- Special Series 2)
Ohio Municipal Money Market Fund
(Class BB and Class BB -- Special Series 1)
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<PAGE> 142
Intermediate Bond Fund
(Class I, Class I -- Special Series 1 and Class I -- Special Series 2)
Ohio Tax Exempt Fund
(Class K, Class K -- Special Series 1 and Class K -- Special Series 2)
National Tax Exempt Fund
(Class L and Class L -- Special Series 1 and Class L Special Series 2)
Enhanced Income Fund
(Class O, Class O -- Special Series 1 and Class O -- Special Series 2)
Total Return Advantage Fund
(Class P, Class P -- Special Series 1 and Class P Special Series 2)
Pennsylvania Tax Exempt
Money Market Fund
(Class Q and Class Q -- Special Series 1)
Bond Fund
(Class R, Class R -- Special Series 1 and Class R -- Special Series 2)
GNMA Fund
(Class S, Class S -- Special Series 1 and Class S -- Special Series 2)
Pennsylvania Municipal Fund
(Class T, Class T -- Special Series 1 and Class T -- Special Series 2)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Balanced Allocation Fund
(Class AA, Class AA -- Special Series 1 and Class AA -- Special Series 2)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such Fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Shareholder
Services Plan and B Shares Plan, only the holders of A shares or B shares in an
investment fund are, or would be entitled to vote on matters submitted to a vote
of shareholders (if any) concerning their respective plans. Voting rights are
not cumulative, and accordingly, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the trustees irrespective of the vote of
the other shareholders.
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Trust provides for indemnification out of
the trust property for any shareholder held personally liable solely by reason
of his or her being or having been a shareholder and not because of his or her
acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings
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<PAGE> 143
of shareholders shall be called at the written request
of shareholders entitled to cast at least 10% of the votes entitled to be cast
at such meeting. Such meeting may be called by shareholders to consider the
removal of one or more trustees. Shareholders will receive shareholder
communication assistance with respect to such matter as required by the 1940
Act.
As of September 3, 1998, IMC's bank affiliates held beneficially or of
record approximately 94.60%, 96.16%, 97.68%, 91.88%, 99.66%, 96.17%, 100% and
96.31% of the outstanding I shares of the Small Cap Value, Equity Growth, Equity
Income, Small Cap Growth, International Equity, Core Equity, Equity Index and
Tax Managed Equity Funds, respectively. Neither IMC nor its affiliates have any
economic interest in such shares which are held solely for the benefit of their
customers, but may be deemed to be a controlling person of the Funds within the
meaning of the 1940 Act by reason of its record ownership of such shares. The
names of beneficial owners and record owners who are controlling shareholders
under the 1940 Act may be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank, an affiliate of IMC, serves as the custodian of the
Trust's assets. With respect to each Fund, the Trust pays National City Bank an
annual custody fee, calculated daily and paid monthly, of .02% of each Fund's
first $100 million of average daily net assets, .01% of each Fund's next $650
million of average daily net assets and .008% of the average daily net assets of
each Fund which exceed $750 million, exclusive of out-of-pocket expenses and
transaction charges. The Trust reimburses the custodian for its out-of-pocket
expenses including, but not limited to, postage, telephone, telex, interest
claim fee ($50.00 per claim), transfer and registration fees, federal express
charges, Federal Reserve and wire fees, as well as its out-of-pocket costs in
providing any foreign custody services and/or precious metal custody services.
The transaction charges are a bundled fee which will not exceed .25% of the
total monthly asset based fee payable by the Trust.
State Street Bank and Trust Company serves as the Trust's transfer and
dividend disbursing agent. Communications to the Transfer Agent should be
directed to P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by
the Trust for these services are described in the Statement of Additional
Information.
EXPENSES
Except as noted below, the Adviser bears all expenses in connection with
the performance of its services. Each Fund of the Trust bears its own expenses
incurred in its operations including: taxes; interest; fees (including fees paid
to its trustees and officers); SEC fees; state securities qualification fees;
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders; expenses related to the distribution and
servicing plans; advisory fees; administration fees and expenses; charges of the
custodian and Transfer Agent; certain insurance premiums; outside auditing and
legal expenses; costs of shareholders' reports and shareholder meetings; and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
in connection with the purchase of its portfolio securities.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, since National City Bank serves the Trust as its
custodian and is affiliated with IMC, the Trust's investment adviser, a
procedure has been established requiring three
46
<PAGE> 144
annual verifications, two of which are to be unannounced, of all investments
held pursuant to the Custodian Services Agreement, to be conducted by the
Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
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<PAGE> 145
LOGO ARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
HERBERT R. MARTENS, JR.
President
Executive Vice President,
National City Corporation
Chairman, President and Chief Executive
Officer, NatCity Investments, Inc.
LEIGH CARTER
Retired President and Chief Operating
Officer, B.F. Goodrich Company
Director:
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
ROBERT J. FARLING
Retired Chairman, President and
Chief Executive Officer, Centerior Energy
Director:
Republic Engineered Steels
RICHARD W. FURST, DEAN
Professor of Finance and Dean
Carol Martin Gatton College of Business
and Economics, University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
GERALD L. GHERLEIN
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 146
ARMADA FUNDS
INVESTMENT ADVISER
AN AFFILIATE OF NATIONAL
CITY CORPORATION
- --------------------------------------------------------------------------------
National City Investment Management Company
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 147
CROSS REFERENCE SHEET
---------------------
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
National Tax Exempt Fund
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
1. Cover Page................................ Cover Page
2. Synopsis.................................. Expense Table
3. Condensed Financial
Information............................... Financial Highlights; Yield
and Performance Information
4. General Description of
Registrant................................ Risk Factors, Investment
Objectives and Policies;
Investment Limitations;
Description of the Trust and Its
Shares
5. Management of the Trust................... Management of the Trust; Custodian
and Transfer Agent
6. Capital Stock and Other
Securities................................ How to Purchase and Redeem Shares;
Dividends and Distributions;
Taxes; Description of the Trust
and Its Shares; Miscellaneous
7. Purchase of Securities
Being Offered............................. Pricing of Shares; How to Purchase
and Redeem Shares; Distribution
Agreement
8. Redemption Repurchase..................... How to Purchase and Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
</TABLE>
<PAGE> 148
ARMADA FUNDS
----------------------
PROSPECTUS
----------------------
SEPTEMBER 18, 1998
ARMADA OHIO TAX EXEMPT FUND
ARMADA PENNSYLVANIA MUNICIPAL FUND
ARMADA NATIONAL TAX EXEMPT FUND
<PAGE> 149
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ 2
Expense Table............................................... 3
Financial Highlights........................................ 5
Investment Objectives and Policies.......................... 8
Investment Limitations...................................... 13
Yield and Performance Information........................... 14
Pricing of Shares........................................... 16
How to Purchase and Redeem Shares........................... 17
Distribution and Servicing Arrangements..................... 26
Dividends and Distributions................................. 27
Taxes....................................................... 27
Management of the Trust..................................... 29
Description of the Trust and Its Shares..................... 30
Custodian and Transfer Agent................................ 32
Expenses.................................................... 32
Miscellaneous............................................... 33
</TABLE>
- - SHARES OF THE ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT
MANAGEMENT COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES OR ANY BANK.
- - SHARES OF THE ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN THE ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Investment Management Company serves as investment advisers to
Armada Funds for which it receives an investment advisory fee. Past performance
is not indicative of future performance, and the investment return will
fluctuate, so that you may have a gain or loss when you sell your shares.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 150
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
One Freedom Valley Drive Oaks, If you purchased your shares through NatCity Investments,
Pennsylvania 19456 Inc. or any other broker-dealer, please call your Financial
Consultant for information.
For current performance, fund information, account
redemption information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following three investment funds
(the "Funds") of Armada Funds (the "Trust"), each having its own investment
objective and policies:
OHIO TAX EXEMPT FUND'S investment objective is to provide as high a level
of interest income exempt from federal income tax and, to the extent possible,
from Ohio personal income tax, as is consistent with conservation of capital.
PENNSYLVANIA MUNICIPAL FUND'S investment objective is to provide current
income exempt from both regular federal income and Pennsylvania personal income
taxes while preserving capital.
NATIONAL TAX EXEMPT FUND'S investment objective is to provide as high a
level of current interest income exempt from federal income tax as is consistent
with relative stability of principal.
The Ohio Tax Exempt and Pennsylvania Municipal Funds normally invest in
tax-exempt obligations having average remaining maturities of two to ten years.
The National Tax Exempt Fund invests in tax-exempt obligations having average
remaining maturities of 20 years or less.
Each Fund's net asset value per share will fluctuate as the value of its
assets changes in response to changing market prices and other factors.
National City Investment Management Company ("IMC" or the "adviser") serves
as investment adviser to the Ohio Tax Exempt, Pennsylvania Municipal and
National Tax Exempt Funds.
SEI Investments Distribution Co. (the "Distributor") serves as the Trust's
sponsor and distributor. Each Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT MANAGEMENT
COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 18, 1998
<PAGE> 151
INTRODUCTION
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund consists
of a separate pool of assets with separate investment objectives and policies as
described below under "Investment Objectives and Policies." The Ohio Tax Exempt
and Pennsylvania Municipal Funds are classified as non-diversified investment
funds and the National Tax Exempt Fund is classified as a diversified investment
fund under the 1940 Act.
Shares of each Fund have been classified into three separate classes -- A
shares (formerly, Retail shares), B shares and I shares (formerly, Institutional
shares). ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED IN THE OHIO TAX
EXEMPT AND PENNSYLVANIA MUNICIPAL FUNDS, THEY MAY BE OFFERED IN THE FUTURE. A
shares, B shares and I shares represent equal pro rata interests in the
investments held in a Fund and are identical in all respects, except that shares
of each class bear separate distribution and/or shareholder administrative
servicing fees and enjoy certain exclusive voting rights on matters relating to
these fees. See "Distribution and Servicing Arrangements," "Dividends and
Distributions" and "Description of the Trust and Its Shares." Except as provided
below, A shares and B shares are sold through selected broker-dealers and other
financial intermediaries to individual or institutional customers. A shares are
sold subject to a front-end sales charge. B shares are sold with a contingent
deferred sales charge (back-end charge) imposed on a sliding schedule when such
shares are redeemed.
2
<PAGE> 152
EXPENSE TABLE
<TABLE>
<CAPTION>
OHIO OHIO OHIO PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA
TAX EXEMPT TAX EXEMPT TAX EXEMPT MUNICIPAL MUNICIPAL MUNICIPAL
A SHARES(1) B SHARES(1) I SHARES A SHARES(1) B SHARES(1) I SHARES
----------- ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(2)........................ 3.0% None None 3.0% None None
Sales Charge Imposed on Reinvested
Dividends........................... None None None None None None
Deferred Sales Charge(3).............. None 5.00% None None 5.00% None
Redemption Fee........................ None None None None None None
Exchange Fee.......................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (after fee
waivers)(4)......................... 0% 0% 0% .20% .20% .20%
12b-1 Fees(5)......................... .04% .75% .04% 0% .75% 0%
Other Expenses........................ .30% .30% .20% .38% .38% .28%
---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)........ .34% 1.05% .24% .58% 1.33% .48%
==== ==== ==== ==== ==== ====
<CAPTION>
NATIONAL NATIONAL NATIONAL
TAX EXEMPT TAX EXEMPT TAX EXEMPT
A SHARES(1) B SHARES(1) I SHARES
----------- ----------- ----------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(2)........................ 4.75% None None
Sales Charge Imposed on Reinvested
Dividends........................... None None None
Deferred Sales Charge(3).............. None 5.00% None
Redemption Fee........................ None None None
Exchange Fee.......................... None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees (after fee
waivers)(4)......................... 0% 0% 0%
12b-1 Fees(5)......................... .04% .75% .04%
Other Expenses........................ .53% .53% .28%
---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)........ .57% 1.28% .32%
==== ==== ====
</TABLE>
- ---------------
ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED IN THESE FUNDS, THEY MAY BE
OFFERED IN THE FUTURE.
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to A shares and B shares of each Fund. Pursuant to such plans, the
Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own A shares or B shares in
consideration for the payment of up to .10% (on an annualized basis) of the
net asset value of such shares. For further information concerning these
plans, see "Distribution and Servicing Arrangements."
(2) A reduced sales charge may be available. A contingent deferred sales charge
of 1% may be imposed on certain redemptions of A shares purchased without an
initial sales charge as part of an investment of $1 million or more. See
"How to Purchase and Redeem Shares -- Reduced Sales Charges Applicable to
Purchases of Retail Shares."
(3) This amount applies to redemptions during the first and second years. The
deferred sales charge decreases in subsequent years. For more information
see "How to Purchase and Redeem Shares -- Sales Charges Applicable to
Purchases of B Shares."
(4) The expense information in the table relating to the Funds has been restated
to reflect current fees. For the current fiscal year, the adviser intends to
voluntarily waive all of its fee of .55% of each of the Ohio Tax Exempt
Fund's and National Tax Exempt Fund's average daily net assets and fees
amounting to .35% of the Pennsylvania Municipal Fund's average daily net
assets (the adviser is entitled to receive an advisory fee at the annual
rate of .55% of the average daily net assets of the Pennsylvania Municipal
Fund pursuant to the Advisory Agreement with the Trust. Without such fee
waivers, the Total Operating Expenses for the A, B and I shares of the Ohio
Tax Exempt, Pennsylvania Municipal and National Tax Exempt Funds would be:
.89%, 1.60% and .79%; .93%, 1.68% and .83%; and 1.12%, 1.83% and .87%,
respectively.
(5) The Funds have in effect a 12b-1 Plan for the A and I classes of shares
pursuant to which each Fund's A and I shares may bear fees in an amount of
up to .10% per annum of such classes' average net assets. A separate 12b-1
Plan exists with respect to each Fund's B class of shares, pursuant to which
each Fund's B shares may bear fees in an amount of up to .75% of average
daily net assets. As a result of the payment of sales charges and 12b-1
fees, long-term shareholders may pay more than the economic equivalent of
the maximum sales charges permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which
generally limit the aggregate sales charges and payment under the Trust's
12b-1 Plans to a certain percentage of total new gross share sales, plus
interest. The Trust would stop accruing 12b-1 and related fees if, to the
extent, and for as long as, such limit would otherwise be exceeded.
3
<PAGE> 153
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Ohio Tax Exempt Fund A shares(1)........................... $33 $41 $49 $ 72
Ohio Tax Exempt Fund A shares(2)........................... $13 $11 $19 $ 43
Ohio Tax Exempt Fund B shares(3)........................... $61 $73 $78 $108(4)
Ohio Tax Exempt Fund B shares(5)........................... $11 $33 $58 $128
Ohio Tax Exempt Fund I shares.............................. $ 2 $ 8 $14 $ 31
Pennsylvania Municipal Fund A shares(1).................... $36 $48 $61 $100
Pennsylvania Municipal Fund A shares(2).................... $16 $19 $32 $ 73
Pennsylvania Municipal Fund B shares(3).................... $64 $82 $93 $140(4)
Pennsylvania Tax Exempt Fund B shares(5)................... $14 $42 $73 $160
Pennsylvania Municipal Fund I shares....................... $ 5 $15 $27 $ 60
National Tax Exempt Fund A shares(1)....................... $53 $65 N/A N/A
National Tax Exempt Fund A shares(2)....................... $16 $18 N/A N/A
National Tax Exempt Fund B shares(3)....................... $63 $81 N/A N/A
National Tax Exempt Fund B shares(5)....................... $13 $41 N/A N/A
National Tax Exempt Fund I shares.......................... $ 3 $10 N/A N/A
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes no front end sales charge but the maximum deferred sales charge at 1
year.
(3) Assumes deduction of maximum applicable contingent sales charge.
(4) Based on conversion of B shares to A shares after eight years.
(5) Assumes no redemption.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution and
Servicing Arrangements" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Funds. Any fees that are charged by affiliates of the
adviser or other institutions directly to their customer accounts for services
related to an investment in shares of any of the Funds are in addition to and
not reflected in the fees and expenses described above.
4
<PAGE> 154
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
OHIO TAX EXEMPT FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose reports are incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Ohio Tax Exempt Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
As of the date of this Prospectus, "Institutional shares" are renamed "I shares"
and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
I SHARES A SHARES I SHARES A SHARES I SHARES A SHARES I SHARES A SHARES I SHARES A SHARES
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ 10.86 10.82 $ 10.70 $10.66 $ 10.74 $10.70 $ 10.57 $10.53 $ 10.84 $10.80
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income.......... 0.51 0.51 0.51 0.51 0.50 0.50 0.50 0.50 0.52 0.52
Net Gains (Losses)
on Securities
(Realized and
Unrealized)..... 0.28 0.28 0.16 0.16 (0.04) (0.04) 0.17 0.17 (0.26) (0.26)
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total from
Investment
Operations...... 0.79 0.79 0.67 0.67 0.46 0.46 0.67 0.67 0.26 0.26
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net
Investment
Income.......... (0.51) (0.51) (0.51) (0.51) (0.50) (0.50) (0.50) (0.50) (0.52) (0.52)
Dividends in
Excess of Net
Investment
Income.......... (0.01) (0.01) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Dividends in
Excess of Net
Realized Capital
Gains........... (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01)
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total
Distributions... (0.52) (0.52) (0.51) (0.51) (0.50) (0.50) (0.50) (0.50) (0.53) (0.53)
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net Asset Value,
End of Period..... $ 11.13 $11.09 $ 10.86 $10.82 $ 10.70 $10.66 $ 10.74 $10.70 $ 10.57 $10.53
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
TOTAL RETURN....... 7.43% 7.39%(4) 6.37% 6.38%(4) 4.36% 4.35%(4) 6.61% 6.64%(4) 2.28% 2.29%(4)
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (000s)... $165,395 $4,037 $91,366 $3,535 $82,886 $2,869 $71,996 $3,168 $63,133 $2,725
Ratio of Expenses
to Average Net
Assets (after
fee waivers).... 0.25%(5) 0.25%(6) 0.24%(5) 0.24%(6) 0.26%(5) 0.26%(6) 0.24%(5) 0.24%(6) 0.33%(5) 0.33%(6)
Ratio of Net
Investment
Income to
Average Net
Assets (after
fee waivers).... 4.67%(5) 4.59%(6) 4.71%(5) 4.71%(6) 4.68%(5) 4.68%(6) 4.82%(5) 4.82%(6) 4.54%(5) 4.54%(6)
Portfolio Turnover
Rate............ 15% 15% 23% 23% 10% 10% 3% 3% 2% 2%
<CAPTION>
FOR THE YEAR ENDED MAY 31
-------------------------------------------------------------------
1993 1992 1991 1990(1)
------------------- ---------------------- -------- --------
I SHARES A SHARES I SHARES A SHARES(2)
-------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $ 10.33 $10.30 $ 10.14 $10.14 $ 9.93 $10.00
------- ------ ------- ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income.......... 0.51 0.51 0.19 0.46 0.50 0.13
Net Gains (Losses)
on Securities
(Realized and
Unrealized)..... 0.56 0.54 0.15 0.16 0.22 (0.11)
------- ------ ------- ------ ------ ------
Total from
Investment
Operations...... 1.07 1.05 0.34 0.62 0.72 0.02
------- ------ ------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net
Investment
Income.......... (0.51) (0.51) (0.15) (0.46) (0.50) (0.09)
Dividends in
Excess of Net
Investment
Income.......... (0.05) (0.04) (0.00) (0.00) (0.01) (0.00)
Dividends in
Excess of Net
Realized Capital
Gains........... (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
------- ------ ------- ------ ------ ------
Total
Distributions... (0.56) (0.55) (0.15) (0.46) (0.51) (0.09)
------- ------ ------- ------ ------ ------
Net Asset Value,
End of Period..... $ 10.84 $10.80 $ 10.33 $10.30 $10.14 $ 9.93
======= ====== ======= ====== ====== ======
TOTAL RETURN....... 10.36% 10.27%(4) 8.23% 6.22%(3,4) 7.40% 0.50%(3)
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (000s)... $40,080 $1,466 $10,453 $ 437 $ 246 $ 582
Ratio of Expenses
to Average Net
Assets (after
fee waivers).... 0.09%(5) 0.09%(6) 0.73%(5) 0.93%(3,6)() 1.25%(5) 1.20%(3,5)
Ratio of Net
Investment
Income to
Average Net
Assets (after
fee waivers).... 5.00%(5) 5.00%(6) 4.56%(5) 4.49%(3,6) 4.89%(5) 3.82%(3,5)
Portfolio Turnover
Rate............ 11% 11% 1% 1% 25% 0%
</TABLE>
- ---------------
(1) The Fund commenced operations on January 5, 1990.
(2) A class commenced operations on April 15, 1991.
(3) Annualized.
(4) Total Return excludes sales charge.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the I class for the year ended May 31, 1998 and
1997 would have been .80% and 4.12%, and .79% and 4.16%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the adviser and custodian for the I class for the years ended May
31, 1996 and 1995 would have been .83% and 4.11%, and .80% and 4.26%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser for the I class for the years ended
May 31, 1994, 1993, 1992, 1991 and for the period ended 1990 would have been
.88% and 3.99%, .64% and 4.45%, 1.28% and 4.01%, 1.80% and 4.34% and 1.75%
and 3.72%, respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the A class for the year ended May 31, 1998 and
1997 would have been .80% and 4.04%, and .79% and 4.16%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the adviser and custodian for the A class for the years ended May
31, 1996 and 1995 would have been .83% and 4.11% and .78% and 4.27%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser for the A class for the years ended
May 31, 1994, 1993 and for the period ended May 31, 1992 would have been
.88% and 3.99%, .64% and 4.45%, and 1.48% and 3.94%, respectively.
5
<PAGE> 155
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
PENNSYLVANIA MUNICIPAL FUND
The Fund commenced operations on August 10, 1994 as a separate investment
portfolio (the "Predecessor Pennsylvania Municipal Fund") of Inventor Funds,
Inc., which was organized as a Maryland corporation. On September 9, 1996, the
Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Pennsylvania Municipal Fund offered and sold
Retail shares that were similar to the Fund's A shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Fund's Retail shares (the
series that is similar to the A shares of the Pennsylvania Municipal Fund) for
the fiscal period from May 1, 1996 to May 31, 1996, the fiscal year ended April
30, 1996 and the fiscal period ended April 30, 1995. As part of the
reorganization, the fiscal year of the Predecessor Pennsylvania Municipal Fund
was changed to coincide with the Trust's May 31 fiscal year. A one-month
financial report representing the Predecessor Pennsylvania Municipal Fund's
operations from May 1, 1996 through May 31, 1996 is being presented. The
information was audited by PricewaterhouseCoopers LLP, independent accountants
for the Predecessor Fund, whose reports thereon are contained in Inventor Funds'
Annual Report to Shareholders for the fiscal year ended April 30, 1996 and the
period ended May 31, 1996. Such financial highlights should be read in
conjunction with the financial statements and notes thereto contained in
Inventor Funds' Annual Reports to Shareholders and incorporated by reference
into the Statement of Additional Information relating to the Pennsylvania
Municipal Fund. Additional information about the performance of the Predecessor
Pennsylvania Municipal Fund is contained in Inventor Funds' Annual Reports to
Shareholders, which may be obtained without charge by contacting the Trust at
its telephone number or address provided on page 1.
The information presented below relating to the fiscal years ended May 31,
1998 and May 31, 1997 has been derived from financial statements audited by
Ernst & Young LLP, independent auditors for the Pennsylvania Municipal Fund,
whose report is incorporated by reference in the Statement of Additional
Information. It should be read in conjunction with the financial statements and
related notes which are incorporated by reference in the Statement of Additional
Information. As of the date of this Prospectus, "Institutional shares" are
renamed "I shares," and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997(5) FOR THE FOR THE
------------------- ---------------------- PERIOD ENDED YEAR ENDED
I SHARES A SHARES I SHARES A SHARES(6) MAY 31, 1996(5) APRIL 30, 1996(5)
-------- -------- -------- ----------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 10.22 $10.22 $ 10.08 $10.13 $ 10.12 $ 10.04
------- ------ ------- ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............ 0.46 0.45 0.44 0.31 0.04 0.43
Net gain/(loss) on Securities
(realized and unrealized)...... 0.24 0.24 0.17 0.12 (0.04) 0.08
------- ------ ------- ------ ------- -------
Total from Investment
Operations............... 0.70 0.69 0.61 0.43 (0.00) 0.51
------- ------ ------- ------ ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income......................... (0.46) (0.45) (0.44) (0.31) (0.04) (0.43)
Dividends from Net Realized
Capital Gains.................. (0.00) (0.00) (0.02) (0.02) (0.00) (0.00)
Dividends in Excess of Net
Realized Capital Gains......... (0.01) (0.01) (0.01) (0.01) (0.00) (0.00)
------- ------ ------- ------ ------- -------
Total Distributions........ (0.47) (0.46) (0.47) (0.34) (0.04) (0.43)
------- ------ ------- ------ ------- -------
Net Asset Value, End of Period..... $ 10.45 $10.45 $ 10.22 $10.22 $ 10.08 $ 10.12
======= ====== ======= ====== ======= =======
TOTAL RETURN....................... 6.95% 6.84%(7) 6.21% 6.13%(7) (0.03)%(4,7) 5.06%(7)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000).......................... $38,753 $ 125 $36,769 $ 81 $38,733 $38,809
Ratio of Expenses To Average Net 0.77%(2)
Assets......................... 0.69%(1) .87%(1) .99%(2,3) .85%(1,3) .85%(1)
Ratio of Net Investment Income to
Average Net Assets............. 4.40%(1) 4.32%(2) 4.35%(1) 4.26%(2,3) 4.32%(1,3) 4.16%(1)
Portfolio Turnover Rate.......... 20% 20% 42% 42% 0% 22%
<CAPTION>
FOR THE
PERIOD ENDED
APRIL 30, 1995(5)
-----------------
<S> <C>
Net Asset Value, Beginning of
Period........................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............ 0.29
Net gain/(loss) on Securities
(realized and unrealized)...... 0.04
-------
Total from Investment
Operations............... 0.33
-------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income......................... (0.29)
Dividends from Net Realized
Capital Gains.................. (0.00)
Dividends in Excess of Net
Realized Capital Gains......... (0.00)
-------
Total Distributions........ (0.29)
-------
Net Asset Value, End of Period..... $ 10.04
=======
TOTAL RETURN....................... 3.38%(4,7)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000).......................... $34,638
Ratio of Expenses To Average Net
Assets......................... .85%(1,3)
Ratio of Net Investment Income to
Average Net Assets............. 4.05%(1,3)
Portfolio Turnover Rate.......... 4%
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and other service providers for the I shares class
for the years ended May 31, 1998 and 1997, for the period ended May 31,
1996, for the year ended April 30, 1996, and for the period ended April 30,
1995 would have been .84% and 4.25%, 1.02% and 4.20%, 1.31% and 3.86%, 1.24%
and 3.77%, and 1.36% and 3.54%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser for the A share class for the period ended May 31,
1998 and 1997 would have been .94% and 4.15% , and 1.00% and 4.25%,
respectively.
(3) Annualized.
(4) Not Annualized.
(5) Activity for the period presented includes that of the Predecessor
Pennsylvania Municipal Fund through September 6, 1996. The Predecessor A
share Fund commenced operations on August 10, 1994. During 1996, the
Predecessor Pennsylvania Municipal Fund changed its fiscal year-end from
April 30 to May 31.
(6) A class commenced operations on September 11, 1996.
(7) Total Return excludes sales charge.
6
<PAGE> 156
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
NATIONAL TAX EXEMPT FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose reports are
incorporated by reference in the Statement of Additional Information. It should
be read in conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the National Tax Exempt Fund is contained
in the Trust's Annual Report to Shareholders, which may be obtained without
charge by contacting the Trust at its telephone number or address provided on
page 1. As of the date of this Prospectus, "Institutional shares" are renamed "I
shares" and "Retail shares" are renamed "A shares."
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED MAY 31, 1998
INSTITUTIONAL(2)
------------------
<S> <C>
Net asset value, beginning of period........................ $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.07
Net gain on securities (realized and unrealized).......... 0.03
-------
Total from investment operations.................. 0.10
-------
LESS DISTRIBUTIONS
Dividends from net investment income...................... (0.07)
-------
Total distributions............................... (0.07)
=======
Net asset value, end of period.............................. $ 10.03
TOTAL RETURN................................................ 7.03%(3)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)...................... $80,259
Ratio of expenses to average net assets................... 0.33%(1)
Ratio of net investment income to average net assets...... 4.62%(1)
Portfolio turnover rate................................... 0%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the I Shares class for the fiscal period ended
May 31, 1998 would have been 0.87% and 4.08%, respectively.
(2) I class commenced operations on April 9, 1998.
(3) Annualized.
7
<PAGE> 157
INVESTMENT OBJECTIVES AND POLICIES
A Fund's investment objective may be changed without a vote of
shareholders, although the Board of Trustees would only change a Fund's
objective upon 30 days' notice to shareholders. There can be no assurance that a
Fund will achieve its objective. See "Investment Objectives and Policies" in the
Statement of Additional Information for further information on the investments
in which the Funds may invest.
OHIO TAX EXEMPT FUND
The investment objective of the Ohio Tax Exempt Fund is to provide as high
a level of interest income exempt from regular federal income tax and, to the
extent possible, from Ohio personal income tax, as is consistent with
conservation of capital. The Fund seeks to achieve its objective by investing
substantially all of its assets in a portfolio of obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and their political subdivisions, agencies, instrumentalities and
authorities, the interest on which, in the opinion of counsel issued on the date
of the issuance thereof, is exempt from regular federal income tax ("Municipal
Securities").
Under normal market conditions, at least 80% of the value of the Fund's
total assets will be invested in Municipal Securities. This policy is
fundamental and may not be changed without the affirmative vote of the holders
of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous"). In addition, under normal market conditions, at least 65% of
the value of the Fund's total assets will be invested in Municipal Securities
issued by or on behalf of the State of Ohio, political subdivisions thereof, or
agencies or instrumentalities of the State or its political subdivisions ("Ohio
Municipal Securities"). Dividends paid by the Fund which are derived from
interest properly attributable to Ohio Municipal Securities will be exempt from
regular federal income tax and Ohio personal income tax. Dividends derived from
interest on Municipal Securities of other governmental issuers will be exempt
from regular federal income tax but may be subject to Ohio personal income tax.
See "Taxes."
PENNSYLVANIA MUNICIPAL FUND
The investment objective of the Pennsylvania Municipal Fund is to provide
current income exempt from both regular federal income tax and Pennsylvania
personal income tax while preserving capital. The Fund seeks to achieve its
objective by investing substantially all of its assets in Municipal Securities
issued by or on behalf of the Commonwealth of Pennsylvania and its political
subdivisions and financing authorities, obligations of the United States,
including territories and possessions of the United States, the income from
which is, in the opinion of counsel, exempt from regular federal income tax and
Pennsylvania state income tax imposed upon non-corporate taxpayers, and
securities of money market investment companies that invest primarily in such
securities ("Pennsylvania Municipal Securities").
Under normal market conditions, the Fund will be fully invested in
Pennsylvania Municipal Securities. This policy is fundamental and may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as defined under "Miscellaneous"). Dividends paid by the
Fund which are derived from interest properly attributable to Pennsylvania
Municipal Securities will be exempt from regular federal income tax and
Pennsylvania personal income tax. Dividends derived from interest on Municipal
Securities of other governmental issuers will be exempt from regular federal
income tax but may be subject to Pennsylvania personal income tax. See "Taxes."
NATIONAL TAX EXEMPT FUND
The investment objective of the National Tax Exempt Fund is to provide as
high a level of current interest income exempt from federal income tax as is
consistent with relative stability of principal. The Fund seeks to achieve its
objective by investing substantially all of its assets in Municipal Securities.
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Under normal market conditions, at least 80% of the value of the Fund's
total assets will be invested in Municipal Securities. This policy is
fundamental and may not be changed without the affirmative vote of the holders
of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous").
ALL FUNDS
Although each Fund's average weighted maturity will vary in light of
current market and economic conditions, the comparative yields on instruments
with different maturities, and other factors, the Ohio Tax Exempt and
Pennsylvania Municipal Funds anticipate that they will maintain a
dollar-weighted average portfolio maturity of two to ten years. The National Tax
Exempt Fund anticipates that Municipal Securities it acquires will normally have
average remaining maturities of 20 years or less.
For temporary defensive or liquidity purposes when, in the opinion of the
Funds' adviser, Ohio Municipal Securities or Pennsylvania Municipal Securities
of sufficient quality, as the case may be, are not readily available, the Ohio
Tax Exempt and Pennsylvania Municipal Funds may invest up to 100% of their
assets in other Municipal Securities and in taxable securities.
All Funds may hold up to 100% of their assets in uninvested cash reserves,
pending investment, during temporary defensive periods; however, uninvested cash
reserves will not earn income.
Each Fund may invest in other investments as described below under "Other
Investment Policies" including stand-by commitments, variable and floating rate
obligations, certificates of participation, other investment companies, illiquid
securities, Taxable Money Market Instruments (as defined below), zero coupon
obligations and repurchase agreements and engage in when-issued transactions.
SPECIAL RISK CONSIDERATIONS
All Funds
The Ohio Tax Exempt and Pennsylvania Municipal Funds are classified as
non-diversified under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio. Consequently,
the change in value of any one security may affect the overall value of a
non-diversified portfolio more than it would a diversified portfolio, and
thereby subject the market-based net asset value per share of the
non-diversified portfolio to greater fluctuations. In addition, a
non-diversified portfolio may be more susceptible to economic, political and
regulatory developments than a diversified investment portfolio with similar
objectives may be.
Although (i) all of the Funds may invest 25% or more of their respective
net assets in Municipal Securities the interest on which is paid solely from
revenues of similar projects, (ii) the Ohio Tax Exempt and National Tax Exempt
Funds may invest up to 20% of their respective total assets in private activity
bonds (described below) and taxable investments, (iii) the Pennsylvania
Municipal Fund may invest up to 100% of its total assets in Pennsylvania private
activity bonds and (iv) the National Tax Exempt Fund may invest 25% or more of
its net assets in Municipal Securities whose issues are in the same state, the
Funds do not presently intend to do so unless, in the opinion of the adviser,
the investment is warranted. To the extent that a Fund's assets are invested in
such investments, the Fund will be subject to the peculiar risks presented by
the laws and economic conditions relating to such projects and private activity
bonds to a greater extent than it would be if its assets were not so invested.
Ohio Tax Exempt Fund
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's
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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).
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 Securities. A
more detailed summary of the more significant conditions affecting the financial
situation in Ohio is contained in the Statement of Additional Information.
Pennsylvania Municipal Fund
Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food-related industries. Service industries
currently employ the greatest share of non-agricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth of Pennsylvania or its municipalities, and could adversely affect
the market value of the securities in the Fund or the ability of the respective
obligors to make payments of interest and principal due on the obligations held
by the Fund. Rising unemployment, a relatively high proportion of persons 65 and
older in the Commonwealth of Pennsylvania and court ordered increases in
healthcare reimbursement rates place increased pressures on the tax resources of
the Commonwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains
moderate. The recession in the early 1990s affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January 1995,
but the Commonwealth has continued to show fiscal restraint.
OTHER INVESTMENT POLICIES
Types of Municipal Securities
The two principal classifications of Municipal Securities which may be held
by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue or "special obligation" securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a specific excise tax or other specific revenue source such
as the user of the facility being financed. "Private activity" bonds are revenue
securities normally issued by industrial development authorities to finance
privately-owned facilities and are backed by private entities. Any private
activity bonds (including industrial development bonds) held by the Funds are
not payable from revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of the
corporate or other user of the facility involved and/or of a provider of credit
enhancement on the bonds. Private activity bonds are included in the term
"Municipal Securities" with respect to the Ohio Tax Exempt and National Tax
Exempt Funds only if the interest paid thereon is exempt from regular federal
income tax and not treated as a specific tax preference item under the federal
alternative minimum tax. See "Taxes."
Each Fund may also invest in "moral obligation" bonds, which are ordinarily
issued by special purpose public authorities. If the issuer of moral obligation
bonds is unable to meet its debt service obligations from current revenues, it
may draw on a
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reserve fund, the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.
The Funds may also purchase municipal leases. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to be illiquid.
They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate in any of the above.
Municipal lease obligations typically are not backed by the municipality's
credit, and their interest may become taxable if the lease is assigned. If funds
are not appropriated for the following year's lease payments, a lease may
terminate, with a possibility of default on the lease obligation and significant
loss to the Fund. Under guidelines established by the Board of Trustees, the
credit quality of municipal leases will be determined on an ongoing basis,
including an assessment of the likelihood that a lease will be canceled.
The Funds may also invest in unsecured short-term promissory notes issued
by municipalities and other entities.
Ratings Criteria
The Funds invest in Municipal Securities which at the time of purchase are
rated the following or higher: "BBB" by S&P or Fitch, "Baa" by Moody's, or "A"
by Duff in the case of bonds; "SP-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff,
or "MIG-2" ("VMIG-2" for variable rate demand notes) by Moody's in the case of
notes; or "A-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, Baa or "Prime-2" by
Moody's in the case of tax-exempt commercial paper.
Securities that are unrated at the time of purchase will be determined to
be of comparable quality by the Funds' adviser pursuant to guidelines approved
by the Trust's Board of Trustees. If the rating of an obligation held by a Fund
is reduced below its rating requirements, the Fund will sell the obligation when
the adviser believes that it is in the best interests of the Fund to do so. The
applicable ratings are more fully described in the Appendix to the Statement of
Additional Information.
Stand-by Commitments
Each Fund may acquire stand-by commitments with respect to Municipal
Securities held in its portfolio. Under a stand-by commitment, a dealer agrees
to purchase at a Fund's option specified Municipal Securities at a specified
price. Stand-by commitments acquired by the Funds must be of high quality as
determined by any Rating Agency, or, if not rated, must be of comparable quality
as determined by the adviser. Each Fund acquires stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
Variable and Floating Rate Obligations
Each Fund may purchase variable and floating rate obligations (including
variable amount master demand notes) which are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Because variable and floating rate obligations are direct lending
arrangements between a Fund and the issuer, they are not normally traded.
Although there may be no active secondary market in such instruments, a Fund may
demand payment of principal and accrued interest at a time specified in the
instrument or may resell them to a third party. Such obligations may be backed
by bank letters of credit, guarantees or other forms of credit and/or liquidity
enhancements issued by banks, other financial institutions or the U.S.
government, its agencies or instrumentalities. The quality of any credit or
liquidity enhancement will be rated high quality or, if unrated, will be
determined to be of comparable quality by the Funds' adviser. In the event an
issuer of a variable or floating rate obligation defaulted on its payment
obligation, the Funds might be unable to dispose of the instrument because of
the absence of a secondary market and could, for this or other reasons, suffer a
loss to the extent of the default.
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<PAGE> 161
Certificates of Participation
Each Fund may purchase Municipal Securities in the form of "certificates of
participation" which represent undivided proportional interests in lease
payments by a governmental or nonprofit entity. The municipal leases underlying
the certificates of participation in which a Fund invests will be subject to the
same quality rating standards applicable to Municipal Securities. Certificates
of participation may be purchased from a bank, broker-dealer or other financial
institution. The lease payments and other rights under the lease provide for and
secure the payments on the certificates.
Lease obligations may be limited by law, municipal charter or the duration
or nature of the appropriation for the lease and may be subject to periodic
appropriation. In particular, lease obligations, may be subject to periodic
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. Furthermore, a
lease may provide that the certificate trustee cannot accelerate lease
obligations upon default; in such event, the trustee would only be able to
enforce lease payments as they became due. In the event of a default or failure
of appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In addition, certificates of
participation are less liquid than other bonds because there is a limited
secondary trading market for such obligations.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. These transactions
involve the risk that the price or yield obtained may be less favorable than the
price or yield available when delivery takes place. The Funds expect that
commitments to purchase when-issued securities will not exceed 25% of the value
of their respective total assets under normal market conditions. The Funds do
not intend to purchase when-issued securities for speculative purposes but only
for the purpose of acquiring portfolio securities. In when-issued and delayed
delivery transactions, each Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be attractive.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Funds may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. As a shareholder of another investment company, the Funds would
bear, along with other shareholders, their pro rata portion of that company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that a Fund bears directly in connection with its
own operations. Investment companies in which a Fund may invest may also impose
a sales or distribution charge in connection with the purchase or redemption of
their shares and other types of commissions or charges. Such charges will be
payable by a Fund and, therefore, will be borne indirectly by its shareholders.
Illiquid Securities
The Funds will not knowingly invest more than 15% of the value of their
respective net assets in securities that are illiquid. Illiquid securities would
generally include repurchase agreements with notice/termination dates in excess
of seven days, illiquid certificates of participation and certain securities
which are subject to trading restrictions because they are not registered under
the Securities Act of 1933, as amended (the "1933 Act").
The Funds may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long as it is determined by the Board of Trustees or the Funds' adviser,
acting under guidelines approved and monitored by the Board, that an adequate
trading market exists for that security. This investment practice could have the
effect of increasing the
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<PAGE> 162
level of illiquidity in the Funds during any period that qualified institutional
buyers become uninterested in purchasing these restricted securities.
Taxable Money Market Instruments
Each Fund may invest, from time to time, a portion of its assets for
temporary defensive or liquidity purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the highest rating category of S&P, Fitch,
Duff, or Moody's; certificates of deposit; bankers' acceptances; and repurchase
agreements with respect to such obligations.
Zero Coupon Obligations
Zero coupon obligations are discount debt obligations that do not make
periodic interest payments although income is generally imputed to the holder on
a current basis. Such obligations may have higher price volatility than those
which require the payment of interest periodically. The adviser will consider
the liquidity needs of the Funds when any investment in zero coupon obligations
is made.
Repurchase Agreements
The Funds may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). The Fund may enter into repurchase agreements only
with financial institutions such as banks and broker-dealers which are deemed to
be creditworthy by the adviser pursuant to guidelines approved by the Trust's
Board of Trustees. The Funds are not permitted to enter into repurchase
agreements with the adviser, Distributor, or any of their affiliates.
The seller under a repurchase agreement will be required to maintain the
value of the securities which a Fund holds subject to the agreement at not less
than the repurchase price, marked to market daily, by providing additional
securities or other collateral to the Fund if necessary. If the seller defaulted
on its repurchase obligation, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying securities (including accrued
interest) were less than the repurchase price (including accrued interest) under
the agreement. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Further, it is uncertain whether the Trust would be
entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the holders of
a majority of the Fund's outstanding shares (as defined under "Miscellaneous").
(Other fundamental investment limitations, as well as non-fundamental investment
limitations, are contained in the Statement of Additional Information under
"Investment Objectives and Policies.")
No Fund may:
1. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the securities of one
or more issuers conducting their principal business activities in the same
industry, provided that:
(a) there is no limitation with respect to obligations issued or
guaranteed by the U.S. government, any state, territory or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, and repurchase
agreements secured by such instruments;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents;
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(c) utilities will be divided according to their services, for
example, gas, gas transmission, electric and gas, electric, and telephone
will each be considered a separate industry;
(d) personal credit and business credit businesses will be considered
separate industries.
2. Make loans, except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment objective
and policies and may lend portfolio securities in an amount not exceeding one-
third of its total assets.
3. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
In addition, the National Tax Exempt Fund may not purchase securities of
any one issuer, other than securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in such issuer or the Fund would hold more than 10% of any class of securities
of the issuer or more than 10% of the outstanding voting securities of the
issuer, except that up to 25% of the value of the Fund's total assets may be
invested without regard to such limitations.
For purposes of the above investment limitations, a security is considered
to be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to a private activity bond that is backed
only by the assets and revenues of a nongovernmental user, a security is
considered to be issued by such nongovernmental user.
Except for the Funds' policy on illiquid securities, if a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of a Fund's portfolio
securities will not constitute a violation of such limitation for purposes of
the 1940 Act.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal and state income taxes are rendered
by qualified legal counsel to the respective issuers at the time of issuance.
Neither the Funds nor their adviser will review the proceedings relating to the
issuance of Municipal Securities or the basis for such opinions.
YIELD AND PERFORMANCE INFORMATION
From time to time, the Trust may quote in advertisements or in reports to
shareholders each Fund's yield and total return data for its A shares, B shares
and I shares. The "yield" quoted in advertisements refers to the income
generated by an investment in a class of shares over a 30-day period identified
in the advertisement. This income is then "annualized." The amount of income
generated by an investment during a 30-day period is assumed to be earned and
reinvested at a constant rate and compounded semi-annually; the annualized
income is then shown as a percentage of the investment. Each Fund's
"tax-equivalent" yield for a class of shares, which shows the level of taxable
yield necessary to produce an after-tax equivalent to a Fund's tax-free yield
for that class, may also be quoted from time to time. It is calculated by
increasing the yield (calculated as above) for a class of shares by the amount
necessary to reflect the payment of federal and Ohio or Pennsylvania income tax
at stated tax rates. A Fund's tax-equivalent yield for a class of shares will
always be higher than its yield.
Each Fund calculates its total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage
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<PAGE> 164
change in value over the measuring period. Both methods of calculating total
return reflect changes in the price of the shares and assume that any dividends
and capital gain distributions made by the Fund with respect to a class during
the period are reinvested in shares of that class. When considering average
total return figures for periods longer than one year, it is important to note
that the annual total return of a class for any one year in the period might
have been greater or less than the average for the entire period. Each Fund may
also advertise, from time to time, the total returns of one or more classes of
shares on a year-by-year or other basis for various specified periods by means
of quotations, charts, graphs or schedules.
Investors may compare the performance of each class of shares of each Fund
to the performance of other mutual funds with comparable investment objectives,
to various mutual fund or market indices, and to data or rankings prepared by
independent services such as Lipper Analytical Services, Inc. or other financial
or industry publications that monitor the performance of mutual funds.
Comparisons may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar, Incorporated
and other publications of a local, regional or financial industry nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in the net asset value of a class should be
considered in ascertaining the total return to shareholders for a given period.
Yield and total return data should also be considered in light of the risks
associated with a Fund's portfolio composition, quality, maturity, operating
expenses and market conditions. Any fees charged by financial institutions (as
described in "How to Purchase and Redeem Shares") are not included in the
computation of performance data but will reduce a shareholder's net return on
his or her investment in a Fund.
Shareholders should note that the yields and total returns of A shares and
B shares will be lower than those of the I shares of a Fund because of the
different distribution and/or servicing fees. The yields and total returns of
the B shares will be lower than those of the A shares of a Fund due to the
different distribution fees of the classes. See "Distribution and Servicing
Arrangements."
Further information about the performance of each Fund is available in the
annual and semi-annual reports to shareholders. Shareholders may obtain copies
from the Trust free of charge by calling 1-800-622-FUND(3863).
The National Tax Exempt Fund is the successor to a common trust fund
previously managed by National City Bank, an affiliate of the adviser. All of
the assets of this predecessor common trust fund were transferred to the Fund
(as indicated below) on April 9, 1998. Set forth below are certain performance
data for the predecessor fund which were calculated using the same method the
Fund utilizes to calculate its average annual total returns with certain
adjustments, as noted below. This performance information is deemed relevant
because the predecessor common trust fund was managed using the same investment
objective, policies and restrictions, and portfolio manager as those being used
by the National Tax Exempt Fund. However, these performance data are not
necessarily indicative of the future performance of the Fund. In addition, the
predecessor fund was not subject to the diversification requirements and other
restrictions of the 1940 Act and Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"); if such requirements and restrictions had been
applicable, they may have adversely affected performance.
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PREDECESSOR
COMMON TRUST FUND
AVERAGE ANNUAL TOTAL RETURNS FOR
VARIOUS PERIODS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR TO THE
PREDECESSOR TO THE PREDECESSOR TO THE NATIONAL TAX PREDECESSOR TO THE
NATIONAL TAX NATIONAL TAX EXEMPT NATIONAL TAX
EXEMPT EXEMPT FUND B SHARES EXEMPT
FUND A SHARES FUND A SHARES (WITH MAXIMUM FUND B SHARES
(ASSUMING (ASSUMING NO DEFERRED SALES (WITHOUT DEFERRED
SALES CHARGES)(1) SALES CHARGES)(2) CHARGES)(3) SALES CHARGES)(4)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Period Ended 5-31-98
Six Months............. -1.54% 3.41% 3.41% 3.41%
Periods Ended 5-31-98
One Year............... 1.60% 6.65% 7.69% 7.69%
Three Years............ 1.93% 3.59% 4.15% 4.15%
Five Years............. 2.81% 3.80% 4.28% 4.28%
Ten Years.............. 5.64% 6.15% 6.55% 6.55%
<CAPTION>
PREDECESSOR TO THE
NATIONAL TAX
EXEMPT FUND
I SHARES(5)
------------------
<S> <C>
Period Ended 5-31-98
Six Months............. 3.41%
Periods Ended 5-31-98
One Year............... 7.69%
Three Years............ 4.15%
Five Years............. 4.28%
Ten Years.............. 6.55%
</TABLE>
- ------------
(1) The predecessor common trust fund is the Tax Exempt Fund. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.14% of assets and assuming the maximum front-end sales charge
of 4.75%.
(2) The predecessor common trust fund is the Tax Exempt Fund. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.14% of assets and assuming full waiver of the maximum
front-end sales charge.
(3) The predecessor common trust fund is the Tax Exempt Fund. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.83% of assets and assuming the maximum contingent deferred
sales charge.
(4) The predecessor common trust fund is the Tax Exempt Fund. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of 1.83% of assets and assuming a full waiver of the maximum
contingent deferred sales charge.
(5) The predecessor common trust fund is the Tax Exempt Fund. The above
information is the average annual total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
expenses of .87% of assets. Institutional shares are sold without a sales
charge.
PRICING OF SHARES
For processing purchase and redemption orders, the net asset value per
share of each Fund is calculated on each business day as of the close of trading
of the New York Stock Exchange (the "Exchange"), generally 4:00 p.m. Eastern
time. Net asset value per share is determined on each business day, except those
holidays which the Exchange observes (currently New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day) ("Business Day").
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
With respect to each Fund, investments in securities are valued at their
closing sales price if the principal market is an exchange. Other securities,
and temporary cash investments acquired more than 60 days from maturity, are
valued at the mean between quoted bid and asked prices. Such valuations are
provided by one or more independent pricing services when such valuations are
believed to reflect fair market value. When valuing securities, pricing services
consider institutional size trading in similar groups of securities and any
developments related to specific issues, among other things. Short-term
investments with maturities of 60 days or less are generally valued on the basis
of amortized cost, unless the Trust's Board of Trustees determines that this
does not represent fair value. The net asset value per share of each class of
shares will fluctuate as the value of its investment portfolio changes.
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HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at One Freedom Valley Drive, Oaks, Pennsylvania 19456.
The Distributor, adviser and/or their affiliates, at their own expense, may
provide compensation to dealers in connection with the sale and/or servicing of
shares of the Funds and other investment funds of the Trust. Compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more Funds, and/or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell a
significant amount of such shares. Compensation may include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to exotic locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation may also include the following types of non-cash items
offered through sales contests: (1) vacation trips, including travel
arrangements and lodging at resorts; (2) tickets for entertainment events (such
as concerts, cruises and sporting events); and (3) merchandise (such as
clothing, trophies, clocks and pens). The Distributor, at its expense, currently
conducts sales contests for dealers in connection with their sales of shares of
the Funds. Dealers may not use sales of a Fund's shares to qualify for this
compensation to the extent such may be prohibited by the laws of any state or
any self-regulatory agency, such as the National Association of Securities
Dealers, Inc.
PURCHASE OF A SHARES AND B SHARES
A shares of the Funds are sold subject to a front-end sales charge. B
shares of the Funds are sold subject to a back-end sales charge. This back-end
sales charge declines over time and is known as a "contingent deferred sales
charge." Before choosing between A shares and B shares of the Funds, investors
should read "Characteristics of A shares and B Shares" and "Factors to Consider
When Selecting A shares or B Shares" below.
A shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase A or B shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. Investors purchasing shares
of a Fund must specify at the time of investment whether they are purchasing A
shares or B shares.
Financial institutions may charge certain account fees depending on the
type of account the Investor has established with the institution. Investors may
be charged a fee if they effect transactions in fund shares through a broker or
agent. (For information on such fees, the Investor should review his or her
agreement with the institution or contact it directly.) For direct purchases of
shares, Investors should call 1-800-622-FUND(3863) or to speak with a NatCity
Investments, Inc. professional, call 1-888-4NATCTY (462-8289).
The minimum investment is $500 for the initial purchase of A shares or B
shares in a Fund; there is no minimum for subsequent investments. All purchases
made by check should be in U.S. dollars. Please make the check payable to Armada
Funds (fund name), or, in the case of a retirement account, the custodian or
trustee for the account. We will not accept third-party checks under any
circumstance. Investments made in A shares or B shares of the Fund through a
Planned Investment Program ("PIP"), a monthly savings program described below,
are not subject to the minimum initial and subsequent investment requirements or
any minimum account balance requirements described under "Other Redemption
Information" below.
Under a PIP, Investors may add to their investment in A shares or B shares
of a Fund, in a
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<PAGE> 167
consistent manner each month or quarter, with a minimum amount of $50. Monies
may be automatically withdrawn from a shareholder's checking or savings account
available through an Investor's financial institution and invested in additional
A shares at the Public Offering Price or B shares at the net asset value next
determined after an order is received by the Trust. An Investor may apply for
participation in a PIP by completing an application obtained through a financial
institution, such as banks, brokers, or dealers selling A shares or B shares of
the Funds, or by calling 1-800-622-FUND (3863). The program may be modified or
terminated by an Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The Public Offering Price for A shares of each Fund is the sum of the net
asset value of the shares being purchased plus any applicable sales charge per
account, which is assessed as follows:
For the Ohio Tax Exempt and Pennsylvania Municipal Funds:
<TABLE>
<CAPTION>
AS A % DEALERS'
AS A % OF NET REALLOWANCE
OF OFFERING ASSET AS A % OF
AMOUNT OF PRICE PER VALUE OFFERING
TRANSACTION SHARE PER SHARE PRICE
- ----------- ----------- --------- -----------
<S> <C> <C> <C>
Less than $100,000... 3.00 3.09 2.75
$100,000 but less
than $250,000...... 2.00 2.04 1.75
$250,000 but less
than $500,000...... 1.50 1.52 1.25
$500,000 but less
than $1,000,000.... 1.00 1.01 0.75
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
For the National Tax Exempt Fund:
<TABLE>
<CAPTION>
AS A % DEALERS'
AS A % OF NET REALLOWANCE
OF OFFERING ASSET AS A % OF
AMOUNT OF PRICE PER VALUE OFFERING
TRANSACTION SHARE PER SHARE PRICE
- ----------- ----------- --------- -----------
<S> <C> <C> <C>
Less than $50,000.... 4.75 5.00 4.50
$50,000 but less than
$100,000........... 4.00 4.20 3.75
$100,000 but less
than $250,000...... 3.75 3.90 3.50
$250,000 but less
than $500,000...... 2.50 2.80 2.25
$500,000 but less
than $1,000,000.... 2.00 2.00 1.75
$1,000,000 or more... 0.00 0.00 0.00
</TABLE>
With respect to purchases of $1,000,000 or more of a Fund, the adviser may
pay from its own funds a fee of 1.00% of the amount invested to the financial
institution placing the purchase order.
With respect to each of the above mentioned Funds, a 1% sales charge will
be assessed against a shareholder's fund account if its value falls below
$1,000,000 due to a redemption by the shareholder within the first year
following the initial investment of $1,000,000 or more.
Under the 1933 Act, the term "underwriter" includes persons who offer or
sell for an issuer in connection with the distribution of a security or have a
direct or indirect participation in such undertaking, but excludes persons whose
interest is limited to a commission from an underwriter or dealer not in excess
of the usual and customary distributors' or sellers' commission. The Staff of
the SEC has expressed the view that persons who receive 90% or more of a sales
load may be deemed to be underwriters within the meaning of this definition. The
Dealers' Reallowance may be changed from time to time.
No sales charge will be assessed on purchases of A shares made by:
(a) trustees and officers of the Trust;
(b) directors, employees and participants in employee
benefit/retirement plans (annuitants) of National City Corporation or any
of its affiliates;
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<PAGE> 168
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above;
(d) individuals investing in a Fund by way of a direct transfer or a
rollover from a qualified plan distribution where affiliates of National
City Corporation are serving as a trustee or agent, or certain institutions
having relationships with affiliates of National City Corporation;
(e) investors purchasing Fund shares through a payroll deduction plan;
(f) investors investing in the Armada Plus account through National
City's Retirement Plan Services; and
(g) investors purchasing fund shares through "one-stop" mutual fund
networks.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, Investors have the
privilege of combining "concurrent purchases" of A shares of one or more of the
investment funds of the Trust that are sold with a sales charge (each a "load
fund"). The Investor's "concurrent purchases" described above shall include the
combined purchases of the Investor, the Investor's spouse and children under the
age of 21 and the Investor's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Investors must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This privilege, however, may be modified
or eliminated at any time or from time to time by the Trust without notice.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF A SHARES
The applicable sales charge may be reduced on purchases of A shares of each
Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND (3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in A shares in determining
the applicable sales charge. An Investor's aggregate investment in A shares is
the total value (based on the higher of current net asset value or any Public
Offering Price originally paid) of:
(a) current purchases;
(b) A shares that are already beneficially owned by the Investor for
which a sales charge has been paid;
(c) A shares that are already beneficially owned by the Investor which
were purchased prior to July 22, 1990; and
(d) A shares purchased by dividends or capital gains that are
reinvested.
If, for example, an Investor beneficially owns A shares of the Ohio Tax
Exempt Fund with an aggregate current value of $90,000 and subsequently
purchases A shares of that Fund having a current value of $10,000, the sales
charge applicable to the subsequent purchase would be reduced to 2.0% of the
Public Offering Price for the Ohio Tax Exempt Fund.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. A Letter of Intent option is found on the account
application which may be obtained from the Investor's financial institution or
directly from the Trust by calling 1-800-622-FUND (3863). If an Investor so
elects, the 13-month period may begin up to 30 days prior to the Investor's
signing the Letter of Intent. The initial investment under the Letter of Intent
must be equal to at least 4.0% of the amount indicated in the Letter of
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<PAGE> 169
Intent. During the term of a Letter of Intent, the Transfer Agent will hold A
shares representing 4.0% of the amount indicated in the Letter of Intent in
escrow for payment of a higher sales charge if the entire amount is not
purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13-month period, or is redeemed within one year from the
time of fulfillment, the Investor will be required to pay an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge the Investor would have had to pay on the aggregate purchases if
the total of such purchases had been made at a single time.
SALES CHARGES APPLICABLE TO PURCHASES OF B SHARES
B shares of each Fund are sold at their net asset value next determined
after a purchase order is received in good form by the Trust's Distributor.
Although Investors pay no front-end sales charge on purchases of B shares, such
shares are subject to a deferred sales charge at the rates set forth in the
chart below if they are redeemed within five years of purchase. Broker-dealers
and other organizations selling B shares to Investors will receive commissions
from the Distributor in connection with sales of B shares. These commissions may
be different than the reallowances or placement fees, if any, paid to dealers in
connection with sales of A shares.
The deferred sales charge on B shares is based on the lesser of the net
asset value of the shares on the redemption date or the original cost of the
shares being redeemed. As a result, no sales charge is charged on any increase
in the principal value of an Investor's shares. In addition, a contingent
deferred sales charge will not be assessed on B shares purchased through
reinvestment of dividends or capital gain distributions.
The amount of any contingent deferred sales charge an Investor must pay on
B shares depends on the number of years that elapse between the purchase date
and the date such B shares are redeemed. Solely for purposes of determining the
number of years from the time of payment for an Investor's share purchase, all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
---------------------- ---------------------------
<S> <C>
Less than one............. 5.0%
More than one, but less
than two................ 5.0%
More than two, but less
than three.............. 4.0%
More than three, but less
than four............... 3.0%
More than four, but less
than five............... 2.0%
After five years.......... None
After eight years......... *
</TABLE>
- ------------
* Conversion to A shares.
When an Investor redeems his or her B shares, the redemption order is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. B shares are redeemed first from those B shares that are not
subject to the deferred sales load (i.e., B shares that were acquired through
reinvestment of dividends or capital gain distributions) and thereafter, unless
otherwise designated by the shareholder, from the B shares that have been held
the longest.
For example, assume an Investor purchased 100 B shares at $10 a share (for
a total cost of $1,000), three years later the shares have a net asset value of
$12 per share and during that time the investor acquired 10 additional shares
through dividend reinvestment. If the Investor then makes one redemption of 50
shares (resulting in proceeds of $600, 50 shares x $12 per share), the first 10
shares redeemed will not be subject to the contingent deferred sales charge
because they were acquired through reinvestment of dividends. With respect to
the remaining 40 shares redeemed, the contingent deferred sales charge is
charged at $10 per share (because the original purchase price of $10 per share
is lower than the current net asset value of $12 per share). Therefore, only
$400 of the $600 such Investor received from selling his or her shares will be
subject to the contingent deferred sales charge, at a rate of 4.0% (the
applicable rate in the third
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<PAGE> 170
year after purchase). The proceeds from the contingent deferred sales charge
that the Investor may pay upon redemption go to the Distributor, which may use
such amounts to defray the expenses associated with the distribution-related
services involved in selling B shares. The contingent deferred sales charge,
along with ongoing distribution fees paid with respect to B shares, enables
those shares to be purchased without the imposition of a front-end sales charge.
Exemptions From Contingent Deferred Sales Charge
The following types of redemptions qualify for an exemption from the
contingent deferred sales charge:
(a) exchanges described under "Exchange Privilege Applicable to A
shares and B Shares" below
(b) redemptions in connection with required (or, in some cases,
discretionary) distributions to participants or beneficiaries of an
employee pension, profit-sharing or other trust or qualified retirement or
Keogh plan, individual retirement account or custodial account maintained
pursuant to Section 403(b)(7) of the Internal Revenue Code due to death,
disability or the attainment of a specified age
(c) redemptions effected pursuant to a Fund's right to liquidate a
shareholder's account if the aggregate net asset value of shares held in
the account is less than the minimum account size
(d) redemptions in connection with the death or disability of a
shareholder
(e) redemptions by a settlor of a living trust
(f) redemptions resulting from a tax-free return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Internal Revenue
Code.
CHARACTERISTICS OF A SHARES AND B SHARES
The primary difference between A shares and B shares lies in their sales
charge structures and distribution arrangements. An Investor should understand
that the purpose and function of the sales charge structures and distribution
arrangements for both A shares and B shares are the same.
A shares are sold at their net asset value plus a front-end sales charge.
This front-end sales charge may be reduced or waived in some cases. A and I
shares are subject to ongoing distribution fees at an annual rate of up to 0.10%
of the Fund's average daily net assets attributable to its A and I shares.
B shares are sold at net asset value without an initial sales charge.
Normally, however, a deferred sales charge is paid if the shares are redeemed
within six years of investment. B shares are subject to ongoing distribution
fees at an annual rate of up to .75% of the Fund's average daily net assets
attributable to its B shares. These ongoing fees, which are higher than those
charged on A shares, will cause B shares to have a higher expense ratio and pay
lower dividends than A shares.
B shares which have been outstanding for eight years after the end of the
month in which the shares were initially purchased will automatically convert to
A shares. The purpose of the conversion is to relieve a holder of B shares of
the higher ongoing expenses charged to those shares, after enough time has
passed to allow the Distributor to recover approximately the amount it would
have received if a front-end sales charge had been charged. The conversion from
B shares to A shares takes place at net asset value, as a result of which an
Investor receives dollar-for-dollar the same value of A shares as he or she had
of B shares. As a result of the conversion, the converted shares are relieved of
the distribution and service fees borne by B shares, although they are subject
to the distribution and service fees borne by A shares.
B shares acquired through a reinvestment of dividends or distributions are
also converted at the earlier of two dates -- eight years after the beginning of
the calendar month in which the reinvestment occurred or the date of conversion
of the most
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<PAGE> 171
recently purchased B shares that were not acquired
through reinvestment of dividends or distributions. For example, if an Investor
makes a one-time purchase of B shares of the Fund, and subsequently acquires
additional B shares of the Fund only through reinvestment of dividends and/or
distributions, all of such Investor's B shares in the Fund, including those
acquired through reinvestment, will convert to A shares of the Fund on the same
date.
FACTORS TO CONSIDER WHEN SELECTING A SHARES OR B SHARES
Before purchasing shares of the Fund, Investors should consider whether,
during the anticipated life of their investment in the Fund, the accumulated
distribution fees and potential contingent deferred sales charges on B shares
prior to conversion would be less than the initial sales charge and accumulated
distribution fees on A shares purchased at the same time, and to what extent
such differential would be offset by the higher yield of A shares. In this
regard, to the extent that the sales charge for A shares is waived or reduced by
one of the methods described above, investments in A shares become more
desirable. The Trust will refuse all purchase orders for B shares of over
$250,000.
Although A shares are subject to a distribution fee, they are not subject
to the higher distribution fee applicable to B shares. For this reason, A shares
can be expected to pay correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, purchasers
of A shares that do not qualify for waivers of or reductions in the initial
sales charge would have less of their purchase price initially invested in the
Fund than purchasers of B shares of the Fund.
As described above, purchasers of B shares will have more of their initial
purchase price invested. Any positive investment return on this additional
invested amount would partially or wholly offset the expected higher annual
expenses borne by B shares. Because the Fund's future returns cannot be
predicted, there can be no assurance that this will be the case. Holders of B
shares would, however, own shares that are subject to higher annual expenses
and, for a five-year period, such shares would be subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this five-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
annual B shares' distribution fees to the cost of the initial sales charge and
distribution fees on the A shares. Over time, the expense of the annual
distribution fees on the B shares may equal or exceed the initial sales charge,
if any, and annual distribution fees applicable to A shares. For example, if net
asset value remains constant, the aggregate distribution fees with respect to B
shares of the Fund would equal or exceed the initial sales charge and aggregate
distribution fees of A shares of the Fund approximately eight years after the
purchase. In order to reduce such fees of Investors that hold B shares for more
than eight years, B shares will be automatically converted to A shares as
described above at the end of such eight-year period.
PURCHASE OF I SHARES
I shares are sold primarily to banks and trust companies which are
affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions and
registered investment advisers and financial planners affiliated with National
City Corporation ("Financial Advisers") who charge an advisory, consulting or
other fee for their services and buy shares for their own accounts or the
accounts of their clients ("Customers"). I shares are sold without a sales
charge imposed by the Trust or the Distributor. However, depending on the terms
governing the particular account, the Banks, NAM or Financial Advisers may
impose account charges such as account maintenance fees, compensating balance
requirements or other charges based upon account transactions, assets or income
which will have the effect of reducing the shareholder's net return on his or
her investment in a Fund. There is no minimum investment.
It is the responsibility of the Banks, NAM and Financial Advisers to
transmit their Customers' purchase orders to the Transfer Agent and to deliver
required funds on a timely basis, in accordance with
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<PAGE> 172
the procedures stated above. I shares will normally be held of record by the
Banks, NAM or Financial Advisers. Confirmations of share purchases and
redemptions will be sent to the Banks, NAM and Financial Advisers. Beneficial
ownership of I shares will be recorded by the Banks, NAM or Financial Advisers
and reflected in the account statements provided by them to their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of a Fund which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern time) on any business day are processed at the
net asset value per share next determined after receipt of the order plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF A SHARES AND B SHARES
Redemption orders are effected at a Fund's net asset value per share next
determined after receipt of the order by the Fund. Proceeds from the redemptions
of B shares will be reduced by the amount of any applicable contingent deferred
sales charge. Redemption orders must be placed in writing or by telephone to the
same financial institution that placed the original purchase order. It is the
responsibility of the financial institutions to transmit redemption orders to
the Transfer Agent. Investors who purchased shares directly from the Trust may
redeem shares in any amount by calling 1-800-622-FUND(3863). Redemption proceeds
are paid by check or credited to the Investor's account with his or her
financial institution.
REDEMPTION OF I SHARES
Customers may redeem all or part of their I shares in accordance with
instructions and limitations pertaining to their accounts at the Banks, NAM or
Financial Advisers. It is the responsibility of the Banks, NAM or Financial
Advisers to transmit redemption orders to the Transfer Agent and credit their
Customers' accounts with the redemption proceeds on a timely basis. Redemption
orders are effected at the net asset value per share next determined after
receipt of the order by the Transfer Agent. No charge for wiring redemption
payments is imposed by the Trust, although Banks, NAM or Financial Advisers may
charge their Customers' accounts for services. Information relating to such
services and charges, if any, is available from the Banks, NAM or Financial
Advisers.
If a Customer has agreed with a particular Bank, NAM or Financial Advisers
to maintain a minimum balance in his or her account at the institution and the
balance in such account falls below that minimum, the Customer may be obliged to
redeem all or part of his or her I shares to the extent necessary to maintain
the required minimum balance. Customers who have instructed that automatic
purchases and redemptions be made for their accounts receive monthly
confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly with the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
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<PAGE> 173
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $10,000, no
signature guarantee is needed. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and I share investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly with the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming A shares or B shares by
telephone may be modified or terminated at any time by the Trust or the Transfer
Agent.
OPTION TO MAKE SYSTEMATIC WITHDRAWALS
The Trust has available a Systematic Withdrawal Plan (the "Plan") for a
shareholder who owns shares of any Fund held on the Transfer Agent's system. The
Plan allows the shareholder to have a fixed minimum sum of $100 distributed at
regular intervals. The shareholder's account must have a minimum value of $1,000
to be eligible for the Plan. Withdrawals will be reduced by any applicable
contingent deferred sales charge. Because automatic withdrawals of B shares will
be subject to the contingent deferred sales charge, it may not be in the best
interest of B shares shareholders to make systematic withdrawals. Additional
information regarding this service may be obtained from an investor's financial
institution or the Transfer Agent at 1-800-622-FUND(3863).
OTHER REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A FUND, SHAREHOLDERS SHOULD INDICATE WHETHER THEY
ARE REDEEMING A SHARES OR B SHARES. In the event a redeeming shareholder owns
both A shares and B shares in a Fund, the A shares will be redeemed first unless
the shareholder indicates otherwise. Due to the relatively high cost of
maintaining small accounts, the Trust reserves the right to redeem, at net asset
value, any account maintained by a shareholder that has a value of less than
$500 due to redemptions where the shareholder does not increase the amount in
the account to at least $500 upon 60 days notice.
If any portion of the shares to be redeemed represents an investment made
by personal check, the Trust reserves the right to delay payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to 15 calendar days from the date
of purchase. A shareholder who anticipates the need for more immediate access to
his or her investment should purchase shares by federal funds, bank wire,
certified or cashier's check. Financial institutions normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and federal funds.
The Trust may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of the
Trust's
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<PAGE> 174
responsibilities under the 1940 Act. See the Statement of Additional
Information.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO A SHARES AND B SHARES
Subject to the conditions described below, the Trust offers an exchange
program whereby investors who have paid a front-end sales charge to purchase A
shares of one or more of the Funds or other investment funds offered by the
Trust or Parkstone which is sold with a front-end sales charge (each a "load
Fund") may exchange those A shares for A shares of another load Fund, or another
investment fund offered by the Trust or Parkstone without the imposition of a
front-end sales charge (each a "no load Fund"), at the net asset value per share
on the date of exchange subject to the following. If a shareholder paid a sales
charge on the exchange equal to such acquired through the exchange, he or she
must pay a sales charge on the exchange equal to such difference. Shareholders
may also exchange A shares of a no load Fund for A shares of another no load
Fund at the net asset value per share without payment of a sales charge. In
addition, shareholders of a no load Fund may exchange A shares for A shares of a
load Fund subject to payment of the applicable sales charge. However,
shareholders exchanging A shares of a no load Fund which were received in a
previous exchange transaction involving A shares of a load Fund will not be
required to pay an additional sales charge upon the reinvestment of the
equivalent amount into the A shares of a load Fund except to the extent of any
difference in the applicable sales load.
Shareholders who have purchased B shares of one or more of the Funds or
another investment fund offered by the Trust or Parkstone (including shares
acquired through reinvestment of dividends or distributions on such shares) may
exchange those shares for B shares of another fund without the payment of any
contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemptions of B shares, the holding period of the B shares
originally held will be added to the holding period of the B shares acquired
through the exchange.
No exchange fee is imposed by the Trust. Shareholders contemplating an
exchange should carefully review the Prospectus of the fund into which the
exchange is being considered. An Armada Funds Prospectus may be obtained from
NatCity Investments, Inc., an Investor's financial institution or by calling
1-800-622-FUND(3863).
Any A shares or B shares exchanged must have a value at least equal to the
minimum initial investment required by the particular investment fund into which
the exchange is being made. Investors should make their exchange requests in
writing or by telephone to the financial institutions through which they
purchased their original A shares or B shares. It is the responsibility of
financial institutions to transmit exchange requests to the Transfer Agent.
Investors who purchased shares directly from the Trust should transmit exchange
requests directly to the Transfer Agent. Exchange requests received by the
Transfer Agent prior to 4:00 p.m. (Eastern Time) will be processed as of the
close of business on the day of receipt; requests received by the Transfer Agent
after 4:00 p.m. (Eastern Time) will be processed on the next Business Day. The
Trust reserves the right to reject any exchange request. During periods of
unusual economic or market changes, telephone exchanges may be difficult to
implement. In such event, an Investor should mail the exchange request to his or
her financial institution, and an Investor who directly purchased shares from
the Trust should mail the exchange request to the Transfer Agent.
The exchange privilege is a convenient way to respond to changes in
investment goals or in market conditions. This privilege is not designed for
frequent trading in response to short-term market fluctuations. Management of
the Trust reserves the right to limit, amend, impose charges upon, terminate or
otherwise modify the exchange privilege upon 60 days' notice to shareholders.
Except for the Systematic Exchange Program described below, as of the date of
this Prospectus, an Investor is limited to one exchange every two months during
a given
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12-month period beginning upon the date of the first exchange transaction.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO A SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly or
quarterly deductions from a shareholder's account from any Armada money market
fund. Under a systematic exchange program, a shareholder enters an agreement to
purchase shares of one or more specified Funds over a specified period of time,
and initially purchases shares of one Armada money market fund in an amount
equal to the total amount of the investment. On a regular basis, a specified
dollar amount of shares of the Armada money market fund is exchanged for shares
of the Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the Planned
Investment Program described previously in this Prospectus. Because purchases of
A shares are subject to an initial sales charge, it may be beneficial for an
investor to execute a Letter of Intent indicating an intent to purchase A shares
in connection with the systematic exchange program. A shareholder may apply for
participation in this program through his or her financial institution or by
calling 1-800-622-FUND (3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement and Rule 12b-1 under the
1940 Act, the Trust adopted a Service and Distribution Plan For A and I Share
Classes ("A and I Shares Plan") and a separate B Shares Distribution and
Servicing Plan ("B Shares Plan"). Under the A and I Shares Plan, the Trust
reimburses the Distributor for direct and indirect costs and expenses incurred
in connection with advertising and marketing, and other distribution services
related to the A and I shares of each of the Trust's investment funds and in
preparing and distributing such shares' prospectus. In the case of each fund,
such reimbursement shall not exceed .10% per annum of the average aggregate net
assets of its A and I shares. Under the B Shares Plan, the Trust pays the
Distributor up to .75% annually of the average daily net assets of each fund's B
shares for the same types of services provided and expenses assumed as in the A
and I Shares Plan. Such compensation is payable monthly and accrued daily by
each fund's B shares only.
Although B shares are sold without an initial sales charge, the Distributor
pays a sales commission equal to 4.25% of the amount invested (including a
prepaid service fee of 0.25% of the amount invested) to dealers who sell B
shares. These commissions are not paid on exchanges from other Armada funds or
on sales to investors exempt from the contingent deferred sales charge.
Under the Shareholder Services Plan relating to each Fund's A shares and
the B Shares Plan, the Trust enters into shareholder servicing agreements with
certain financial institutions. Pursuant to these agreements, the institutions
agree to render shareholder administrative services to their customers who are
the beneficial owners of A or B shares in consideration for the payment of up to
.25% (on an annualized basis) of the average daily net asset value of such
shares. Persons entitled to receive compensation for servicing A or B shares may
receive different compensation with respect to those shares than with respect to
I shares in the same Fund. Shareholder administrative services may include
aggregating and processing purchase and redemption orders, processing dividend
payments from the Fund on behalf of customers, providing information
periodically to customers showing their position in A or B shares, and providing
sub-transfer agent services or the information necessary for sub-transfer agent
services, with respect to A or B shares beneficially owned by customers. Since
financial institutions may charge their customers fees depending on the type of
customer account the Investor has established, beneficial owners of A or B
shares should read this Prospectus in light of the terms and fees governing
their accounts with financial institutions.
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DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared daily
and paid monthly. With respect to each Fund, net income for dividend purposes
consists of dividends, distributions and other income on the Fund's assets, less
the accrued expenses of the Fund. Any net realized capital gains will be
distributed at least annually. Dividends and distributions will reduce the
Funds' net asset values per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class of any Armada Funds at the net
asset value of such shares on ex-dividend date. Shareholders must make such
election, or any revocation thereof, in writing to their Banks or financial
institutions. The election will become effective with respect to dividends and
distributions paid after its receipt.
TAXES
FEDERAL TAXES
Each Fund intends to qualify as a separate "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for federal income tax to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its net tax-exempt
interest income and 90% of its investment company taxable income, if any, for
such year. Each Fund intends to distribute substantially all of its net
tax-exempt income (such distributions are known as "exempt-interest dividends")
and investment company taxable income, if any, each taxable year.
Exempt-interest dividends may be treated by shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code unless under
the circumstances applicable to the particular shareholder the exclusion would
be disallowed. See the Statement of Additional Information under "Additional
Information Concerning Taxes." In general, the Fund's investment company taxable
income will be the sum of its net investment income and the excess of any net
short-term capital gain for the taxable year over the net long-term capital
loss, if any, for such year. To the extent, if any, dividends paid to
shareholders are derived from taxable income or from net long-term capital
gains, such dividends will not be exempt from federal income tax and may also be
subject to state and local taxes. The Funds do not intend to earn any investment
company taxable income or net long-term capital gains. None of their
distributions are expected to be eligible for the dividends received deduction
for corporations.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by the Funds on December
31 of such year in the event such dividends are actually paid during January of
the following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
If the Funds hold certain private activity bonds, shareholders must include
as an item of tax preference for purposes of the federal alternative minimum tax
that portion of dividends paid by the Funds derived from interest on such bonds.
Shareholders receiving Social Security or certain other retirement payments
should note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.
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<PAGE> 177
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Funds generally will not be deductible for federal income tax
purposes.
A taxable gain or loss may be realized by a shareholder upon his or her
redemption, transfer or exchange of shares of the Funds depending upon the tax
basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include sales
charges incurred upon the purchase of Fund shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of such shares for shares of another Fund within 90 days of the
purchase and is able to reduce the sales charges applicable to the new shares
(by virtue of the Trust's exchange privilege), the amount equal to such
reduction may not be included in the tax basis of the shareholder's exchanged
shares but may be included (subject to this limitation) in the tax basis of the
new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
STATE AND LOCAL TAXES
Ohio Taxes
Under current Ohio law, individuals and estates that are subject to the
Ohio personal income tax, or municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions with respect to shares of the
Ohio Tax Exempt Fund ("Distributions") to the extent that the Distributions are
properly attributable to interest on Ohio Municipal Securities. Corporations
that are subject to the Ohio corporation franchise tax will not be required to
include Distributions in their tax base for purposes of calculating the Ohio
corporation franchise tax on the net income basis to the extent that such
Distributions either represent exempt-interest dividends for federal income tax
purposes or are properly attributable to interest on Municipal Securities.
However, shares of the Fund will be included in a corporation's tax base for
purposes of calculating the Ohio corporation franchise tax on the net worth
basis.
Distributions that consist of interest on obligations of the United States
or its territories or possessions or of any authority, commission, or
instrumentality of the United States ("Territorial Obligations") the interest on
which is exempt from state income taxes under the laws of the United States are
exempt from the Ohio personal income tax, and municipal and school district
income taxes in Ohio, and, provided, in the case of Territorial Obligations,
such interest is excluded from gross income for federal income tax purposes, are
excluded from the net income base of the Ohio corporation franchise tax.
Distributions properly attributable to gain on the sale, exchange or other
disposition of Ohio Municipal Securities will not be subject to the Ohio
personal income tax, or municipal or school district income taxes in Ohio, and
will not be included in the net income base of the Ohio corporation franchise
tax. Distributions attributable to other sources generally will not be exempt
from the Ohio personal income tax, municipal or school district income taxes in
Ohio, or the net income base of the Ohio corporation franchise tax.
It is assumed for purposes of this discussion of Ohio state and local taxes
that the Fund will continue to qualify as a regulated investment company under
the Code and that at all times at least 50% of the value of the total assets of
the Fund consists of Municipal Securities or similar obligations of other states
or their subdivisions.
Pennsylvania Taxes
Under current Pennsylvania law, shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Pennsylvania Munici-
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<PAGE> 178
pal Fund attributable to interest income from obligations of the State of
Pennsylvania or its political subdivisions, the United States, its territories
or certain of its agencies and instrumentalities ("Exempt Securities"). However,
Pennsylvania Personal Income Tax will apply to distributions from the Fund
attributable to gain realized on the disposition of any investment, including
Exempt Securities, or to interest income from investments other than Exempt
Securities. Shareholders also will be subject to the Pennsylvania Personal
Income Tax on any gain they realize on the disposition of shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of shares in the Fund
that he or she has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended to
the extent that the Fund is comprised of Exempt Securities.
MISCELLANEOUS
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISER
IMC serves as investment adviser to the Funds. IMC is a registered
investment adviser and an indirect, wholly owned subsidiary of National City
Corporation ("NCC"). On June 30, 1998, IMC had approximately $18.73 billion in
assets under management. IMC has its principal offices at 1900 East Ninth
Street, Cleveland, Ohio 44114.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment policies, the adviser has agreed to manage
the Funds, make decisions with respect to and place orders for all purchases and
sales of such Funds' securities, and maintain records relating to such purchases
and sales. The Fixed Income Team of IMC makes the investment decisions for the
Funds. No individual person is primarily responsible for making recommendations
to the Fixed Income Team.
For the services provided and expenses assumed pursuant to the Advisory
Agreement relating to the Funds, the adviser is entitled to receive an advisory
fee, computed daily and payable monthly, at the annual rate of .55% of the
average net assets of each of the Funds. The adviser may, from time to time,
waive all or a portion of its advisory fees to increase the net income of the
Funds available for distribution as dividends.
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YEAR 2000 RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the adviser and the Funds' other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
adviser is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurance that comparable steps are
being taken by the Funds' other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Funds as a result of the Year 2000 Problem.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SEI Fund Resources (the "Administrator"), located at One Freedom Valley
Drive, Oaks, Pennsylvania 19456, serves as the administrator to the Funds. SEI
Fund Resources is an indirect, wholly-owned subsidiary of SEI Investments
Company ("SEI").
Under its Administration Agreement with the Trust relating to the Funds,
SEI provides the Funds with administrative services, including fund accounting,
regulatory reporting, necessary office space, equipment, personnel and
facilities. The Administrator also acts as shareholder servicing agent of the
Funds. SEI is entitled to receive with respect to the Funds an administrative
fee, computed daily and paid monthly, at the annual rate of .07% of the
aggregate average daily net assets of all of the investment funds of Armada up
to the first $18 billion, and .06% of the aggregate average daily net assets
over $18 billion, and is entitled to be reimbursed for its out-of-pocket
expenses incurred on behalf of the Funds.
IMC serves as sub-administrator for each Fund and provides certain services
as may be requested by the Administrator from time to time. For its services as
Sub-Administrator, IMC receives, from the Administrator, pursuant to its
Sub-Administration Agreement with the Administrator, a fee, computed daily and
paid monthly, at the annual rate of .01% of the aggregate average daily net
assets of all of the investment funds of Armada up to the first $15 billion, and
.015% of the aggregate average daily net assets over $15 billion.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue the separate classes or
series of shares of beneficial interest ("shares") mentioned below. Nine of
these classes or series, which represent interests in the Ohio Tax Exempt Fund
(Class K, Class K -- Special Series 1, and Class K -- Special Series 2),
Pennsylvania Municipal Fund (Class T, Class T -- Special Series 1, and Class
T -- Special Series 2), and National Tax Exempt Fund (Class L, Class
L -- Special Series 1 and Class L -- Special Series 2) are described in this
Prospectus. Class K, Class T and Class L shares constitute the I class or series
of shares; Class K -- Special Series 1, Class T -- Special Series 1 and Class
L -- Special Series 1 shares constitute the A class or series of shares; Class
K -- Special Series 2, Class T -- Special Series 2, and Class L -- Special
Series 2 constitute the B class or series of shares. The other investment funds
of the Trust are:
Money Market Fund
(Class A, Class A -- Special Series 1 and Class A -- Special Series 2)
Government Money Market Fund
(Class B and Class B -- Special Series 1)
Treasury Money Market Fund
(Class C and Class C -- Special Series 1)
Tax Exempt Money Market Fund
(Class D, Class D -- Special Series 1 and Class D -- Special Series 2)
Pennsylvania Tax Exempt Money Market Fund
(Class Q and Class Q -- Special Series 1)
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<PAGE> 180
Ohio Municipal Money Market Fund
(Class BB and Class BB -- Special Series 1)
Intermediate Bond Fund
(Class I, Class I -- Special Series 1 and Class I -- Special Series 2)
Equity Growth Fund
(Class H, Class H -- Special Series 1 and Class H -- Special Series 2)
Equity Income Fund
(Class M, Class M -- Special Series 1 and Class M -- Special Series 2)
Small Cap Value Fund
(Class N, Class N -- Special Series 1 and Class N -- Special Series 2)
Enhanced Income Fund
(Class O, Class O -- Special Series 1 and Class O -- Special Series 2)
Total Return Advantage Fund
(Class P, Class P -- Special Series 1 and Class P Special Series 2)
Bond Fund
(Class R, Class R -- Special Series 1 and Class R -- Special Series 2)
GNMA Fund
(Class S, Class S -- Special Series 1 and Class S -- Special Series 2)
International Equity Fund
(Class U, Class U -- Special Series 1 and Class U -- Special Series 2)
Equity Index Fund
(Class V and Class V -- Special Series 1)
Core Equity Fund
(Class W, Class W -- Special Series 1 and Class W -- Special Series 2)
Small Cap Growth Fund
(Class X, Class X -- Special Series 1 and Class X -- Special Series 2)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Tax Managed Equity Fund
(Class Z, Class Z -- Special Series 1 and Class Z -- Special Series 2)
Balanced Allocation Fund
(Class AA, Class AA -- Special Series 1 and Class AA -- Special Series 2)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Shareholder
Services Plan and B Shares Plan, only the holders of A or B shares in an
investment fund are, or would be entitled to vote on matters submitted to a vote
of shareholders (if any) concerning their respective plans. Voting rights are
not cumulative, and accordingly, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the trustees irrespective of the vote of
the other shareholders.
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
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<PAGE> 181
held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Trust provides for indemnification out of
the trust property for any shareholder held personally liable solely by reason
of his or her being or having been a shareholder and not because of his or her
acts or omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of September 3, 1998, IMC's bank affiliates held beneficially or of
record approximately 0%, 97.54%, 98.87% of the outstanding I shares of the Ohio
Tax Exempt, Pennsylvania Municipal and National Tax Exempt Funds, respectively.
Neither National City nor its affiliates have any economic interest in such
shares which are held solely for the benefit of their customers, but may be
deemed to be a controlling person of the Funds within the meaning of the 1940
Act by reason of their record ownership of such shares. The names of beneficial
owners and record owners who are controlling shareholders under the 1940 Act may
be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank, an affiliate of IMC, serves as the custodian of the
Trust's assets. With respect to each fund, the Trust pays National City Bank an
annual custody fee, calculated daily and paid monthly, of .02% of each fund's
first $100 million of average daily net assets, .01% of each fund's next $650
million of average daily net assets and .008% of the average daily net assets of
each fund which exceed $750 million, exclusive of out-of-pocket expenses and
transaction charges. The Trust reimburses the custodian for its out-of-pocket
expenses including, but not limited to, postage, telephone, telex, interest
claim fee ($50.00 per claim), transfer and registration fees, federal express
charges, Federal Reserve and wire fees, as well as its out-of-pocket costs in
providing any foreign custody services and/or precious metal custody services.
The transaction charges are a bundled fee which will not exceed .25% of the
total monthly asset based fee payable by the Trust.
State Street Bank and Trust Company serves as the Trust's transfer and
dividend disbursing agent. Communications to the Transfer Agent should be
directed to P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by
the Trust for these services are described in the Statement of Additional
Information.
EXPENSES
Except as noted below, the Trust's adviser bears all expenses in connection
with the performance of its services. Each Fund of the Trust bears its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
distribution and servicing plans; advisory fees; administration fees and
expenses; charges of the custodian and Transfer Agent; certain insurance
premiums; outside auditing and legal expenses; costs of shareholders' reports
and shareholder meetings; and any extraordinary expenses. Each Fund also pays
for brokerage fees and commissions in connection with the purchase of its
portfolio securities.
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<PAGE> 182
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, since National City Bank serves the Trust as its
custodian and is affiliated with IMC, the Trust's investment adviser, a
procedure has been established requiring three annual verifications, two of
which are to be unannounced, of all investments held pursuant to the Custodian
Services Agreement, to be conducted by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
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<PAGE> 183
LOGOARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
HERBERT R. MARTENS, JR.
President
Executive Vice President,
National City Corporation
Chairman, President and Chief Executive
Officer, NatCity Investments, Inc.
LEIGH CARTER
Retired President and Chief Operating
Officer, B.F. Goodrich Company
Director:
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief
Operating Officer,
Kittle's Home Furnishings Center, Inc.
ROBERT J. FARLING
Retired Chairman, President and
Chief Executive Officer, Centerior Energy
Director:
Republic Engineered Steels
RICHARD W. FURST, DEAN
Professor of Finance and Dean
Carol Martin Gatton College of Business
and Economics, University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
GERALD L. GHERLEIN
Executive Vice President and General
Counsel, Eaton Corporation
Trustee:
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 184
ARMADA FUNDS
INVESTMENT ADVISER
AN AFFILIATE OF NATIONAL
CITY CORPORATION
- --------------------------------------------------------------------------------
National City Investment Management Company
1900 East Ninth Street
Cleveland, Ohio 44114
<PAGE> 185
CROSS REFERENCE SHEET
---------------------
Balanced Allocation Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C> <C>
1. Cover Page.......................................Cover Page
2. Table of Contents................................Table of Contents
3. General Information and History..................Statement of Additional
Information
4. Investment Objectives and Policies...............Investment Objectives
and Policies
5. Management of Registrant.........................Trustees and Officers
6. Control Persons and Principal....................Description of Shares
Holders of Securities
7. Investment Advisory and Other
Services Management .............................Advisory, Administration,
Distribution, Custody and
Transfer Agency Agreements
8. Brokerage Allocation and Other
Practices........................................Investment Objectives and
Policies
9. Capital Stock and Other Securities...............Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing
of Securities Being Offered .....................Additional Purchase and
Redemption Information
11. Tax Status.......................................Additional Information
Concerning Taxes
12. Underwriters.....................................Not Applicable
13. Calculation of Performance Data .................Yield and Performance
Information
14. Financial Statements.............................Financial Statements
</TABLE>
<PAGE> 186
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 18, 1998
BALANCED ALLOCATION FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Fund of Armada Funds
(the "Trust"), dated September 18, 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.
<PAGE> 187
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION..............................................................................1
INVESTMENT OBJECTIVE AND POLICIES................................................................................1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................................13
DESCRIPTION OF SHARES...........................................................................................15
ADDITIONAL INFORMATION CONCERNING TAXES.........................................................................16
TRUSTEES AND OFFICERS...........................................................................................18
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS.........................................................................23
SHAREHOLDER SERVICES PLANS......................................................................................27
PORTFOLIO TRANSACTIONS..........................................................................................27
AUDITORS....................................................................................................... 28
COUNSEL....................................................................................................... 28
PERFORMANCE INFORMATION.........................................................................................29
MISCELLANEOUS...................................................................................................33
APPENDIX A.....................................................................................................A-1
APPENDIX B.....................................................................................................B-1
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Balanced Allocation Fund. The information contained in this Statement of
Additional Information expands upon matters discussed in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by Standard &
Poor's Rating Group ("S&P"), Fitch IBCA, Inc. ("Fitch IBCA"), Duff & Phelps
Credit Rating Co. (Duff"), and Moody's Investors Service, Inc. ("Moody's") for
securities which may be held by the Fund.
FOREIGN SECURITIES
Unanticipated political or social developments may affect the
value of the Fund's investments in emerging market countries and the
availability to the Fund of additional investments in those countries. The small
size, relatively unseasoned nature of the securities markets and limited volume
of trading in securities in certain of these countries may make the Fund's
investments there illiquid and more volatile than investments in Japan or most
Western European countries. In addition, the Fund may be required to establish
special custodial or other arrangements before making certain investments.
Moreover, there may be little financial or accounting information available with
respect to issuers located in certain emerging market countries, and it may be
difficult as a result to assess the value or prospects of an investment in such
issuers.
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FOREIGN GOVERNMENT OBLIGATIONS
The Fund may purchase debt obligations issued or guaranteed by
governments (including states, provinces or municipalities) of countries other
than the United States, or by their agencies, authorities or instrumentalities.
The percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with the adviser's
assessment of gross domestic product in relation to aggregate debt, current
account surplus or deficit, the trend of the current account, reserves available
to defend the currency, and the monetary and fiscal policies of the government.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments
resulting from a decline or appreciation in the value of a particular foreign
currency against the U.S. dollar or another foreign currency or for other
reasons, the Fund is authorized to enter into forward currency exchange
contracts. These contracts involve an obligation to purchase or sell a specified
currency at a future date at a price set at the time of the contract. Forward
currency contracts do not eliminate fluctuations in the values of portfolio
securities but rather allow the Fund to establish a rate of exchange for a
future point in time.
When entering into a contract for the purchase or sale of a
security, the Fund may enter into a forward foreign currency exchange contract
for the amount of the purchase or sale price to protect against variations,
between the date the security is purchased or sold and the date on which payment
is made or received, in the value of the foreign currency relative to the U.S.
dollar or other foreign currency.
When the adviser anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Similarly, when the obligations held by the Fund create a short
position in a foreign currency, the Fund may enter into a forward contract to
buy, for a fixed amount, an amount of foreign currency approximating the short
position. With respect to any forward foreign currency contract, it will not
generally be possible to match precisely the amount covered by that contract and
the value of the securities involved due to the changes in the values of such
securities resulting from market movements between the date the forward contract
is entered into and the date it matures. In addition, while forward contracts
may offer protection from losses resulting from declines or appreciation in the
value of a particular foreign currency, they also limit potential gains which
might result from changes in the value of such currency. The Fund will also
incur costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
A separate account consisting of cash or liquid securities
equal to the amount of the Fund's assets that could be required to consummate
forward contracts will be established
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with the Trust's custodian except to the extent the contracts are otherwise
"covered." For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If the
market or fair value of such securities declines, additional cash or liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the Fund. A forward contract to
sell a foreign currency is "covered" if the Fund owns the currency (or
securities denominated in the currency) underlying the contract, or holds a
forward contract (or call option) permitting the Fund to buy the same currency
at a price no higher than the Fund's price to sell the currency. A forward
contract to buy a foreign currency is "covered" if the Fund holds a forward
contract (or call option) permitting the Fund to sell the same currency at a
price as high as or higher than the Fund's price to buy the currency.
CONVERTIBLE SECURITIES
Convertible securities entitle the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock. The
value of the convertibility feature depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities for the Fund, the adviser
will consider, among other factors, the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of the
Fund's portfolio as to issuers; and the ratings of the securities. Since credit
rating agencies may fail to timely change the credit ratings of securities to
reflect subsequent events, the adviser will consider whether such issuers will
have sufficient cash flow and profits to meet required principal and interest
payments. The Fund may retain a portfolio security whose rating has been changed
if the adviser deems that retention of such security is warranted.
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<PAGE> 191
WARRANTS
Warrants enable the owner to subscribe to and purchase a
specified number of shares of the issuing corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The purchase of warrants
involves the risk that the purchaser could lose the purchase value of the
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may invest in futures contracts and related options.
For a detailed description of these investments and related risks, see Appendix
B attached to this Statement of Additional Information.
"COVERED CALL" OPTIONS
As described in the Prospectus, the Fund may write covered
call options. The Fund will write call options only if they are "covered." The
option is "covered" if the Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, liquid assets
of equal value are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if the Fund maintains with its custodian a
portfolio of securities substantially replicating the movement of the index, or
liquid assets equal to the contract value. A call option is also covered if the
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
The Fund's obligation to sell a security subject to a covered
call option written by it may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or to permit the writing
of a new option containing different terms on such underlying security. The cost
of such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss on the transaction. There is no assurance that a liquid
secondary market will exist for any particular
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<PAGE> 192
option. An option writer, unable to effect a closing purchase transaction, will
not be able to sell the underlying security until the option expires or the
optioned security is delivered upon exercise with the result that the writer in
such circumstances will be subject to the risk of market decline or appreciation
in the security during such period.
When the Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the current bid price. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in
certain options. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a securities exchange may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
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<PAGE> 193
ASSET-BACKED SECURITIES
As described in the Prospectus, the Fund may purchase
asset-backed securities, which are securities backed by mortgages, installment
contracts, credit card receivables or other assets. Asset-backed securities
represent interests in "pools" of assets in which payments of both interest and
principal on the securities are made periodically, thus in effect "passing
through" periodic payments made by the individual borrowers on the assets that
underlie the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of asset-backed securities varies with the
maturities of the underlying instruments, and the average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as a
result of mortgage prepayments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely. Asset-backed securities acquired by the Fund
may include collateralized mortgage obligations ("CMOs") issued by private
companies.
The Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to predict
accurately the average maturity of a particular GNMA pool. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. The scheduled monthly
interest and principal payments relating to mortgages in the pool are "passed
through" to investors. In addition, there may be unscheduled principal payments
representing prepayments on the underlying mortgages. Although GNMA certificates
may offer yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a GNMA certificate originally purchased at a premium to decline in price to its
par value, which may result in a loss.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related securities
guaranteed by the GNMA include GNMA Mortgage Pass-Through Certificates (also
known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation
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<PAGE> 194
within the Department of Housing and Urban Development. GNMA certificates also
are supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the FNMA
include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of the FNMA and are not backed
by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). They are
solely the obligations of the FHLMC and guaranteed as to timely payment of the
principal and interest by FHLMC only.
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities may not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which have given debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most issuers
of automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
INTEREST RATE AND TOTAL RETURN SWAPS
The Fund may enter into interest rate or total return swaps
for hedging purposes and not for speculation. It will typically use interest
rate or total return swaps to preserve a return on a particular investment or
portion of its portfolio or to shorten the effective duration of its
investments. Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest or the total return of a
predefined "index," such as an exchange of fixed rate payments for floating rate
payments or an exchange of a floating rate payment for the total return on an
index.
The Fund will only enter into swaps on a net basis, (i.e., the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments). Inasmuch as these
transactions are entered into for good faith hedging purposes, the Fund and its
adviser believe that such obligations do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Fund's borrowing restrictions. The net amount of the excess, if any, of
the Fund's obligations over its entitlements with respect to each swap will be
accrued on a daily basis and an amount of liquid assets, such as cash, U.S.
government securities or other liquid high grade debt securities, having
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<PAGE> 195
an aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by the Fund's custodian.
If there is a default by the other party to a swap
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with markets for
other similar instruments which are traded in the Interbank market.
INCOME PARTICIPATION LOANS
The Fund may make or acquire participations in privately
negotiated loans to borrowers. Frequently, such loans have variable interest
rates and may be backed by a bank letter of credit; in other cases they may be
unsecured. Such transactions may provide an opportunity to achieve higher yields
than those that may be available from other securities offered and sold to the
general public.
Privately arranged loans, however, will generally not be rated
by a credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made by
the Fund may have a demand provision permitting the Fund to require repayment
within seven days. Participations in such loans, however, may not have such a
demand provision and may not be otherwise marketable. Recovery of an investment
in any such loan that is illiquid and payable on demand will depend on the
ability of the borrower to meet an obligation for full repayment of principal
and payment of accrued interest within the demand period, normally seven days or
less (unless the Fund determines that a particular loan issue, unlike most such
loans, has a readily available market). As it deems appropriate, the Board of
Trustees of the Trust will establish procedures to monitor the credit standing
of each such borrower, including its ability to honor contractual payment
obligations.
SHORT-TERM OBLIGATIONS
The Fund may invest directly in various short-term obligations
including those described below.
Investments include commercial paper and other short-term
promissory notes issued by corporations (including variable and floating rate
instruments). The Fund may invest in Canadian Commercial Paper ("CCP"), which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer. The Fund may also acquire zero coupon obligations,
which have greater price volatility than coupon obligations and which will not
result in the payment of interest until maturity.
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<PAGE> 196
Bank obligations include bankers' acceptances and negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which is
a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances and certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. The Fund
may also make interest bearing savings deposits in commercial and savings banks
not in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of the Fund's total assets at the time of
purchase.
The Fund may make limited investments in "GICs" issued by U.S.
insurance companies. When investing in GICs, the Fund makes cash contributions
to a deposit fund or an insurance company's general account. The insurance
company then credits to the Fund monthly a guaranteed minimum interest which is
based on an index. The insurance company may assess periodic charges against a
GIC for expense and service costs allocable to it, and the charges will be
deducted from the value of the deposit fund. The Fund will purchase a GIC only
when its 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 one or more
rating agencies. 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 15% of the Fund's
net assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When the Fund agrees to purchase when-issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment, marked to market daily. It is likely that the
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash or liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its total
assets.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
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REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the 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 would suffer a loss to
the extent that the proceeds from a sale of the underlying portfolio securities
were less than the repurchase price under the agreement, or to the extent that
the disposition of such securities by the Fund were delayed pending court
action. Although there is no controlling legal precedent confirming that the
Fund would be entitled, as against a claim by such seller or its receiver or
trustee in bankruptcy, to retain the underlying securities, the Board of
Trustees of the Trust believes that, under the regular procedures normally in
effect for custody of the Fund's securities subject to repurchase agreements and
under federal laws, a court of competent jurisdiction would rule in favor of the
Trust if presented with the question. Securities subject to repurchase
agreements will be held by the Trust's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by the Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow funds for temporary purposes by entering
into reverse repurchase agreements in accordance with its investment
restrictions. Pursuant to such agreements, the Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed-upon date and price. The Fund intends to
enter into reverse repurchase agreements only to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. At the time
the Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as U.S. Government securities or other
liquid, high grade debt securities consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Fund may decline below the
price at which it is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings by the Fund under the Investment
Company Act of 1940.
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U.S. GOVERNMENT OBLIGATIONS
As described in the Prospectus, the Fund may purchase
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Some of these obligations are supported by the full faith and
credit of the U.S. Treasury, such as obligations issued by the Government
National Mortgage Association. Others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the U.S. Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given that
the U.S. Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
VARIABLE AND FLOATING RATE OBLIGATIONS
The Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between the Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, the Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the adviser. In the event an issuer of
a variable or floating rate obligation defaulted on its payment obligation, the
Fund might be unable to dispose of the instrument because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
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<PAGE> 199
PORTFOLIO TURNOVER
The Fund may engage in short term trading and may sell
securities which have been held for periods ranging from several months to less
than a day. Portfolio turnover will tend to rise during periods of economic
turbulence and decline during periods of stable growth. The Fund's annual
portfolio turnover is not expected to exceed 200% under normal market
conditions.
The portfolio turnover rate for the Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
a Fund to receive certain favorable tax treatment. Portfolio turnover will not
be a limiting factor in making investment decisions.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations which
may be changed with respect to the Fund only by a vote of the holders of a
majority of its outstanding shares (as defined under "Miscellaneous" in the
Prospectus).
The Fund may not:
1. Purchase or sell real estate, except that the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with its
investment objective and policies the Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices; (b) purchase and sell options on futures contracts or
indices; and (c) purchase publicly traded securities of companies engaging in
whole or in part in such activities. For purposes of this investment limitation,
"commodities" will include 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.
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<PAGE> 200
In addition, the Fund is subject to the following
non-fundamental limitations, which may be changed without the vote of
shareholders.
The Fund may not:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles,
spreads, or any combination thereof, except as consistent with the Fund's
investment objective and policies, for transactions in options on securities or
indices of securities, futures contracts and options on futures contracts and in
similar investments.
3. Purchase securities on margin, make short sales of
securities or maintain a short position, except that, as consistent with the
Fund's investment objective and policies, (a) this investment limitation shall
not apply to the Fund's transactions in futures contracts and related options,
options on securities or indices of securities and similar instruments, and (b)
the Fund may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 15% of its net assets in illiquid
securities.
The Fund does not intend to purchase securities while its
outstanding borrowings (including reverse repurchase agreements) are in excess
of 5% of its assets. Securities held in escrow or in separate accounts in
connection with the Fund's investment practices are not deemed to be pledged for
purposes of this limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must be
signed by each shareholder, with each signature guaranteed by a U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
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<PAGE> 201
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 shares of the Fund are sold
to certain qualified investors at their net asset value without a sales charge.
A shares of the Fund are sold to public investors at the public offering price
based on the Fund's net asset value plus a front-end load or sales charge as
described in the Prospectus. B shares of the Fund 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 sales load or contingent deferred sales charge imposed for shares acquired
through the reinvestment of dividends or distributions on such shares.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Fund permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
protect against losses in a declining market, or prevent a loss if an investor
ultimately redeems his or her shares at a price which is lower than their
purchase price. An investor may want to consider his or her financial ability to
continue purchases through periods of low price levels. From time to time, in
advertisements, sales literature, communications to shareholders and other
materials ("Materials"), the Trust may illustrate the effects of dollar cost
averaging through use of or comparison to an index such as the S&P 500 Index.
OFFERING PRICE PER A SHARE OF THE FUND
An illustration of the computation of the offering price per A
share of the Fund, based on the estimated value of the Fund's net assets and
number of outstanding shares on its commencement date, are as follows:
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<PAGE> 202
BALANCED ALLOCATION FUND*
------------------------
<TABLE>
<S> <C>
Net Assets of A Shares..................................................................$10,000,000
Outstanding A Shares....................................................................$1,000,000
Net Asset Value Per Share
($10,000,000 / 1,000,000)...............................................................$10.00
Sales Charge, 4.75% of
offering price (5.00% of
net asset value per share)..............................................................$ .50
Offering to Public......................................................................$10.50
</TABLE>
* Amounts are estimated as the Fund has not commenced operations.
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<PAGE> 203
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.
By use of the exchange privilege, the Investor authorizes the
Transfer Agent's 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 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 set forth in the Prospectus, including three classes or
series, which represent interests in the Balanced Allocation Fund (Class AA,
Class AA - Special Series 1 and Class AA - Special Series 2) are described in
this Statement of Additional Information and the related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be
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<PAGE> 204
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 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 advisers with
specific reference to their own tax situation.
The Fund will be treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
qualify for tax treatment as a regulated investment company under the Code, the
Fund must satisfy, in addition to the distribution requirement described in the
Prospectus, certain requirements with respect to the source of its
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<PAGE> 205
income during a taxable year. At least 90% of the gross income of the Fund must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by the Fund from a partnership or trust is treated as derived
with respect to the Fund's business of investing in stock, securities or
currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.
Some investments held by the Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. The Treasury Department has issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" are not subject to the mark-to-market or loss deferral
rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by the Fund which are not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
The Trust will designate any distribution of long-term capital
gains of the Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for at least six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
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<PAGE> 206
If for any taxable year the Fund does not qualify for federal
tax treatment as a regulated investment company, all of the Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits, and would be eligible for
the dividends received deduction for corporations.
The Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
TRUSTEES AND OFFICERS
---------------------
The 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> 207
<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 and
Cleveland, OH 44114 Chief Executive Officer, NatCity
Age 46 Investments, Inc., since July 1995
(investment banking); President and
Chief Executive Officer, Raffensberger,
Hughes & Co. from 1993 until 1995
(broker-dealer); President, Reserve
Capital Group, from 1990 until 1993.
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.
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.
</TABLE>
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<PAGE> 208
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol
600 Autumn Lane Martin Gatton College of Business and
Lexington, KY 40502 Economics, University of Kentucky, since
Age 60 1981; Director, The Seed Corporation
(restaurant group), since 1990; Director;
Foam Design, Inc., (manufacturer of
industrial and commercial foam products),
since 1993.
Gerald L. Gherlein Trustee Executive Vice-President and General
3679 Greenwood Drive Counsel, Eaton Corporation, since 1991
Pepper Pike, OH 44124 (global manufacturing); Trustee, Meridia
Age 60 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 1994;
Oaks, PA 19456 Associate, Morgan Lewis & Bockius LLP
Age 39 (law firm).
</TABLE>
- --------------------
* Messrs. Carter and Martens are considered by the Trust to be
"interested persons" of the Trust as defined in the 1940 Act.
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<PAGE> 209
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, 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 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 fiscal 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.
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<PAGE> 210
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
- ------------------------------------
* The "Fund Complex" consists of Armada Funds, The Parkstone Group of
Funds and The Parkstone Advantage Funds. Each of the Trustees serves as
Trustee to all three investment companies. The Trustees became trustees
of The Parkstone Group of Funds and the Parkstone Advantage Fund
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> 211
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 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 Fund under an Advisory
Agreement dated April 9, 1998. The adviser is an affiliate of National City
Corporation, a bank holding company with $81 billion in assets, and headquarters
in Cleveland, Ohio and nearly 1,000 branch offices in six states. From time to
time, the advisers may voluntarily waive fees or reimburse the Trust for
expenses.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of their
duties or from reckless disregard by them of their duties and obligations
thereunder.
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<PAGE> 212
The Advisory Agreement with IMC was approved by the sole
shareholder of the Fund on the date it commenced operations. Unless sooner
terminated, the Advisory Agreement will continue in effect with respect to the
Fund 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 the Fund (as defined in the Fund's Prospectus) and a
majority of the trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement may be terminated by the
Trust or the advisers on 60 days written notice, and will terminate immediately
in the event of its assignment.
ADMINISTRATION AGREEMENT AND SUB-ADMINISTRATION AGREEMENT
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.
The Administrator, a Delaware business trust, has its
principal business offices at One Freedom Valley Drive, 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, I 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, Boston 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 I Investments Trust, SEI I
Managed Trust, SEI International Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, STI Classic Funds, STI Classic Variable Trust, TIP Funds and TIP I Funds.
The Administrator is entitled to receive with respect to the
Fund, an administrative fee, computed daily and paid monthly, at an annual rate
of .07% of the aggregate average daily net assets of all of the investment funds
of Armada up to the first eighteen (18) billion dollars in assets, and .06% of
the aggregate average daily net assets of
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over eighteen (18) billion dollars in assets, and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of the Fund.
IMC serves as sub-administrator for the Fund and provides
certain services as may be requested by the Administrator from time to time. For
its services as Sub-Administrator, IMC receives, from the Administrator,
pursuant to its Sub-Administration Agreement with the Administrator, a fee,
computed daily and paid monthly, at the annual rate of .01% of the aggregate
average daily net assets of all of the investment funds of Armada up to the
first $15 billion, and .015% of the aggregate average daily net assets over $15
billion.
DISTRIBUTION PLANS AND RELATED AGREEMENT
The Distributor acts as distributor of the Fund's shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a 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
related Distribution Agreements 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 agreements. 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 agreements 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 agreements
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 either 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
the 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
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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.
The Distribution Plans have been approved by the Board of
Trustees, and will continue in effect for successive one year periods provided
that such continuance is specifically approved by (1) the vote of a majority of
the trustees who are not parties to either Plan or interested persons of any
such party and who have no direct or indirect financial interest in either Plan
and (2) the vote of a majority of the entire Board of Trustees.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with
respect to the Fund. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of the
Fund; (ii) hold and disburse portfolio securities on account of the Fund; (iii)
collect and make disbursements of money on behalf of the Fund; (iv) collect and
receive all income and other payments and distributions on account of the Fund's
portfolio securities; (v) respond to correspondence by security brokers and
others relating to its duties; and (vi) make periodic reports to the Board of
Trustees concerning the Fund's operations. National City Bank is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Fund, provided that it shall remain responsible for the performance of
all of its duties under the Custodian Services Agreement and shall hold the Fund
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Fund. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of the Fund; (ii) transmit all communications by the Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Fund's operations. The Transfer Agent sends each
shareholder of record a 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
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a daily transaction report for each day on which a transaction occurs in the
shareholder's account with the Fund.
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 the Fund's
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 .25% (on an annualized basis), of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase and redemption requests from customers; (ii) providing
customers with a service that invests the assets of their accounts in 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 Agreement with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of portfolio securities for the Fund. The adviser
purchases portfolio securities either directly from the issuer or from an
underwriter or dealer making a market in the securities involved. Purchases from
an underwriter of portfolio securities include a commission or concession paid
by the issuer to the underwriter and purchases from dealers serving as market
makers may include the spread between the bid and asked price. Transactions on
stock exchanges involve the payment of negotiated brokerage commissions. There
is generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up.
While the adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction 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 Agreement, 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 the Fund. Information so received is in
addition to and not in lieu of services required to be performed by the adviser
and does not
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<PAGE> 216
reduce the fees payable to the adviser by the Fund. Such information may be
useful to the adviser in serving both the Trust and other clients, and,
similarly, supplemental information obtained by the placement of business of
other clients may be useful to the adviser in carrying out its obligations to
the Trust.
Portfolio securities will not be purchased from or sold to the
Trust's Adviser, Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Fund will not give preference to
its Adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
While serving as Adviser to the Fund, National City has agreed
to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department. In making investment recommendations
for the Trust, Trust Department personnel will not inquire or take into
consideration whether the issuer of securities proposed for purchase or sale for
the Trust's account are customers of the Commercial Department. In dealing with
commercial customers, the Commercial Department will not inquire or take into
consideration whether securities of those customers are held by the Trust.
Investment decisions for the Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the Adviser. Such other Funds, investment companies and
accounts may also invest in the same securities as the Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Fund and another investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Fund and such other
investment company or account. In some instances, this investment procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtained or sold by the Fund. In connection therewith, and to the
extent permitted by law, and by the Advisory Agreement, the Adviser may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for other investment companies or 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.
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.
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<PAGE> 217
PERFORMANCE INFORMATION
-----------------------
The Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b 6
Yield = 2 [(------) - 1]
cd + 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
The Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each 30-day
period, or, with respect to obligations purchased during the 30-day period, the
purchase price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30-day period that the obligation is in the Fund.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased by the Fund at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by the Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned
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<PAGE> 218
income will be subtracted from the net asset value per share (variable "d" in
the formula). Undeclared earned income is the net investment income which, at
the end of the 30-day base period, has not been declared as a dividend, but is
reasonably expected to be and is declared as a dividend shortly thereafter. For
applicable sales charges, see "How to Purchase and Redeem Shares -- Sales
Charges Applicable to Purchases of A Shares" and "Sales Charges Applicable to
Purchases of B Shares" in the Prospectus.
The Fund computes its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
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<PAGE> 219
The Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
T = (---) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all contingent deferred sales charges and other nonrecurring
charges at the end of the measuring period covered by the computation.
Each Fund may also advertise the "aggregate total return" for
its shares which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per Share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.
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<PAGE> 220
<TABLE>
<CAPTION>
Aggregate Aggregate
Total Return Total Return
From From
Inception Inception
Through Through
5/31/98 (with 5/31/98
Deduction of (without
Maximum Sales Deduction for
Charge) Any Sales Inception
Charge) Date
Armada Balanced Allocation
Fund
<S> <C> <C>
Class A N/A N/A
Class I N/A N/A
B Shares N/A N/A
</TABLE>
The Fund may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing the Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its aggregate total return for
the period of time specified in the advertisement or communication by assuming
the investment of $10,000 in shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested or the ending value redeemed any amount representing sales charges. The
Fund will, however, disclose the maximum sales charge and will also disclose
that the performance data do not reflect sales charges and that inclusion of
sale charges would reduce the performance quoted.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on the Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of the Fund, high-quality investments,
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<PAGE> 221
economic conditions, the relationship between sectors of the economy and the
economy as a whole, various securities markets, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury securities. From time to time, Materials may
summarize the substance of information contained in shareholder reports
(including the investment composition of the Fund), as well as the views of the
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Materials may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
-------------
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are being amortized on the straight-line method over a period of five
years from the date of commencement of operations.
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
that Fund, together with all income, earnings, profits, and proceeds derived
from the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to the
Fund. In determining the Fund's net asset value, assets belonging to the Fund
are charged with the liabilities in respect of that Fund.
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<PAGE> 222
As of August 24, 1998, the following persons owned of record
5% or more of the shares of the Trust:
<TABLE>
<CAPTION>
Balanced Allocation Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities, Inc. 958.0840 37.83%
908 Aetna Drive
Ellwood City, PA 16117-1410
Wheat, First Securities, Inc. 931.3850 36.77%
308 Division Avenue
Ellwood City, PA 16117-2209
Wheat, First Securities, Inc. 633.0940 25.00%
P.O. Box 194, Route 18
Wampum, PA 16157-0194
Balanced Allocation Fund (I)
OUTSTANDING SHARES PERCENTAGE
Whitelaw & Co. 4,939,418.8410 88.25%
c/o National City Bank
Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
Whitelaw & Co. 411,201.3840 7.35%
Daily Valuation Acct.
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 223
APPENDIX A
----------
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's. 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.
"BB," "B," "CCC," "CC" and "C" - Debt is 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.
"BB" - Debt is less vulnerable to non-payment 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" - Debt is more vulnerable to non-payment 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" - Debt is currently vulnerable to non-payment, 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.
A-1
<PAGE> 224
"CC" - An obligation rated "CCC" 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" - An obligation rated "D" is in payment default. This
rating is used when payments on an obligation are not made on the date due, even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
A-2
<PAGE> 225
"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 operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
A-3
<PAGE> 226
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of
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principal and interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of
interest and/or principal seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
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"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
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COMMERCIAL PAPER RATINGS
A Standard & Poor's ("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" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default. The "D" rating category
is used when interest payments of principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
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
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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
effects of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and 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 highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify 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 ensure 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.
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Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
"LOC" - The symbol "LOC" indicates that the rating is based on
a letter of credit issued by a commercial bank.
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:
"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.
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"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.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of "A1+" is assigned.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by an adequate capacity for
timely repayment such capacity is more susceptible to adverse changes in
business, economic, or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic, or financial
conditions.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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APPENDIX B
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As stated in the Prospectus, the Balanced Allocation Fund (the
"Fund") may enter into certain futures transactions and options for hedging
purposes. Such transactions are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Fund, through using
futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected
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by the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. The
Fund would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury Bonds
and Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Fund may trade in any interest rate futures
contracts for which there exists a public market, including, without limitation,
the foregoing instruments.
EXAMPLE OF FUTURES CONTRACT SALE. The Fund may engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security held by
the Fund tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The adviser wants to fix the
current market value of this fund security until some point in the future.
Assume the fund security has a market value of 100, and the adviser believes
that because of an anticipated rise in interest rates, the value will decline to
95. The Fund might enter into futures contract sales of Treasury bonds for a
equivalent of 98. If the market value of the fund security does indeed decline
from 100 to 95, the equivalent futures market price for the Treasury bonds might
also decline from 98 to 93.
In that case, the five point loss in the market value of the
fund security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The adviser could be wrong in its forecast of interest rates
and the equivalent futures market price could rise above 98. In this case, the
market value of the fund securities, including the fund security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above
example might incur a loss (which might be reduced by a offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Fund may engage in
an interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer
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for a time the purchase of long-term bonds in light of the availability of
advantageous interim investments, e.g., shorter term securities whose yields are
greater than those available on long-term bonds. The Fund's basic motivation
would be to maintain for a time the income advantage from investing in the
short-term securities; the Fund would be endeavoring at the same time to
eliminate the effect of all or part of a expected increase in market price of
the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond
that the Fund may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The adviser wishes to fix the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the adviser believes that, because
of an anticipated fall in interest rates, the price will have risen to 105 (and
the yield will have dropped to about 9 1/2%) in four months. The Fund might
enter into futures contracts purchases of Treasury bonds for an equivalent price
of 98. At the same time, the Fund would assign a pool of investments in
short-term securities that are either maturing in four months or earmarked for
sale in four months, for purchase of the long-term bond at an assumed market
price of 100. Assume these short-term securities are yielding 15%. If the market
price of the long-term bond does indeed rise from 100 to 105, the equivalent
futures market price for Treasury bonds might also rise from 98 to 103. In that
case, the 5 point increase in the price that the Fund pays for the long-term
bond would be offset by the 5 point gain realized by closing out the futures
contract purchase.
The adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Fund would continue with its purchase
program for long-term bonds. The market price of available long-term bonds would
have decreased. The benefit of this price decrease, and thus yield increase,
will be reduced by the loss realized on closing out the futures contract
purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Fund would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the Fund,
including those originally in the pool assigned to the particular long-term
bond, would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing out
the futures contract purchase. In each transaction, expenses would also be
incurred.
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II. INDEX FUTURES CONTRACTS
GENERAL. A bond or stock index assigns relative values to the
bonds or stocks included in the index which fluctuates with changes in the
market values of the bonds or stocks included. Some stock index futures
contracts are based on broad market indexes, such as the Standard & Poor's
Ratings Group 500 or the New York Stock Exchange Composite Index. In contrast,
certain exchanges offer futures contracts on narrower market indexes or indexes
based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
The Fund may sell index futures contracts in order to offset a
decrease in market value of its fund securities that might otherwise result from
a market decline. The Fund may do so either to hedge the value of its fund as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, the Fund may purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its fund holdings. For example, in
the event that the Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. The
Fund may also sell futures contracts in connection with this strategy, in order
to protect against the possibility that the value of the securities to be sold
as part of the restructuring of the fund will decline prior to the time of sale.
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III. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian or a subcustodian an amount of cash or
cash equivalents, known as initial margin, based on the value of the contract.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when the Fund has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the adviser may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
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IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures
by the Fund as hedging devices. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund will experience either a loss or gain on the futures which will not be
completely offset by movements in the price of the instruments which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of instruments being hedged and movements in the price of futures
contracts, the Fund may buy or sell futures contracts in a greater dollar amount
than the dollar amount of instruments being hedged if the volatility over a
particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by the advisers. Conversely, the Fund may buy or sell fewer
futures contracts if the volatility over a particular time period of the prices
of the instruments being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by the adviser.
Where futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market
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trends or interest rate movements by the advisers may still not result in a
successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge fund securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Fund is also subject to the
adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
B-7
<PAGE> 240
V. OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
VI. OTHER MATTERS
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
B-8
<PAGE> 241
CROSS REFERENCE SHEET
---------------------
Total Return Advantage Fund
Intermediate Bond Fund
Enhanced Income Fund
GNMA Fund
Bond Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
1. Cover Page...........................................Cover Page
2. Table of Contents....................................Table of Contents
3. General Information and History......................Statement of Additional
Information
4. Investment Objectives and Policies...................Risk Factors, Investment
Objectives and Policies
5. Management of Registrant.............................Trustees and Officers
6. Control Persons and Principal
Holders of Securities................................Description of Shares
7. Investment Advisory and Other
Services Management..................................Advisory, Administration,
Distribution, Custody, and
Transfer Agency Agreements
8. Brokerage Allocation and Other
Practices............................................Risk Factors, Investment
Objectives and Policies
9. Capital Stock and Other Securities ..................Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing
of Securities Being Offered .........................Additional Purchase and
Redemption Information
11. Tax Status...........................................Additional Information
Concerning Taxes
12. Underwriters.........................................Not Applicable
13. Calculation of Performance Data......................Yield and Performance
Information
14. Financial Statements.................................Financial Statements
</TABLE>
<PAGE> 242
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 18, 1998
TOTAL RETURN ADVANTAGE FUND
INTERMEDIATE BOND FUND
ENHANCED INCOME FUND
GNMA FUND
BOND 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 18, 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.
<PAGE> 243
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION..............................................................................1
INVESTMENT OBJECTIVES AND POLICIES...............................................................................1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................................................................9
DESCRIPTION OF SHARES...........................................................................................13
ADDITIONAL INFORMATION CONCERNING TAXES.........................................................................14
TRUSTEES AND OFFICERS...........................................................................................17
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS.........................................................................21
SHAREHOLDER SERVICES PLAN.......................................................................................27
PORTFOLIO TRANSACTIONS..........................................................................................28
AUDITORS....................................................................................................... 29
COUNSEL....................................................................................................... 29
YIELD AND PERFORMANCE INFORMATION...............................................................................30
MISCELLANEOUS...................................................................................................35
FINANCIAL STATEMENTS............................................................................................40
APPENDIX A.....................................................................................................A-1
</TABLE>
<PAGE> 244
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Total Return Advantage, Intermediate Bond (formerly, the "Fixed Income Fund"),
Enhanced Income, GNMA and Bond (formerly, the "Intermediate Government Fund")
Funds. The information contained in this Statement of Additional Information
expands upon matters discussed in the Prospectus. No investment in shares of a
Fund should be made without first reading the Prospectus.
The GNMA Fund and Bond Fund commenced operations on August 10,
1994 as separate investment portfolios (the "Predecessor GNMA Fund" and
"Predecessor Intermediate Government Fund," collectively the "Predecessor
Funds") of Inventor Funds, Inc. which was organized as a Maryland corporation.
On September 9, 1996, the Predecessor Funds were reorganized as new portfolios
of Armada. Prior to the reorganization, the Predecessor Funds offered and sold
shares of stock that were similar to Armada's A shares of beneficial interest.
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on National City Investment Management
Company's ("IMC" or the "Adviser") investment management strategies, techniques,
policies and related matters may be included from time to time in
advertisements, sales literature, communications to shareholders and other
materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for securities which may be held by the Funds.
ASSET-BACKED SECURITIES
- -----------------------
As described in the Prospectus, each Fund may purchase
asset-backed securities, which are securities backed by mortgages, installment
contracts, credit card receivables or other assets. Asset-backed securities
represent interests in "pools" of assets in which payments of both interest and
principal on the securities are made monthly, thus in effect "passing through"
monthly payments made by the individual borrowers on the assets that underlie
the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of asset-backed securities varies with the
maturities of the underlying instruments, and the average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as a
result of mortgage prepayments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely. Asset-backed securities acquired by a Fund
may include collateralized mortgage obligations ("CMOS") issued by private
companies.
Each Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-
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<PAGE> 245
owned U.S. Government corporation within the Department of Housing and Urban
Development. The market value and interest yield of these instruments can vary
due to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of federally insured
mortgage loans. GNMA certificates consist of underlying mortgages with a maximum
maturity of 30 years. However, due to scheduled and unscheduled principal
payments, GNMA certificates have a shorter average maturity and, therefore, less
principal volatility than a comparable 30-year bond. Since prepayment rates vary
widely, it is not possible to predict accurately the average maturity of a
particular GNMA pool. GNMA securities differ from conventional bonds in that
principal is paid back to the certificate holders over the life of the loan
rather than at maturity. The scheduled monthly interest and principal payments
relating to mortgages in the pool are "passed through" to investors. In
addition, there may be unscheduled principal payments representing prepayments
on the underlying mortgages. Although GNMA certificates may offer yields higher
than those available from other types of U.S. Government securities, GNMA
certificates may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because of the prepayment feature. For
instance, when interest rates decline, the value of a GNMA certificate likely
will not rise as much as comparable debt securities due to the prepayment
feature. In addition, these prepayments can cause the price of a GNMA
certificate originally purchased at a premium to decline in price to its par
value, which may result in a loss.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related securities
guaranteed by the GNMA include GNMA Mortgage Pass-Through Certificates (also
known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by the FNMA include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by FNMA. Mortgage-related securities issued by the FHLMC include
FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or
"Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
-2-
<PAGE> 246
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which have given debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most issuers
of automobile receivables permit the services to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
FOREIGN CURRENCY TRANSACTIONS
- -----------------------------
In order to protect against a possible loss on investments
resulting from a decline or appreciation in the value of a particular foreign
currency against the U.S. dollar or another foreign currency or for other
reasons, the Total Return Advantage and Enhanced Income Funds are authorized to
enter into forward currency exchange contracts. These contracts involve an
obligation to purchase or sell a specified currency at a future date at a price
set at the time of the contract. Forward currency contracts do not eliminate
fluctuations in the values of fund securities but rather allow a Fund to
establish a rate of exchange for a future point in time.
When entering into a contract for the purchase or sale of a
security, these Funds may enter into a forward foreign currency exchange
contract for the amount of the purchase or sale price to protect against
variations, between the date the security is purchased or sold and the date on
which payment is made or received, in the value of the foreign currency relative
to the U.S. dollar or other foreign currency.
When the Sub-adviser to Total Return Advantage and Adviser to
Enhanced Income Fund anticipates that a particular foreign currency may decline
substantially relative to the U.S. dollar or other leading currencies, in order
to reduce risk, a Fund may enter into a forward contract to sell, for a fixed
amount, the amount of foreign currency approximating the value of some or all of
the Fund's securities denominated in such foreign currency. Similarly, when the
obligations held by a Fund create a short position in a foreign currency, the
Fund may enter into a forward contract to buy, for a fixed amount, an amount of
foreign currency approximating the short position. With respect to any forward
foreign currency contract, it will not generally be possible to match precisely
the amount covered by that contract and the value of the securities involved due
to the changes in the values of such securities resulting from market movements
between the date the forward contract is entered into and the date it matures.
In addition, while forward contracts may offer protection from losses resulting
from declines or appreciation in the value of a particular foreign currency,
they also limit potential gains which might result from changes in the value of
such currency. A Fund will also incur costs in connection with forward foreign
currency exchange contracts and conversions of foreign currencies and U.S.
dollars.
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<PAGE> 247
A separate account consisting of liquid assets, such as cash,
U.S. government securities or other liquid high grade debt obligations equal to
the amount of the Enhanced Income and Total Return Advantage Funds' assets that
could be required to consummate forward contracts will be established with the
Funds' Custodian except to the extent the contracts are otherwise "covered." For
the purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Funds. A forward contract to sell a foreign
currency is "covered" if a Fund owns the currency (or securities denominated in
the currency) underlying the contract, or holds a forward contract (or call
option) permitting the Fund to buy the same currency at a price no higher than
the Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if a Fund holds a forward contract (or call option)
permitting the Fund to sell the same currency at a price as high as or higher
than the Fund's price to buy the currency.
INTEREST RATE SWAPS
- -------------------
The Total Return Advantage, Enhanced Income and GNMA Funds may
enter into interest rate swaps for hedging purposes and not for speculation. A
Fund will typically use interest rate swaps to preserve a return on a particular
investment or portion of its portfolio or to shorten the effective duration of
its investments. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments.
The Total Return Advantage, Enhanced Income and GNMA Funds
will only enter into interest rate swaps on a net basis, (i.e., the two payment
streams are netted out, with a Fund receiving or paying, as the case may be,
only the net amount of the two payments). Inasmuch as these transactions are
entered into for good faith hedging purposes, the Funds and their respective
Adviser or Sub-adviser believe that such obligations do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to the Funds' borrowing restrictions. The net amount of the
excess, if any, of the Funds' obligations over their entitlements with respect
to each interest rate swap will be accrued on a daily basis and an amount of
liquid assets, such as cash, U.S. government securities or other liquid high
grade debt securities, having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Funds'
custodian.
If there is a default by the other party to an interest rate
swap transaction, the Fund involved will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with markets for other similar instruments which are traded in the
Interbank market.
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<PAGE> 248
FUTURES CONTRACTS AND RELATED OPTIONS
For a detailed description of futures contracts and related
options, see Appendix B to this Statement of Additional Information.
INCOME PARTICIPATION LOANS
The Total Return Advantage, Intermediate Bond and Enhanced
Income Funds may make or acquire participations in privately negotiated loans to
borrowers. Frequently, such loans have variable interest rates and may be backed
by a bank letter of credit; in other cases they may be unsecured. Such
transactions may provide an opportunity to achieve higher yields than those that
may be available from other securities offered and sold to the general public.
Privately arranged loans, however, will generally not be rated
by a credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made by
a Fund may have a demand provision permitting the Fund to require repayment
within seven days. Participations in such loans, however, may not have such a
demand provision and may not be otherwise marketable. Recovery of an investment
in any such loan that is illiquid and payable on demand will depend on the
ability of the borrower to meet an obligation for full repayment of principal
and payment of accrued interest within the demand period, normally seven days or
less (unless the Fund determines that a particular loan issue, unlike most such
loans, has a readily available market). As it deems appropriate, the Board of
Trustees of the Trust will establish procedures to monitor the credit standing
of each such borrower, including its ability to honor contractual payment
obligations.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase when-issued securities, the custodian
sets aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment, marked to market daily. It is likely that a Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its fund might be affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
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<PAGE> 249
VARIABLE AND FLOATING RATE OBLIGATIONS
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between a Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, a Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the Adviser or Sub-adviser. In the
event an issuer of a variable or floating rate obligation defaulted on its
payment obligation, a Fund might be unable to dispose of the instrument because
of the absence of a secondary market and could, for this or other reasons,
suffer a loss to the extent of the default.
SHORT TERM OBLIGATIONS
Each Fund may invest in various short-term obligations
including those described below.
Investments include commercial paper and other short-term
promissory notes issued by corporations (including variable and floating rate
instruments). In addition, the Total Return Advantage, Intermediate Bond and
Enhanced Income Funds may invest in Canadian Commercial Paper ("CCP"), which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer. Each such Fund may also acquire zero coupon
obligations, which have greater price volatility than coupon obligations and
which will not result in the payment of interest until maturity.
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by an U.S. bank which
is a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances, certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. The Total
Return Advantage, Intermediate Bond and Enhanced Income Funds may also make
interest bearing savings deposits in commercial and savings banks not in excess
of 5% of its total assets. Investment in non-negotiable time deposits is limited
to no more than 5% of each such Fund's total assets at the time of purchase.
The Total Return Advantage, Intermediate Bond and Enhanced
Income Funds may also make limited investments in Guaranteed Investment
Contracts ("GIC") issued by U.S.
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<PAGE> 250
insurance companies. When investing in GICs, a Fund makes cash contributions to
a deposit fund or an insurance company's general account. The insurance company
then credits to that Fund monthly a guaranteed minimum interest which is based
on an index. The insurance company may assess periodic charges against a GIC for
expense and service costs allocable to it, and the charges will be deducted from
the value of the deposit fund. A Fund will purchase a GIC only when its Adviser
or Sub-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 one or more
rating agencies.
U.S. GOVERNMENT OBLIGATIONS
As described in the Prospectus, each Fund may purchase
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of these obligations are supported by the full faith and
credit of the U.S. Treasury, such as obligations issued by the Government
National Mortgage Association. Others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the U.S. Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. government
to purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given that
the U.S. government would provide financial support to U.S. government-sponsored
agencies or instrumentalities if it is not obligated to do so by law. The Funds
will invest in the obligations of such agencies or instrumentalities only when
its Adviser or Sub-adviser believes that the credit risk with respect thereto is
minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making fund decisions.
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<PAGE> 251
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.
2. Invest in commodities, except that as consistent with its
investment objective and policies the Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices; (b) purchase and sell options on futures contracts or
indices; (c) purchase publicly traded securities of companies engaging in whole
or in part in such activities.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as 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.
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<PAGE> 252
4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 15% of its net assets in illiquid
securities.
The Funds do not intend to purchase securities while their
respective outstanding borrowings (including reverse repurchase agreements) are
in excess of 5% of their respective total assets. Securities held in escrow or
in separate accounts in connection with a Fund's investment practices are not
deemed to be pledged for purposes of this limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Fund 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 an U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for 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 shares of the Funds are sold
to certain qualified investors at their net asset value without a sales charge.
A shares of the Funds are sold to public investors at the public offering price
based on the Fund's net asset value plus a front-end load or sales charge as
described in the Prospectus. 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 sales load or contingent deferred sales charge imposed for shares acquired
through the reinvestment of dividends or distributions on such shares.
For the fiscal year ended May 31, 1998, sales loads paid by
shareholders of the Total Return Advantage, Intermediate Bond, Enhanced Income,
GNMA and Bond Funds totalled $10,700, $8,675, $1,830, $23 and $1,775,
respectively.
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Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Funds permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
protect against losses in a declining market, or prevent a loss if an investor
ultimately redeems his or her shares at a price which is lower than their
purchase price. An investor may want to consider his or her financial ability to
continue purchases through periods of low price levels. From time to time, in
advertisements, sales literature, communications to shareholders and other
materials ("Materials"), the Trust may illustrate the effects of dollar cost
averaging through use of or comparison to an index such as the S&P 500 Index or
Lehman Intermediate Government Index.
OFFERING PRICE PER A SHARE OF THE FUNDS
Illustrations of the computation of the offering price per A
share of the Total Return Advantage, Intermediate Bond, Enhanced Income, GNMA
and Bond Funds, based on the value of the Funds' net assets and number of
outstanding shares on May 31, 1998 are as follows:
<TABLE>
<CAPTION>
TABLE
TOTAL RETURN ADVANTAGE FUND
<S> <C>
Net Assets of A Shares................................................. $639,550
Outstanding A Shares................................................... $62,425
Net Asset Value Per Share
($639,550 / 62,425).................................................... $10.25
Sales Charge, 4.75% of
offering price (4.98% of
net asset value per share)*............................................ $ .51
Offering to Public..................................................... $10.76
* Reflects current sales charge
</TABLE>
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<TABLE>
<CAPTION>
INTERMEDIATE BOND FUND
<S> <C>
Net Assets of A Shares................................................. $3,287,953
Outstanding A Shares................................................... 309,175
Net Asset Value Per Share
($3,287,953 / 309,175)................................................. $10.63
Sales Charge, 4.75% of
offering price (4.99% of
net asset value per share)*............................................ $ .53
Offering to Public..................................................... $11.16
ENHANCED INCOME FUND
Net Assets of A Shares................................................. $559,023
Outstanding A Shares................................................... 55,477
Net Asset Value Per Share
($559,023 / 55,477).................................................... $10.08
Sales Charge, 2.75% of
offering price (2.88% of
net asset value per share)............................................. $ .29
Offering to Public..................................................... $10.37
</TABLE>
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<TABLE>
<CAPTION>
GNMA FUND
<S> <C>
Net Assets of A Shares................................................. $548,847
Outstanding A Shares................................................... $52,986
Net Asset Value Per Share
($548,847 / 52,986).................................................... $10.36
Sales Charge, 4.75% of
offering price (5.02% of
net asset value per share)*............................................ $ .52
Offering to Public..................................................... $10.88
* Reflects current sales charge
BOND FUND
Net Assets of A Shares................................................. $160,689
Outstanding A Shares................................................... 15,640
Net Asset Value Per Share
($160,689 / 15,640).................................................... $10.27
Sales Charge, 4.75% of
offering price (4.99% of
net asset value per share)*............................................ $10.27
Offering to Public..................................................... $10.78
</TABLE>
* Reflects current sales charge
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.
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
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<PAGE> 256
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 classes or
series of shares. Fifteen of these classes or series, which represent interests
in the Intermediate Bond Fund (Class I, Class I - Special Series 1 and Class I -
Special Series 2), Enhanced Income Fund (Class O, Class O - Special Series 1 and
Class O - Special Series 2), Total Return Advantage Fund (Class P, Class P -
Special Series 1 and Class P - Special Series 2), Bond Fund (Class R, Class R -
Special Series 1 and Class R - Special Series 2) and GNMA Fund (Class S Class S
- - Special Series 1 and Class S - Special Series 2).
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 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.
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<PAGE> 257
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.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or
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<PAGE> 258
trust. Some of the investments that the Funds may make (such as equipment lease
and trust certificates) may not be securities or may not produce qualifying
income. Therefore, it may be necessary for the Adviser or Sub-adviser to
restrict the investments of the Funds to ensure that nonqualifying income does
not exceed 10% of its total gross income for a taxable year.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Fund which are not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the gain
or loss on the underlying transaction.
The Trust will designate any distribution of long-term capital
gains of a Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of such Funds' shares,
if the shareholder has not held such shares for at least six months, any loss on
the sale or exchange of those shares will be treated as long-term capital loss
to the extent of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions would be taxable as ordinary income to the Fund's shareholders to
the extent of the Fund's current and accumulated earnings and profits, and would
be eligible for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are
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<PAGE> 259
subject to withholding by the Internal Revenue Service for failure to properly
include on their return payments of taxable interest or dividends, or who have
failed to certify to the Fund that they are not subject to backup withholding
when required to do so or that they are "exempt recipients."
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<PAGE> 260
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board 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, Raffensperger,
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>
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<PAGE> 261
<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 (law firm).
</TABLE>
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<PAGE> 262
- --------------------
* Messrs. Carter and Martens are considered by the Trust to be
"interested persons" of the Trust as defined in the 1940 Act.
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.
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.
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 fiscal 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.
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<PAGE> 263
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 Estimated
Aggregate Retirement Benefits Approval Total Compensation
Name of Compensation from Accrued as Part of Benefits Upon from the Trust and
Person, Position the Trust the Trust's Expenses Retirement Fund 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>
- ---------------------
* 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> 264
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 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 Total Return Advantage
Fund and Enhanced Income Fund under an Advisory Agreement dated March 6, 1998
and to the Intermediate Bond Fund, GNMA Fund and Bond Fund under an Advisory
Agreement dated November 21, 1997. NAM serves as sub-investment adviser to the
Total Return Advantage Fund under a Sub-Advisory Agreement with IMC dated March
6, 1998 and until June 29, 1998 served as investment adviser to the Total Return
Advantage and Enhanced Income Funds. IMC is an affiliate of National City
Corporation, a bank holding company with $81 billion in assets, and headquarters
in Cleveland, Ohio and nearly 1,000 branch offices in six states. Through its
subsidiaries, National City Corporation has been
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<PAGE> 265
managing investments for individuals, pension and profit-sharing plans and other
institutional investors for over 75 years and currently manages over $18.73
billion in assets. From time to time, the Adviser may voluntarily waive fees or
reimburse the Trust for expenses.
Pursuant to the advisory agreements relating to the Total
Return Advantage, Intermediate Bond and Enhanced Income Funds then in effect,
the Trust incurred advisory fees in the following respective amounts for the
fiscal years ended May 31, 1998, 1997 and 1996: (i) $404,823 (after waivers of
$1,133,101), $0 (after waivers of $1,530,963), and $0 (after waivers of
$1,545,558) for the Total Return Advantage Fund; (ii) $593,301 (after waivers of
$222,488), $550,261 (after waivers of $118,288) and $588,875 for the
Intermediate Bond Fund; and (iii) $65,970 (after waivers of $264,973) $0, (after
waivers of $296,129) and $0 (after waivers of $298,505) for the Enhanced Income
Fund.
Pursuant to the advisory agreements relating to the GNMA and
Bond Funds then in effect, the Trust incurred advisory fees in the following
amounts for the fiscal years ended May 31, 1998 and 1997: (i) $395,769 (after
waivers of $0) and $323,854 (after fee waivers of $50,450) for the GNMA Fund and
(ii) $574,688 (after waivers of $0) and $485,145 (after fee waivers of $54,417)
for the Bond Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, IMC earned advisory fees of
$256,168 and $366,399 and waived fees in the amounts of $0 and $0 for the GNMA
and Bond Funds, respectively. Integra Trust Company ("Integra"), the investment
adviser to the Predecessor GNMA and Bond Funds, earned the following advisory
fees with respect to such funds for the stated periods: (i) $118,136 and
$173,163 for the period from June 1, 1996 until September 9, 1996; (ii) $36,971
and $53,654 for the one-month period ended May 31, 1996; (iii) $385,463 and
$602,602 for the fiscal year ended April 30, 1996; and (iv) $178,282 and
$132,372 for the period from August 10, 1994 (commencement of operations)
through April 30, 1995, respectively. Integra waived advisory fees during the
same periods in the amounts of: (i) $50,450 and $54,417; (ii) $9,583 and
$11,464; (iii) $107,340 and $130,371; and (iv) $72,352 and $76,919,
respectively.
Each Advisory and Sub-Advisory Agreement provides that the
Adviser and Sub-Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Trust in connection with the performance
under the Advisory or Sub-Advisory Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser or Sub-Adviser in the performance of their
duties or from reckless disregard by them of their duties and obligations
thereunder.
The current Advisory Agreement with respect to the Total
Return Advantage Fund and Enhanced Income Fund was approved by a majority of
shareholders of each such Fund at a Special Meeting of Shareholders held on June
29, 1998 in order to approve such Advisory Agreement. The current Advisory
Agreement with respect to the other Funds was approved by a majority of
shareholders of each such Fund at a Special Meeting of Shareholders held on
November 19, 1997 in order to approve such Advisory Agreement. The current
Sub-Advisory Agreement with respect to the Total Return Advantage Fund was
approved by a
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<PAGE> 266
majority of shareholders of the Fund at a Special Meeting of Shareholders held
on June 29, 1998 in order to approve such Sub-Advisory Agreement. Unless sooner
terminated, each Advisory Agreement will continue in effect with respect to each
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
Fund's Prospectus) and a majority of the trustees who are not parties to the
Agreement or interested persons (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. Each Advisory
Agreement and the Sub-Advisory Agreement may be terminated by the Trust or the
Adviser or Sub-Adviser on 60 days written notice, and will terminate immediately
in the event of its assignment.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a bank holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company. The Adviser believes that it
may perform the services for the Funds contemplated by its Advisory Agreements
with the Trust as described in such agreements and this Prospectus without
violation of applicable banking laws or regulations. However, there are no
controlling judicial precedents and future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well as
future interpretations of present requirements, could prevent the Adviser from
continuing to perform services for the Trust. If the Adviser were prohibited
from providing services to the Funds, the Board of Trustees would consider
selecting another qualified firm. Any new investment advisory agreement would be
subject to shareholder approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the Adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Fund shares,
the Adviser and its affiliated and correspondent banks might be required to
alter materially or discontinue the services offered by them to shareholders. It
is not anticipated, however, that any resulting change in the Trust's method of
operations would affect its net asset value per share or result in financial
losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Adviser, or an affiliate of the Adviser,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the Adviser,
or such an affiliate, might offer to provide such services.
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ADMINISTRATION AGREEMENT AND SUB-ADMINISTRATION AGREEMENT
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.
The Administrator, a Delaware business trust, has its
principal business offices at One Freedom Valley Drive, 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.
The Administrator is entitled to receive with respect to the
Funds, an administrative fee, computed daily and paid monthly, at an annual rate
of .07% of the aggregate average daily net assets of all of the investment funds
of Armada up to the first eighteen (18) billion dollars in assets, and .06% of
the aggregate average daily net assets over eighteen (18) billion dollars in
assets, and is entitled to be reimbursed for its out-of-pocket expenses incurred
on behalf of the Funds.
For the period from May 1, 1998 through May 31, 1998, the
Administrator earned administration fees of $13,648, $8,873 $4,081 $4,405 and
$6,901 with respect to the Total Return Advantage, Intermediate Bond, Enhanced
Income, GNMA and Bond Funds.
Prior to May 1, 1998, PFPC served as the administrator and
accounting agent to the Trust. The services provided as administrator and
accounting agent and current fees are described in the Prospectus. Pursuant to
the former Administration and Accounting Services Agreement, the Trust incurred
the following respective fees to PFPC for the fiscal period ended
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<PAGE> 268
April 30, 1998 and for the fiscal years ended May 31, 1997 and 1996: (i)
$241,258, $258,768 and $260,951 for the Total Return Advantage Fund; (ii)
$135,648, $121,554 and $107,068 for the Intermediate Bond Fund; and (iii)
$67,984, $65,807 and $866,336 for the Enhanced Income Fund and the Trust
incurred $65,665 and $94,631 in respective fees to PFPC for the fiscal period
ended April 30, 1998 with respect to GNMA and Bond Funds.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, PFPC earned administration fees of
$46,576 and $66,618 for the GNMA and Bond Funds, respectively. SEI Financial
Management Corporation, a wholly-owned subsidiary of SEI Corporation, served as
administrator to the Predecessor GNMA and Bond Funds and earned the following
fees with respect to such funds for the stated periods: (i) $30,378 and $44,528
for the period from June 1, 1996 until September 9, 1996; (ii) $9,507 and
$13,797 for the one-month period ended May 31, 1996; (iii) $99,119 and $154,955
for the fiscal year ended April 30, 1996; and (iv) $52,643 and $65,623 for the
period from August 10, 1994 (commencement of operations) through April 30, 1995.
IMC serves as sub-administrator for each Fund and provides
certain services as may be requested by the Administrator from time to time. For
its services as Sub-Administrator, IMC receives, from the Administrator,
pursuant to its Sub-Administration Agreement with the Administrator, a fee,
computed daily and paid monthly, at the annual rate of .01% of the aggregate
average daily net assets of all of the investment funds of Armada up to the
first $15 billion, and .015% of the aggregate average daily net assets over $15
billion.
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
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.
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<PAGE> 269
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 either 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 Distribution
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 I and A
shares in an amount not to exceed .10% per annum of the fund's 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.
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.
The Distribution Plans have been approved by the Board of
Trustees, and will continue in effect for successive one year periods provided
that such continuance is specifically approved by (1) the vote of a majority of
the trustees who are not parties to either Plan or interested persons of any
such party and who have no direct or indirect financial interest in either Plan
and (2) the vote of a majority of the entire Board of Trustees.
For the fiscal year ended May 31, 1998, the Trust paid the
Distributor the approximate amounts of $60,000, $82,000, and $11,000 with
respect to the Total Return Advantage, Intermediate Bond and Enhanced Income
Funds under the A and I Shares Plan and B Shares Plan for its distribution
services and shareholder service assistance.
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<PAGE> 270
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse fund securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
Fund's fund securities; (v) respond to correspondence by security brokers and
others relating to its duties; and (vi) make periodic reports to the Board of
Trustees concerning the Funds' 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.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan for each Fund's A shares and the B Shares Plan for
each Fund's 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 .25% (on an
annualized basis) in the case of the Total Return Advantage, Intermediate Bond,
GNMA and Bond Funds, and .10% (on an annualized basis), in the case of the
Enhanced Income Fund, of the net asset value of such shares. Such services may
include: (i) aggregating and processing purchase and redemption requests from
customers; (ii) providing customers with a service that invests the assets of
their
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<PAGE> 271
accounts in A or B shares; (iii) processing dividend payments from the
Funds; (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
Under 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 for the Funds either directly from the issuer or from an
underwriter or dealer making a market in the securities involved. Purchases from
an underwriter of portfolio securities include a commission or concession paid
by the issuer to the underwriter and purchases from dealers serving as market
makers may include the spread between the bid and asked price. Transactions on
stock exchanges involve the payment of negotiated brokerage commissions. There
is generally no stated commission in the case of securities traded in the
over-the-counter market, but the price includes an undisclosed commission or
mark-up.
For the fiscal years ended May 31, 1998, 1997 and 1996, the
Total Return Advantage Fund paid brokerage commissions in the amounts of $0, $0
and $14,093. For the same periods, the Intermediate Bond and Enhanced Income
Funds did not pay any brokerage commissions.
For the fiscal year ended May 31, 1998 and the period from
September 9, 1996 (date of reorganization of the Predecessor Funds) until May
31, 1997, the GNMA and Bond Funds paid no brokerage commissions. For the period
from June 1, 1996 until September 9, 1996, the one-month fiscal period ended May
31, 1996, and the fiscal years ended April 30, 1996 and 1995, the Predecessor
GNMA and Bond Funds did not pay any brokerage commissions.
While the Adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. Under the current 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 them 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> 272
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, a Fund will not give preference to its
Adviser's correspondents with respect to such transactions, securities, savings
deposits, repurchase agreements and reverse repurchase agreements.
The Trust is required to identify any securities of its
"regular brokers or dealers" during its most recent fiscal year. At May 31,
1998, (i) the GNMA Fund had entered into repurchase transactions with: Goldman
Sachs; and the Bond 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 the Funds. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, the transaction will be averaged
as to price, and available investments allocated as to amount, in a manner which
the 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 each of the current 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 Total Return Advantage,
Intermediate Bond, Enhanced Income, GNMA and Bond 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,
1998 with respect to the Predecessor Funds, which are incorporated by reference
in this Statement of Additional Information, were audited by Coopers & Lybrand,
L.L.P., independent accountants for the Predecessor Funds whose report dated
July 26, 1996 expressed an unqualified opinion on such financial statements, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
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<PAGE> 273
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
Each Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. Each
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b to the 6th power
Yield = 2 [(--------------------) - 1]
cd + 1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
Each Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each 30-day
period, or, with respect to obligations purchased during the 30-day period, the
purchase price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30-day period that the obligation is in the Fund.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased by a Fund at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
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<PAGE> 274
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of A Shares" and
"Sales Charges Applicable to Purchases of B Shares" in the Prospectus.
For the 30-day period ended May 31, 1998, the yields of the A
and I shares of the Total Return Advantage Fund, Intermediate Bond Fund,
Enhanced Income Fund, GNMA Fund and Bond Fund were 4.91% and 5.36%; 5.52% and
6.05%; 5.53%, and 5.66%; 4.92%, and 5.46%; and 5.15% and 5.58%, respectively.
For the 30-day period ended May 31, 1998, the yields of the B
shares of the Intermediate Bond Fund and Bond Fund were 18.42% and 28.20%,
respectively.
Each Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed in
terms of years
Each Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
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<PAGE> 275
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all contingent deferred sales charges and other nonrecurring
charges at the end of the measuring period covered by the computation.
The average annual total returns for the Total Return
Advantage Fund's fiscal year ended May 31, 1998 were 4.88% (after taking the
sales load into account) and 10.08% (without taking into account any sales load)
for its A shares, and 10.35% for its I shares. The average annual total returns
since the Total Return Advantage Fund's commencement of May 31, 1998 were 6.96%
(after taking into account the sales load), and 8.38% (without taking into
account any sales load) for its A shares and 8.74% for its I shares. The A share
class of the Total Return Advantage Fund commenced operations on September 6,
1994 and the I share class of the Total Return Advantage Fund commenced
operations on July 7, 1994.
The average annual total returns for the Intermediate Bond
Fund's fiscal year ended May 31, 1998 were 2.59% (after taking the sales load
into account) and 7.71% (without taking into account any sales load) for its A
shares, 2.39% (after taking the sales load into account) and 7.39% (without
taking into account any sales load) for its B shares and 8.09% for its I shares.
The average annual total returns since the Intermediate Bond Fund's commencement
of operations through May 31, 1998 were 6.28% (after taking into account the
sales load) and 7.01% (without taking into account any sales load) for its A
shares, (3.72)% (after taking the sales load into account) and 1.24% (without
taking into account any sales load) for its B shares, and 7.64% for its I
shares. The Intermediate Bond Fund commenced operations on December 20, 1989.
The average annual total returns for the Enhanced Income
Fund's fiscal year ended May 31, 1998 were 3.77% (after taking the sales load
into account) and 6.68% (without taking into account any sales load) for its A
shares and 6.68% for its I shares. The average annual total returns since the
Enhanced Income Fund's commencement of operations through May 31, 1998 were
5.29% (after taking into account the sales load) and 6.09% (without taking into
account any sales load) for its A shares and 6.11% for its I shares. The A share
class of the Enhanced Income Fund commenced operations on September 9, 1994 and
the I share class of the Enhanced Income Fund commenced operations on July 7,
1994.
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<PAGE> 276
The average annual total returns for the GNMA Fund's ended May
31, 1998 were 3.70% (after taking the sales load into account) and 8.90%
(without taking into account any sales load) for its A shares and 9.17% for its
I shares. The average annual total returns since the GNMA Fund's commencement of
operations through May 31, 1998 were 6.30% (after taking into account the sales
load) and 9.35% (without taking into account any sales load) for its A shares
and 8.55% for its I shares. The GNMA Fund commenced operations on August 10,
1994.
The average annual total returns for the Bond Fund's fiscal
year ended May 31, 1998 were 3.14% (after taking the sales load into account)
and 8.29% (without taking into account any sales load) for its A shares and,
3.36% (after taking the sales load into account) and 8.36% (without taking into
account any sales load) for its B shares and 8.55% for its I shares. The average
annual total returns since the Bond Fund's commencement of operations through
May 31, 1998 were 5.03% (after taking into account the sales load) and 8.06%
(without taking into account any sales load) for its A shares, (3.45)% (after
taking the sales load into account) and 1.50% (without taking into account any
sales load) for its B shares and 7.25% for its I shares. The Bond Fund commenced
operations on August 10, 1994.
Each Fund may also advertise the "aggregate total return" for its
shares which is computed by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.
Aggregate Aggregate
Total Return Total Return
From From
Inception Inception
Through Through
5/31/98 (with 5/31/98
Deduction of (without
Maximum Sales Deduction for
Charge) Any Sales
Charge) Inception
Date
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<PAGE> 277
<TABLE>
<CAPTION>
Aggregate Aggregate
Total Return Total Return
From From
Inception Inception
Through Through
5/31/98 (with 5/31/98
Deduction of (without
Maximum Sales Deduction for
Charge) Any Sales
Charge) Inception
Date
<S> <C> <C> <C>
Armada Total Return Advantage
Fund
Class A 28.55% 35.01% 09/06/94
Class I N/A N/A 07/07 /A
B Shares N/A N/A N/A
Armada Intermediate Bond Fund
Class A 54.33% 62.10% 04/15/91
Class I N/A 86.14% 12/20/89
B Shares (3.72)% 1.24% 1/06/98
Armada Enhanced Income Fund
Class A 21.14% 24.62% 09/09/94
Class I N/A 26.01% 07/07/94
B Shares N/A N/A N/A
Armada GNMA Fund
Class A 11.06% 16.60% 9/11/96
Class I N/A 36.66% 8/10/94
B Shares N/A N/A N/A
Armada Bond Fund
Class A 8.79% 14.24% 09/11/96
Class I N/A 30.53% 08/10/94
B Shares (3.45)% 1.50% 01/06/98
</TABLE>
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. A Fund
does not, for these purposes, deduct from the initial value invested or the
ending value redeemed any amount representing sales charges. A Fund will,
however, disclose the maximum sales
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<PAGE> 278
charge and will also disclose that the performance data do not reflect sales
charges and that inclusion of sale charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments, economic conditions,
the relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical performance
of various asset classes, including but not limited to, stocks, bonds and
Treasury securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the 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
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organizational
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As used in the Prospectus, "assets belonging to a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any
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<PAGE> 279
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 August 24 1998, the following persons owned of record 5
percent or more of the shares of the Funds of the Trust:
<TABLE>
<CAPTION>
Intermediate Bond Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
SEI Trust Company 1,622,186.8240 9.32%
Attn: Mutual Fund Administrator
One Freedom Valley Drive
Oaks, PA 19456
Enhanced Income Fund (I)
OUTSTANDING SHARES PERCENTAGE
</TABLE>
-36-
<PAGE> 280
<TABLE>
<S> <C> <C>
Key Trust Company 526,034.1660 6.89%
FBO St. Luke's Self Ins.
P.O. Box 94871
Cleveland, OH 44101-4871
Sheldon & Co. 3,365,979.2080 44.06%
Future Quest
c/o National City Bank
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Sheldon & Co. 2,372,063.5720 31.05%
Future Quest
c/o National City Bank
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
c/o National City Bank 629,262.3480 8.24%
Sheldon & Co.-Pathway 49
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 281
<TABLE>
<CAPTION>
Bond Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Sheldon & Co. 42,840,515.5450 58.76%
c/o National City Bank
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
National City Bank 11,608,613.0560 15.92%
Sheldon & Co. Pathway 49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 8,856,235.2400 12.15%
Daily Valuation Acct.
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 7,751,623.6110 10.63%
c/o National City Bank
Trust Mutual Funds/Pooled
Fund Conversion
P.O. Box 94984
Cleveland, OH 44101-4984
</TABLE>
<TABLE>
<CAPTION>
GNMA Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Bank 5,928,737.2400 71.14%
Sheldon & Co. Pathay-49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 282
<TABLE>
<CAPTION>
Intermediate Bond Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities, Inc. 21,009.9290 7.87%
Brandon G. Schnorf
5217 Monroe Street
Suite A
Toledo, OH 43623-4604
Wheat, First FBO Marian L. Crayne, IRA 17,296.6160 6.48%
5139 Jolly Road
Sylvania, OH 43560-9711
Wheat, First FBO Mary M. 13,993.8860 5.24%
Montgomery IRA
603 East 8th Street
Port Clinton, OH 43452-2014
Enhanced Income Fund (A)
OUTSTANDING SHARES PERCENTAGE
David T. Olsen & Ann M. Olsen 1,428.7530 6.32%
2914 Dark Branch Road
Fayetteville, NC 28304-3717
Wheat First FBO Eleanor D. 1,307.5850 5.78%
Hendershot IRA
351 Buckeye Drive
Berea, OH 44017-1303
Wheat First FBO Harvey M. Brunner, 13,202.5370 58.40%
Jr. IRA
700 Brick Mill Run, Apt. 106
Westlake, OH 44145-1655
</TABLE>
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<PAGE> 283
<TABLE>
<CAPTION>
Bond Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat First Union 5,166.3450 19.35%
FBO Benjamin Kimmel IRA
c/o National City
10700 North Park Drive
Glen Allen, VA 23060-9243
Wheat, First Securities, Inc. 3,719.3950 13.93%
Anna M. Kusner
3501 Executive Parkway
Apt. 729
Toledo, OH 43606-5523
Wheat, First Securities, Inc. 2,686.8610 10.07%
9912 Young Road
Wattsburg, PA 16442-9529
Wheat, First Securities, Inc. 2,439.9650 9.14%
James R. Luke
62 North Lake Street
North East, PA 16428-1321
Wheat, First Securities, Inc. 1,777.3620 6.66%
7041 Truck World Blvd.
Hubbard, OH 44425-3254
</TABLE>
<TABLE>
<CAPTION>
GNMA Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Schweizer Dipple Inc. 7,115.2620 10.26%
401(k) Plan
Dennis J. Clark, Sr.
Attn: Lynn E. Ulrich
7227 Division Street
Oakwood Village, OH 44146-5405
Wheat First Union
FBO Benjamin Kimmel IRA 3,822.0020 5.51%
c/o Nat City
10700 North Park Drive
Glen Allen, VA 23060-9243
</TABLE>
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<PAGE> 284
<TABLE>
<CAPTION>
Intermediate Bond Fund (B)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
SEI Investments Co. 95.1180 55.85%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
SEI Trust Company 71.0150 41.70%
Custodian for the IRA
of Roger J. Thompson
25645 Buena Vista Road
Rockbridge, OH 43149-9507
Bond Fund (B)
OUTSTANDING SHARES PERCENTAGE
Wheat, First Securities, Inc. 4,204.4080 60.88%
1190 Parkside Drive
Limestone, NY 14753-9704
Wheat First Securities, Inc. 1,980.8340 28.68%
4314 Churchill Rd.
Louisville, KY 40207-4047
</TABLE>
FINANCIAL STATEMENTS
The audited financial statements contained in the annual
report for the Funds for the fiscal year ended May 31, 1998 are hereby
incorporated herein by reference. Copies of the annual report may be obtained by
calling the Trust at 1-800-622-FUND (3863) or by writing to the Trust, One
Freedom Valley Drive, Oaks, Pennsylvania 19456.
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<PAGE> 285
APPENDIX A
DESCRIPTION OF RATINGS
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 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
A-1
<PAGE> 286
- 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.
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.
A-2
<PAGE> 287
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify 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.
A-3
<PAGE> 288
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:
"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
A-4
<PAGE> 289
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.
"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.
A-5
<PAGE> 290
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 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.
A-6
<PAGE> 291
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 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.
A-7
<PAGE> 292
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.
"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.
A-8
<PAGE> 293
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.
"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:
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"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:
"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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CROSS REFERENCE SHEET
---------------------
International Equity Fund
Small Cap Growth Fund
Small Cap Value Fund
Equity Growth Fund
Tax Managed Equity Fund
Core Equity Fund
Equity Income Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
1. Cover Page.....................................Cover Page
2. Table of Contents..............................Table of Contents
3. General Information and History................Statement of Additional
Information
4. Investment Objectives and Policies.............Risk Factors, Investment
Objectives and Policies
5. Management of Registrant.......................Trustees and Officers
6. Control Persons and Principal
Holders of Securities .........................Description of Shares
7. Investment Advisory and Other
Services Management............................Advisory, Administration,
Distribution, Custody and
Transfer Agency Agreements
8. Brokerage Allocation and
Practices .....................................Risk Factors, Investment
Objectives and Policies
9. Capital Stock and Other Securities.............Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing
of Securities Being Offered ...................Additional Purchase and
Redemption Information
11. Tax Status.....................................Additional Information
Concerning Taxes
12. Underwriters...................................Not Applicable
13. Calculation of Performance Data................Yield and Performance
Information
14. Financial Statements...........................Financial Statements
</TABLE>
<PAGE> 296
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 18, 1998
SMALL CAP VALUE FUND
EQUITY GROWTH FUND
EQUITY INCOME FUND
SMALL CAP GROWTH FUND
INTERNATIONAL EQUITY FUND
CORE EQUITY FUND
EQUITY INDEX FUND
TAX MANAGED EQUITY FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 18, 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.
<PAGE> 297
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION..............................................................................1
INVESTMENT OBJECTIVES AND POLICIES...............................................................................1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................................11
DESCRIPTION OF SHARES...........................................................................................15
ADDITIONAL INFORMATION CONCERNING TAXES.........................................................................17
TRUSTEES AND OFFICERS...........................................................................................19
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES AND
TRANSFER AGENCY AGREEMENTS.............................................................................23
SHAREHOLDER SERVICES PLANS......................................................................................30
PORTFOLIO TRANSACTIONS..........................................................................................30
AUDITORS....................................................................................................... 31
COUNSEL........................................................................................................ 32
YIELD AND PERFORMANCE INFORMATION...............................................................................32
MISCELLANEOUS...................................................................................................37
FINANCIAL STATEMENTS............................................................................................52
APPENDIX A.....................................................................................................A-1
APPENDIX B.....................................................................................................B-1
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Small Cap Value, Equity Growth, Equity Income, Small Cap Growth, International
Equity, Core Equity, Equity Index and Tax Managed Equity Funds. The information
contained in this Statement of Additional Information expands upon matters
discussed in the Prospectus. No investment in shares of a Fund should be made
without first reading the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on National City Investment Management
Company's ("IMC" or the "Adviser") investment management strategies, techniques,
policies and related matters may be included from time to time in
advertisements, sales literature, communications to shareholders and other
materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for securities which may be held by the Funds.
FOREIGN SECURITIES
Unanticipated political or social developments may affect the
value of the International Equity Fund's investments in emerging market
countries and the availability to the Fund of additional investments in those
countries. The small size, relatively unseasoned nature of the securities
markets and limited volume of trading in securities in certain of these
countries may make the Fund's investments there illiquid and more volatile than
investments in Japan or most Western European countries. In addition, the Fund
may be required to establish special custodial or other arrangements before
making certain investments. Moreover, there may be little financial or
accounting information available with respect to issuers located in certain
emerging market countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.
FOREIGN GOVERNMENT OBLIGATIONS
The International Equity Fund may purchase debt obligations
issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their agencies,
authorities or instrumentalities. The percentage of assets invested in
securities of a particular country or denominated in a particular currency will
vary in accordance with the Adviser's or Sub-Adviser's assessment of gross
domestic product in relation to aggregate debt, current account surplus or
deficit, the trend of the current account,
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reserves available to defend the currency, and the monetary and fiscal policies
of the government.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments
resulting from a decline or appreciation in the value of a particular foreign
currency against the U.S. dollar or another foreign currency or for other
reasons, the Equity Income and International Equity Funds are authorized to
enter into forward currency exchange contracts. These contracts involve an
obligation to purchase or sell a specified currency at a future date at a price
set at the time of the contract. Forward currency contracts do not eliminate
fluctuations in the values of portfolio securities but rather allow the Funds to
establish a rate of exchange for a future point in time.
When entering into a contract for the purchase or sale of a
security, the Equity Income and International Equity Funds may enter into a
forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
When the Adviser or Sub-Adviser anticipates that a particular
foreign currency may decline substantially relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Equity Income and International
Equity Funds may enter into a forward contract to sell, for a fixed amount, the
amount of foreign currency approximating the value of some or all of the Funds'
securities denominated in such foreign currency. Similarly, when the obligations
held by the Funds create a short position in a foreign currency, the Funds may
enter into a forward contract to buy, for a fixed amount, an amount of foreign
currency approximating the short position. With respect to any forward foreign
currency contract, it will not generally be possible to match precisely the
amount covered by that contract and the value of the securities involved due to
the changes in the values of such securities resulting from market movements
between the date the forward contract is entered into and the date it matures.
In addition, while forward contracts may offer protection from losses resulting
from declines or appreciation in the value of a particular foreign currency,
they also limit potential gains which might result from changes in the value of
such currency. The Funds will also incur costs in connection with forward
foreign currency exchange contracts and conversions of foreign currencies and
U.S. dollars.
A separate account consisting of cash or liquid securities
equal to the amount of the Equity Income or International Equity Fund's assets
that could be required to consummate forward contracts will be established with
the Trust's custodian except to the extent the contracts are otherwise
"covered." For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If the
market or fair value of such securities declines, additional cash or liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the Funds. A forward contract to
sell a foreign currency is "covered" if a Fund owns the currency (or securities
denominated in the currency) underlying the contract, or holds a forward
contract (or
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call option) permitting the Fund to buy the same currency at a price no higher
than the Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if the Funds hold a forward contract (or call option)
permitting the Funds to sell the same currency at a price as high as or higher
than the Funds' price to buy the currency.
CONVERTIBLE SECURITIES
Convertible securities entitle the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock. The
value of the convertibility feature depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities, the Adviser or
Sub-Adviser will consider, among other factors, the creditworthiness of the
issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying common stocks; the prices of the securities relative to other
comparable securities and to the underlying common stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Fund's portfolio as to issuers; and the
ratings of the securities. Since credit rating agencies may fail to timely
change the credit ratings of securities to reflect subsequent events, the
Adviser or Sub-Adviser will consider whether such issuers will have sufficient
cash flow and profits to meet required principal and interest payments. A Fund
may retain a portfolio security whose rating has been changed if the Adviser
deems that retention of such security is warranted.
WARRANTS
Each Fund (other than the Equity Index Fund) may invest in
warrants. Warrants enable the owner to subscribe to and purchase a specified
number of shares of the issuing corporation at a specified price during a
specified period of time. The prices of warrants do not necessarily correlate
with the prices of the underlying securities. The purchase of warrants involves
the risk that the purchaser could lose the purchase value of the warrant if the
right to subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security.
FUTURES CONTRACTS AND RELATED OPTIONS
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<PAGE> 301
Each Fund (other than the Core Equity Fund) may invest in
futures contracts and related options. For a detailed description of these
investments and related risks, see Appendix B attached to this Statement of
Additional Information.
"COVERED CALL" OPTIONS
As described in the Prospectus, each Fund (other than the
Equity Index Fund) may write covered call options. A Fund will write call
options only if they are "covered." The option is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, liquid assets of equal value are held in a segregated
account by its custodian) upon conversion or exchange of other securities held
by it. For a call option on an index, the option is covered if the Fund
maintains with its custodian a portfolio of securities substantially replicating
the movement of the index, or liquid assets equal to the contract value. A call
option is also covered if the Fund holds a call on the same security or index as
the call written where the exercise price of the call held is (i) equal to or
less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Fund in liquid assets in a segregated account with its custodian.
A Fund's obligation to sell a security subject to a covered
call option written by it may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or to permit the writing
of a new option containing different terms on such underlying security. The cost
of such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss on the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the optioned security is
delivered upon exercise with the result that the writer in such circumstances
will be subject to the risk of market decline or appreciation in the security
during such period.
When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the current bid price. If an option written by a Fund expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction, it
will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by the
Fund is exercised, the
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<PAGE> 302
proceeds of the sale will be increased by the net premium originally received
and the Fund will realize a gain or loss.
There are several risks associated with transactions in
certain options. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a securities exchange may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
WHEN-ISSUED SECURITIES
Each Fund (other than the Equity Index Fund) may purchase
securities on a "when-issued" basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). When a Fund agrees to purchase
when-issued securities, the custodian sets aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment,
marked to market daily. It is likely that a Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because a Fund will set aside cash or
liquid assets to satisfy its purchase commitments in the manner described, the
Fund's liquidity and ability to manage its portfolio might be affected in the
event its commitments to purchase when-issued securities ever exceeded 25% of
the value of its total assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
SHORT-TERM OBLIGATIONS
Each Fund may invest in various short-term obligations
including those described below.
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Investments include commercial paper and other short-term
promissory notes issued by corporations (including variable and floating rate
instruments). In addition, each Fund (other than the Equity Index Fund) may
invest in Canadian Commercial Paper ("CCP"), which is commercial paper issued by
a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer. Each Fund (other than the Equity Index Fund) may also acquire zero
coupon obligations, which have greater price volatility than coupon obligations
and which will not result in the payment of interest until maturity.
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which is
a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances, certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. Each Fund
may also make interest bearing savings deposits in commercial and savings banks
not in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of a Fund's total assets at the time of
purchase.
Each Fund (other than the Equity Index Fund) may also make
limited investments in "GICs" issued by U.S. insurance companies. When investing
in GICs, a Fund makes cash contributions to a deposit fund or an insurance
company's general account. The insurance company then credits to the Fund
monthly a guaranteed minimum interest which is based on an index. The insurance
company may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. A Fund will purchase a GIC only when its Adviser or Sub-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 one or more rating agencies.
REPURCHASE AGREEMENTS
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's Adviser or Sub Adviser deems creditworthy under guidelines approved
by the Board of Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short term rates, which may be more or less than the rate on
the underlying portfolio securities. The seller under a repurchase agreement
will be required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest). If
the seller were to default on its repurchase obligation or become insolvent, the
Fund holding such obligation would suffer a loss to the extent that the proceeds
from a sale of the underlying portfolio securities were less than the repurchase
price under the agreement, or to the extent that the disposition of such
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securities by the Fund were delayed pending court action. Although there is no
controlling legal precedent confirming that a Fund would be entitled, as against
a claim by such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities, the Board of Trustees of the Trust believes that, under
the regular procedures normally in effect for custody of a Fund's securities
subject to repurchase agreements and under federal laws, a court of competent
jurisdiction would rule in favor of the Trust if presented with the question.
Securities subject to repurchase agreements will be held by the Trust's
custodian or another qualified custodian or in the Federal Reserve/Treasury
book-entry system.
Repurchase agreements are considered to be loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering
into reverse repurchase agreements in accordance with its investment
restrictions. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed-upon date and price. A Fund intends to
enter into reverse repurchase agreements only to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. At the time
a Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid,
high grade debt securities consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will subsequently monitor the account to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by a Fund may decline below the price at which it is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend securities pursuant to agreements requiring
that the loans be continuously secured by cash, securities of the U.S.
government or its agencies, or any combination of cash and such securities, as
collateral equal to 100% of the market value at all times of the securities
lent. Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for a Fund exceed one-third of the value of its
total assets taken at fair market value. A Fund will continue to receive
interest on the securities lent while simultaneously earning interest on the
investment of the cash collateral in U.S. government securities. However, a Fund
will normally pay lending fees to such broker-dealers and related expenses from
the interest earned on invested collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. However, loans are made only to borrowers deemed by the
Adviser to be of good standing and when, in the judgment of the adviser, the
consideration which can be earned currently from such securities loans justifies
the attendant risk. Any loan may be terminated by either party upon reasonable
notice to the other party.
U.S. GOVERNMENT OBLIGATIONS
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Each Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Funds will invest in the obligations of such
agencies or instrumentalities only when the Adviser or Sub-Adviser believes that
the credit risk with respect thereto is minimal.
VARIABLE AND FLOATING RATE OBLIGATIONS
Each Fund (other than the Equity Index Fund) may purchase
variable and floating rate obligations (including variable amount master demand
notes) which are unsecured instruments that permit the indebtedness thereunder
to vary and provide for periodic adjustments in the interest rate. Because
variable and floating rate obligations are direct lending arrangements between
the Fund and the issuer, they are not normally traded although certain variable
and floating rate obligations, such as Student Loan Marketing Association
variable rate obligations, may have a more active secondary market because they
are issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Even though there may be no active secondary market in such
instruments, a Fund may demand payment of principal and accrued interest at a
time specified in the instrument or may resell them to a third party. Such
obligations may be backed by bank letters of credit or guarantees issued by
banks, other financial institutions or the U.S. Government, its agencies or
instrumentalities. The quality of any letter of credit or guarantee will be
rated high quality or, if unrated, will be determined to be of comparable
quality by the Adviser. In the event an issuer of a variable or floating rate
obligation defaulted on its payment obligation, a Fund might be unable to
dispose of the instrument because of the absence of a secondary market and
could, for this or other reasons, suffer a loss to the extent of the default.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (a) not more than 5% of
the value of the Fund's 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; and (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
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SHORT SALES
The Tax Managed Equity Fund may engage in short sales of its
securities. Selling securities short involves selling securities the seller does
not own (but has borrowed) in anticipation of a decline in the market price of
such securities. To deliver the securities to the buyer, the seller must arrange
through a broker to borrow the securities and, in so doing, the seller becomes
obligated to replace the securities borrowed at their market price at the time
of replacement. In a short sale, the proceeds the seller receives from the sale
are retained by a broker until the seller replaces the borrowed securities. The
seller may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Fund may only sell securities short "against the box." A
short sale is "against the box" if, at all times during which the short position
is open, the Fund owns at least an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issuer as the securities that are sold short.
PORTFOLIO TURNOVER
Each Fund may engage in short term trading and may sell
securities which have been held for periods ranging from several months to less
than a day. Portfolio turnover will tend to rise during periods of economic
turbulence and decline during periods of stable growth. The Small Cap Value,
Equity Growth, Equity Income, Small Cap Growth, International Equity and Core
Equity Funds' annual portfolio turnover is not expected to exceed 100% under
normal market conditions. The Equity Index and Tax Managed Equity Fund's annual
portfolio turnover is not expected to exceed 10% and 25%, respectively, under
normal market conditions.
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
a Fund to receive certain favorable tax treatment. Portfolio turnover will not
be a limiting factor in making investment decisions.
With respect to the Equity Index Fund and unlike managed
portfolios, the turnover of securities in an index portfolio is meant to
correlate with the turnover of specific securities listed in the corresponding
index. Therefore, the volume of transactions will normally correspond to the
rate of turnover of securities in the index. Portfolio turnover may also be
affected by cash requirements for redemptions of shares and by requirements
which enable the Fund to receive certain favorable tax treatment. Portfolio
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turnover, however, is a function of the number of changes the S&P 500 will make
over which the Adviser has no control.
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.
2. Invest in commodities, except that as consistent with its
investment objective and policies the Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices; (b) purchase and sell options on futures contracts or
indices; and (c) purchase publicly traded securities of companies engaging in
whole or in part in such activities. 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
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investment limitation shall not apply to the Fund's transactions in futures
contracts and related options, options on securities or indices of securities
and similar instruments, and (b) the Fund may obtain short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities. In
addition, the Tax Managed Equity Fund, may sell securities short "against the
box."
4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 15% of its net assets in illiquid
securities.
6. Purchase securities while its outstanding borrowings
(including reverse repurchase agreements) are in excess of 5% of its total
assets. Securities held in escrow or in separate accounts in connection with a
Fund's investment practices described in its Prospectus or Statement of
Additional Information are not deemed to be pledged for purposes of this
limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must be
signed by each shareholder, with each signature guaranteed by a U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for 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 shares of the Funds are sold
to certain qualified investors at their net asset value without a sales charge.
A shares of the Funds are sold to public investors at the public offering price
based on the Fund's net asset value plus a front-end load or sales charge as
described in the Prospectus. 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 sales load or
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contingent deferred sales charge imposed for shares acquired
through the reinvestment of dividends or distributions on such shares.
For the fiscal year ended May 31, 1998, sales loads paid by
shareholders of the Small Cap Value, Equity Growth, Equity Income, Small Cap
Growth, International Equity, Core Equity and Tax Managed Equity Funds totaled
$95,168, $41,437, $20,877, $6,437, $1,279, $4,313 and $3,756, respectively. As
of May 31, 1998, the Equity Index Fund had not commenced operations.
Automatic investment programs such as the monthly savings
program ("Planned Investment Program") described in the Prospectus offered by
the Funds permit an investor to use "dollar cost averaging" in making
investments. Under this Program, an agreed upon fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help investors to reduce
their average cost per share because the Program results in more shares being
purchased during periods of lower share prices and fewer shares during periods
of higher share prices. In order to be effective, dollar cost averaging should
usually be followed on a sustained, consistent basis. Investors should be aware,
however, that dollar cost averaging results in purchases of shares regardless of
their price on the day of investment or market trends and does not ensure a
profit, protect against losses in a declining market, or prevent a loss if an
investor ultimately redeems his or her shares at a price which is lower than
their purchase price. An investor may want to consider his or her financial
ability to continue purchases through periods of low price levels. From time to
time, in advertisements, sales literature, communications to shareholders and
other materials ("Materials"), the Trust may illustrate the effects of dollar
cost averaging through use of or comparison to an index such as the S&P 500
Index.
OFFERING PRICE PER A SHARE OF THE FUNDS
Illustrations of the computation of the offering price per A
share of the Funds, based on the value of the Funds' net assets and number of
outstanding shares on May 31, 1998 are as follows:
<TABLE>
<CAPTION>
TABLE
SMALL CAP VALUE FUND
<S> <C>
Net Assets of A Shares............................................................... $10,634,266
Outstanding A Shares................................................................. 687,309
Net Asset Value Per Share
($10,634,266 / 687,307).............................................................. $15.47
Sales Charge, 5.50% of
offering price (5.82% of
</TABLE>
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<PAGE> 310
<TABLE>
<S> <C>
net asset value per share)........................................................... $.90
Offering to Public................................................................... $16.37
EQUITY GROWTH FUND
Net Assets of A Shares............................................................... $12,379,654
Outstanding A Shares................................................................. 579,917
Net Asset Value Per Share
($12,379,654 / 579,917).............................................................. $21.35
Sales Charge, 5.50% of
offering price (5.81% of
net asset value per share)........................................................... $1.24
Offering to Public................................................................... $22.59
EQUITY INCOME FUND
Net Assets of A Shares............................................................... $2,150,578
Outstanding A Shares................................................................. 122,810
Net Asset Value Per Share
($2,150,578 / 122,810)............................................................... $17.51
Sales Charge, 5.50% of
offering price (5.83% of
net asset value per share)........................................................... $1.02
Offering to Public................................................................... $18.53
* Reflects current sales charge
INTERNATIONAL EQUITY FUND
Net Assets of A Shares............................................................... $275,859
Outstanding A Shares................................................................. 25,486
Net Asset Value Per Share............................................................ $10.82
($275,859 / 25,486)
</TABLE>
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<PAGE> 311
<TABLE>
<S> <C>
Sales Charge, 5.50% of
offering price (5.82% of
net asset value per share)........................................................... $.63
Offering to Public................................................................... $11.45
SMALL CAP GROWTH FUND
Net Assets of A Shares............................................................... $330,681
Outstanding A Shares................................................................. 28,324
Net Asset Value Per Share
($330,681 / 28,324).................................................................. $11.68
Sales Charge, 5.50% of
offering price (5.82% of
net asset value per share)........................................................... $.68
Offering to Public................................................................... $12.36
CORE EQUITY FUND
Net Assets of A Shares............................................................... $407,574
Outstanding A Shares................................................................. 35,955
Net Asset Value Per Share
($407,374 / 35,955).................................................................. $11.34
Sales Charge, 5.50% of
offering price (5.82% of
net asset value per share)........................................................... $.66
Offering to Public................................................................... $12.00
EQUITY INDEX FUND
Net Assets of A Shares............................................................... $10,000,000
</TABLE>
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<TABLE>
<S> <C>
Outstanding A Shares................................................................. 1,000,000
Net Asset Value Per Share
($10,000,000 / 1,000,000)........................................................... $10.00
Sales Charge, 3.75% of
offering price (3.90% of
net asset value per share)........................................................... $0.39
Offering to Public................................................................... $10.39
TAX MANAGED EQUITY FUND
Net Assets of A Shares............................................................... $10,375
Outstanding A Shares................................................................. 1,045
Net Asset Value Per Share
($10,375 / 1,045).................................................................... $9.93
Sales Charge, 5.50% of
offering price (5.84% of
net asset value per share)........................................................... $.58
Offering to Public................................................................... $10.51
</TABLE>
* Amounts are estimated as the Fund had not commenced operations
as of May 31, 1998.
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.
By use of the exchange privilege, the Investor authorizes the
Transfer Agent's 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 shares and account number. The
Transfer Agent's records of such instructions are binding.
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<PAGE> 313
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 set forth in the Prospectus, including. Twenty-three classes
or series, which represent interests in the Equity Growth Fund (Class H, Class H
- - Special Series 1 and Class H - Special Series 2), Equity Income Fund (Class M,
Class M - Special Series 1 and Class M - Special Series 2), Small Cap Value Fund
(Class N, Class N - Special Series 1 and Class N - Special Series 2),
International Equity Fund (Class U, Class U - Special Series 1 and Class U -
Special Series 2), Core Equity Fund (Class W, Class W - Special Series 1 and
Class W - Special Series 2),Small Cap Growth Fund (Class X, Class X - Special
Series 1 and Class X - Special Series 2), Equity Index Fund (Class V and Class V
- - Special Series 1) and Tax Managed Equity Fund (Class Z, Class Z - Special
Series 1 and Class Z - Special Series 2).
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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<PAGE> 314
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 advisers with
specific reference to their own tax situation.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to the Fund's principal business of investing in stock or
securities, or options
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<PAGE> 315
and futures with respect to stock or securities. Any income derived by a Fund
from a partnership or trust is treated as derived with respect to the Fund's
business of investing in stock, securities or currencies only to the extent that
such income is attributable to items of income which would have been qualifying
income if realized by the Fund in the same manner as by the partnership or
trust.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. The Treasury Department has issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" are not subject to the mark-to-market or loss deferral
rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by a Fund which are not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
The Trust will designate any distribution of long-term capital
gains of a Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for at least six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Securities)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the
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<PAGE> 316
Fund's current and accumulated earnings and profits, and would be eligible
for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
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<PAGE> 317
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board 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,
Age 73 Adams Express Company (closed-end
investment company), April 1982 to December
1997; Director, Acromed Corporation;
(producer of spinal implants), June 1992 to
March of 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.
</TABLE>
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<PAGE> 318
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
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.
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
</TABLE>
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<PAGE> 319
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
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 (law firm).
</TABLE>
- --------------------
* 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 IMC, 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 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.
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1998:
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<PAGE> 320
<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>
- ---------------------------------
* The "Fund Complex" consists of Armada Funds, The Parkstone Group of
Funds and The Parkstone Advantage Funds. Each of the Trustees serves as
Trustee to all three investment companies or the Trustees became
Trustees of The Parkstone Group of Funds and The Parkstone Advantage
Fund 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> 321
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 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: (a) Small Cap Value
Fund, Small Cap Growth and International Equity Funds under an Advisory
Agreement dated August 13, 1998; (b) Equity Growth and Equity Income Funds under
an Advisory Agreement dated November 19, 1997; (c) Core Equity Fund under an
Advisory Agreement dated June 29, 1998; (d) Equity Index and Tax Managed Equity
Funds under an Advisory Agreement dated April 9, 1998. National Asset Management
Corporation ("NAM") serves as investment sub-adviser to the Core Equity Fund
(the "sub-adviser"). Prior to such dates, National City Bank or an affiliate
served as adviser to the Funds other than the Core
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Equity Fund. Prior to June 29, 1998, NAM served as adviser to the Core Equity
Fund. IMC, National City Bank and these affiliates (including NAM until March 6,
1998) are affiliates of National City Corporation, a bank holding company with
$81 billion in assets, and headquarters in Cleveland, Ohio and over 1,000 branch
offices in six states.
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) $1,989,606 (after
waivers of $0), $982,053, and $571,860 with respect to the Small Cap Value Fund;
(ii) $2,395,579 (after waivers of $0), $1,612,194, and $1,114,914 with respect
to the Equity Growth Fund; and (iii) $1,237,195 (after waivers of $0), $669,107,
and $370,633 with respect to the Equity Income Fund. For the period from August
1, 1997 (commencement of operations) to May 31, 1998, the Small Cap Growth,
International Equity and Core Equity Funds incurred advisory fees in the amount
of $208,833, $570,684 and $608,222, (after fee waivers of $18,000, $50,784 and
$64,683) respectively. For the period from April 9, 1998 (commencement of
operations) to May 31, 1998, the Tax Managed Equity Fund incurred advisory fees
in the amount of $173,851 (after fee waivers of $0). As of May 31, 1998, the
Equity Index Fund had not yet commenced operations.
Each Advisory and Sub-Advisory Agreement provides that the
Adviser and sub-adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Trust in connection with the performance
of the Advisory or Sub-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 or sub-adviser in the performance of their
duties or from reckless disregard by them of their duties and obligations
thereunder.
The Advisory Agreement relating to the Small Cap Value, Small
Cap Growth and International Equity Funds was approved by the shareholders of
these Funds on August 13, 1998. The Advisory Agreement relating to the Equity
Growth and Equity Income Funds was approved by the shareholders of each of these
Funds on November 19, 1997. With respect to the Core Equity Fund, the Advisory
Agreement with National City and the Sub-Advisory Agreement with NAM was
approved by the Fund's shareholders on June 29, 1998. The Advisory Agreement
relating to the Equity Index and Tax Managed Equity Funds was approved by their
sole shareholders prior to the Funds' commencement of operations. Unless sooner
terminated, the Advisory Agreements will continue in effect with respect to the
Funds to which they relate 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 Funds (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 and Sub-Advisory Agreement may be terminated by the Trust or the
Adviser or sub-advisers on 60 days written notice, and will terminate
immediately in the event of its assignment.
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AUTHORITY TO ACT AS INVESTMENT ADVISER
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a bank holding company or affiliate from acting as investment Adviser, transfer
agent, or custodian to such an investment company. The Adviser believes that it
may perform the services for the Fund contemplated by its Advisory Agreement
with the Trust as described in such agreement without violation of applicable
banking laws or regulations. However, there are no controlling judicial
precedents and future changes in legal requirements relating to the permissible
activities of banks and their affiliates, as well as future interpretations of
present requirements, could prevent the Adviser from continuing to perform
services for the Trust. If the Adviser were prohibited from providing services
to the Fund, the Board of Trustees would consider selecting another qualified
firm. Any new investment advisory agreement would be subject to shareholder
approval.
Should future legislative, judicial, or administrative action
prohibit or restrict the proposed activities of the Adviser, or its affiliated
and correspondent banks in connection with shareholder purchases of Fund shares,
the Adviser and its affiliated and correspondent banks might be required to
alter materially or discontinue the services offered by them to shareholders. It
is not anticipated, however, that any resulting change in the Trust's method of
operations would affect its net asset value per share or result in financial
losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Adviser, or an affiliate of the Adviser,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the Adviser,
or such an affiliate, might offer to provide such services.
ADMINISTRATION AGREEMENT AND SUB-ADMINISTRATION AGREEMENT
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
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in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
The Administrator, a Delaware business trust, has its
principal business offices at One Freedom Valley Drive, 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.
The Administrator is entitled to receive with respect to the
Funds, an administrative fee, computed daily and paid monthly, at an annual rate
of .07% of the aggregate average daily net assets of all of the investment funds
of Armada up to the first eighteen (18) billion dollars in assets, and .06% of
the aggregate average daily net assets over eighteen (18) billion dollars in
assets, and is entitled to be reimbursed for its out-of-pocket expenses incurred
on behalf of the Funds. The Trust incurred the following fees to SEI for the
period from May 1, 1998 (April 9, 1998 in the case of the Tax Managed Equity
Fund pursuant to an agreement substantially identical to the Administration
Agreement) through May 31, 1998: $16,100 (after waivers of $0) with respect to
the Small Cap Value Fund; $19,814 with respect to the Equity Growth Fund (after
waivers of $0); $ 10,576 (after waivers of $0) with respect to the Equity Income
Fund; $4,252 (after waivers of $0) with respect to the Small Cap Growth Fund;
$8,857 (after waivers of $0) with respect to the International Equity Fund;
$6,096 (after waivers of $0) with respect to the Core Equity Fund; and $15,886
(after waivers of $0) with respect to the Tax Managed Equity Fund. As of May 31,
1998, the Equity Index Fund had not commenced operations.
Prior to May 1, 1998, PFPC served as the administrator and
accounting agent to the Funds other than the Tax Managed Equity Fund. 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 May 31, 1997 and 1996 : $227,796, $130,930
and $76,026 (after waivers of $0, $0 and $0) with respect to the Small Cap Value
Fund; $264,998, $208,810 and $148,244 (after waivers of $0, $0 and $0) with
respect to the Equity Growth Fund; and $148,763, $89,214 and $49,418
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(after waivers of $0, $0 and $0) with respect to the Equity Income Fund. For the
period from August 1, 1997 (commencement of operations) to April 30, 1998, the
Small Cap Growth, International Equity and Core Equity Funds incurred the
following fees to PFPC pursuant to the former Administration and Accounting
Services Agreement: $7,970 (after waivers of $17,879) with respect to the Small
Cap Growth Fund; $0 (after waivers of $71,716) with respect to the International
Equity Fund; and $0 (after waivers of $80,647) with respect to the Core Equity
Fund.
IMC serves as sub-administrator for each Fund and provides
certain services as may be requested by the Administrator from time to time. For
its services as Sub-Administrator, National City Bank receives, from the
Administrator, pursuant to its Sub-Administration Agreement with the
Administrator, a fee, computed daily and paid monthly, at the annual rate of
.01% of the aggregate average daily net assets of all of the investment funds of
Armada up to the first $15 billion, and .015% of the aggregate average daily net
assets over $15 billion.
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
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 either 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
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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 I and A
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.
The Distribution Plans have been approved by the Board of
Trustees, and will continue in effect for successive one year periods provided
that such continuance is specifically approved by (1) the vote of a majority of
the trustees who are not parties to either Plan or interested persons of any
such party and who have no direct or indirect financial interest in either Plan
and (2) the vote of a majority of the entire Board of Trustees.
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 the approximate amounts of $158,000, $160,000 $95,000, $15,000,
$50,000, $55,000, and $14,000 with respect to the Small Cap Value, Equity
Growth, Equity Income, Small Cap Growth, International Equity, Core Equity, and
Tax Managed Equity Funds under the A and I Shares Plan and B Shares Plan for its
distribution services and shareholder service assistance.
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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.
As of May 31, 1998, the Equity Index Fund had not commenced
operations.
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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.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES 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's 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 .25% (on an annualized basis), of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase and redemption requests from customers; (ii) providing
customers with a service that invests the assets of their accounts in A or B
shares; (iii) processing dividend payments from the Funds; (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.
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PORTFOLIO TRANSACTIONS
Pursuant to its Advisory Agreements with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of portfolio securities for the Funds. The Adviser or
Sub-adviser purchases portfolio securities either directly from the issuer or
from an underwriter or dealer making a market in the securities involved.
Purchases from an underwriter of portfolio securities include a commission or
concession paid by the issuer to the underwriter and purchases from dealers
serving as market makers may include the spread between the bid and asked price.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter market, but the price includes an undisclosed
commission or mark-up.
For the fiscal years ended May 31, 1998, 1997 and 1996, the
Small Cap Value, Equity Growth and Equity Income Funds paid $780,933, $421,322
and $356,904; $1,398,444, $803,733 and $265,644; $86,349, $102,856 and $102,100
in brokerage commissions, respectively. For the period from August 1, 1997
(commencement of operations) to May 31, 1998, the Small Cap Growth,
International Equity and Core Equity Funds paid $51,366, $290,141 and $0, in
brokerage commissions, respectively. For the period from April 9, 1998
(commencement of operations) to May 31, 1998, the Tax Managed Equity Fund paid
$0 in brokerage commissions. As of May 31, 1998, the Equity Index Fund had not
yet commenced operations.
While the Adviser (including the Sub-adviser) generally seeks
competitive spreads or commissions, it may not necessarily allocate each
transaction to the underwriter or dealer charging the lowest spread or
commission available on the transaction. Allocation of transactions, including
their frequency, to various dealers is determined by the 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 Fund. Such information may be useful to the
Adviser in serving both the Trust and other clients, and, similarly,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Trust.
Portfolio securities will not be purchased from or sold to the
Trust's Adviser, Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, a Fund will not give preference to its
Adviser's correspondents with respect to such transactions, securities, savings
deposits, repurchase agreements and reverse repurchase agreements.
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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 Small Cap Growth Fund had entered into repurchase
transactions with: Goldman Sachs; (b) the International Equity Fund had entered
into repurchase transactions with: Goldman Sachs; (c) the Core Equity Fund had
entered into repurchase transactions with: Goldman Sachs; and (d) the Tax
Managed Equity 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 each of 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 all the Funds (other than the
Equity Index Fund), which are incorporated by reference in this Statement of
Additional Information, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report referred to under "Financial Statements,"
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
The Equity Income Fund's "yield" described in the Prospectus
is calculated by dividing the Fund's net investment income per share earned
during a 30-day period (or another
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period permitted by the rules of the SEC) by the net asset value per share on
the last day of the period and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the difference. The Fund's net investment
income per share earned during the period is based on the average daily number
of shares outstanding during the period entitled to receive dividends and
includes dividends and interest earned during the period minus expenses accrued
for the period, net of reimbursements. This calculation can be expressed as
follows:
a-b
Yield = 2 [(------)6 - 1]
cd + 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last day
of the period.
The Equity Income Fund calculates interest earned on debt
obligations held in its portfolio by computing the yield to maturity of each
obligation held by it based on the market value of the obligation (including
actual accrued interest) at the close of business on the last business day of
each 30-day period, or, with respect to obligations purchased during the 30-day
period, the purchase price (plus actual accrued interest) and dividing the
result by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent 30-day period that the obligation
is in the Fund. The maturity of an obligation with a call provision is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date. With respect to debt obligations purchased by the Fund
at a discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of A Shares" and
"Sales Charges Applicable to Purchases of B Shares" in the Prospectus.
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For the 30-day period ended May 31, 1998, the yields of the A
and I shares of the Small Cap Value, Equity Growth, Equity Income, Small Cap
Growth, International Equity, Core Equity and Tax Managed Equity Funds were
0.41% and 0.66%, (.36)% and (.13)%, 1.52% and 1.85%, (.48%) and (.26%), 0% and
0%, (.25%) and (.01%), and .87% and .92%, respectively.
Each Fund computes its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of
a hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
Each Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
T = (---) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all contingent deferred sales
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charges and other nonrecurring charges at the end of the measuring period
covered by the computation.
The average annual total returns for the one year period ended
May 31, 1998 were 12.93% (after taking the sales load into account) and 19.51%
(without taking into account any sales load), for the Small Cap Value Fund's A
shares, 14.12% (after taking the sales load into account) and 19.12% (without
taking into account any sales load) for its B shares and 19.82% for the Small
Cap Value Fund's I shares. The average annual total returns since the Small Cap
Value Fund's commencement of operations through May 31, 1998 were 18.41% (after
taking into account the sales load) and 20.18% (without taking into account any
sales load), for its A shares, (4.08%) (after taking the sales load into
account) and 0.92% (without taking into account any sales load) for its B
shares, and 21.00% for the I shares.
The average annual total returns for the one year period
ending May 31, 1998 were 21.24% (after taking the sales load into account) and
28.32% (without taking into account any sales load), for the Equity Growth
Fund's A Shares, 22.90% (after taking the sales load into account) and 27.90%
(without taking into account any sales load) for its B shares and 28.65% for the
Equity Growth Fund's I shares. The average annual total returns since the Equity
Growth Fund's commencement of operations through May 31, 1998 were 14.26% (after
taking into account the sales load) and 15.17% (without taking into account any
sales load), for its A shares, 4.47% (after taking the sales load into account)
and 9.47% (without taking into account any sales load) for its B shares, and
15.93% for the I shares.
The average annual total returns for the one year period ended
May 31, 1998 were 18.55% (after taking the sales load into account) and 25.41`%
(without taking into account any sales load), for the Equity Income Fund's A
shares, 20.58% (after taking the sales load into account) and 25.58% (without
taking into account any sales load) for its B shares and 25.69% for the Equity
Income Fund's I shares. The average annual total returns since the Equity Income
Fund's commencement of operations through May 31, 1998 were 19.13% (after taking
into account the sales load) and 20.94% (without taking into account any sales
load), for its A shares, 4.39% (after taking the sales load into account) and
9.39% (without taking into account any sales load) for its B shares, and 21.17%
for the I shares.
The cumulative total returns for the period since commencement
of operations (August 1, 1997 with respect to A and I shares and January 6, 1998
with respect to B shares until May 31, 1998 were 10.76% (after taking the sales
load into account) and 17.18% (without taking into account any sales load), for
the Small-Cap Growth Fund's A shares, 4.59% (after taking the sales load into
account) and 9.59% (without taking into account any sales load) for its B shares
and 17.35% for the Small-Cap Growth Fund I shares.
The cumulative total returns for the period since commencement
of operations (August 1, 1997 with respect to A and I shares and January 6, 1998
with respect to B shares) until May 31, 1998 were 2.34% (after taking the sales
load into account) and 8.28% (without taking into account any sales load), for
the International Equity Fund's A
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<PAGE> 334
shares, 11.45% (after taking the sales load into account) and 16.45% (without
taking into account any sales load) for its B shares and 8.76% for the
International Equity Fund's I shares.
The cumulative total returns for the period since commencement
of operations (August 1, 1997 with respect to A and I shares and January 6, 1998
with respect to B shares) until May 31, 1998 were 7.61% (after taking the sales
load into account), and 13.85% (without taking into account any sales load) for
the Core Equity Fund's A shares, 5.54% (after taking the sales load into
account) and 10.54% (without taking into account any sales load) for its B
shares and 14.03% for the Core Equity Fund's I shares.
Each Fund may also advertise the "aggregate total return" for
its Shares which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per Share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.
Aggregate Aggregate
Total Return Total Return Inception
From From Date
Inception Inception
Through Through
------- -------
5/31/98 (with 5/31/98
Deduction of (without
Maximum Sales Deduction for
Charge) Any Sales
Charge)
Armada Small Cap Value Fund
Class A 89.79% 100.80% 08/15/94
Class I N/A 108.21% 07/26/94
B Shares (4.08)% .92% 01/06/98
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<PAGE> 335
Aggregate Aggregate
Total Return Total Return Inception
From From Date
Inception Inception
Through Through
------- -------
5/31/98 (with 5/31/98
Deduction of (without
Maximum Sales Deduction for
Charge) Any Sales
Charge)
Armada Equity Growth Fund
Class A 158.64% 173.66% 4/15/91
Class I N/A 248.28% 12/20/89
B Shares 4.47% 9.47% 01/06/98
Armada Equity Income Fund
Class A 93.55% 104.87% 8/22/94
Class I N/A 112.07% 07/01/94
B Shares 4.39% 9.39 01/06/98
Armada Small Cap Growth Fund
Class A 10.76% 17.18% 8/01/97
Class I N/A 17.35% 8/01/97
B Shares 4.59% 9.59% 01/06/98
Armada International Equity Fund
Class A
Class I
B Shares 2.34% 8.28% 8/01/97
N/A 8.76% 8/01/97
11.45% 16.45% 01/06/98
Armada Core Equity Fund
Class A 7.61% 13.85% 8/01/97
Class I N/A 14.03% 8/01/97
B Shares 5.54% 10.54% 01/06/98
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. A Fund
does not, for these purposes, deduct from the initial value invested or the
ending value redeemed
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<PAGE> 336
any amount representing sales charges. A Fund will, however, disclose the
maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sale charges would reduce the
performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments (with respect to the
Equity and Equity Income Funds), economic conditions, the relationship between
sectors of the economy and the economy as a whole, various securities markets,
the effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury securities. From time
to time, Materials may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Adviser or Sub-adviser as to current market, economic, trade
and interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a Fund.
The Funds may also include in Materials charts, graphs or drawings which compare
the investment objective, return potential, relative stability and/or growth
possibilities of the Funds and/or other mutual funds, or illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury securities and shares of a
Fund and/or other mutual funds. Materials may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund and/or other
mutual funds (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
MISCELLANEOUS
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are being amortized on the straight-line method over a period of five
years from the date of commencement of operations.
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<PAGE> 337
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 August 24, 1998, the following persons owned of record 5
percent or more of the shares of the Funds of the Trust:
Equity Growth Fund (I)
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Whitelaw & Co. 12,303,990.8100 25.58%
Daily Valuation Acct.
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Sheldon & Co. 11,648,336.1360 24.22%
c/o National City Bank
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 6,479,722.9130 13.47%
c/o National City Bank
Trust Mutual Funds/Pooled
Fund Conversion
P.O. Box 94984
Cleveland, OH 44101-4984
National City Non-Contributing 2,927,864.0760 6.09%
Retirement Trust
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 338
<TABLE>
<S> <C> <C>
National City Bank 2,568,374.3660 5.34%
Sheldon & Co. Pathway - 49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
International Equity Fund
OUTSTANDING SHARES PERCENTAGE
National City Non-Contributory 6,233,346.6340 45.17%
Retirement Trust
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 2,116,975.9390 15.34%
c/o National City
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 1,419,862.2260 10.29%
c/o National City
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
National City Bank 815,525.1940 5.91%
Sheldon & Co. Pathway - 49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 339
<TABLE>
<CAPTION>
Total Return Advantage Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Fifth Third Bank 104,640.9370 37.65%
P.O. Box 630074
Cincinnati, OH 45263-0778
Fifth Third Bank 98,788.0010 35.55%
P.O. Box 630074
Cincinnati, OH 45263-0778
Tax Managed Equity Fund (A)
OUTSTANDING SHARES PERCENTAGE
Wheat, First Securities, Inc. 8,333.9490 39.74%
130 Penn Street
New Bethlehem, PA 16242-1042
Robert Thomas Securities 7,816.9040 37.28%
Attn: Mutual Funds Transfer
880 Carillon Parkway
St. Petersburg, FL 33733
Tracy L. Sambuco, Custodian 1,978.2390 9.43%
Austin P. Sambuco, UTMA-OH
48970 Cadiz Harrisville Rd.
Cadiz, OH 43907-9707
Wheat, First Securities Inc. 1,311.8060 6.26%
1717 Tenth Street
Cuyahoga Falls, OH 44221-4511
</TABLE>
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<PAGE> 340
<TABLE>
<CAPTION>
Small Cap Growth Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
National City Corporation 1,442,921.50% 29.00%
Non-Contributory Retirement Trust
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 642,645.7880 12.92%
c/o National City
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 588,550.5820 11.83%
c/o National City
Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
National City Bank 556,970.7700 11.19%
Sheldon & Co. Pathway-49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 279,497.2410 5.62%
c/o National City
Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
Core Equity Fund (I)
OUTSTANDING SHARES PERCENTAGE
National City Non-Contributory 9,555,847.0150 97.30%
Retirement Trust
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 341
<TABLE>
<CAPTION>
Small Cap Value Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Sheldon & Co. 5,344,617.8580 29.22%
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Sheldon & Co. 5,268,658.1970 28.81%
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
c/o National City Bank 2,862,283.2470 15.65%
Sheldon & Co. - Pathway 49
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Sheldon & Co. 1,559,966.0240 8.53%
c/o National City Bank
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
National City Bank, Whitelaw & Co. 1,504,410.7620 8.23%
Daily Valuation Account
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 342
<TABLE>
<CAPTION>
Total Return Advantage Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Sheldon & Co. 18,665,180.9850 61.88%
Attn: Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
Sheldon & Co. 6,219,882.8580 20.62%
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
Sheldon & Co. 3,449,617.9060 11.44%
c/o National City Bank
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
Tax Managed Equity Fund (I)
OUTSTANDING SHARES PERCENTAGE
Sheldon & Co. 15,486,746.7950 98.71%
c/o National City Bank
Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
</TABLE>
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<PAGE> 343
<TABLE>
<CAPTION>
Equity Index Fund (I)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Whitelaw & Co. 5,450,034.4100 46.66%
Daily Valuation Account
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
Whitelaw & Co. 3,429,053.9210 29.36%
c/o National City Bank
Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
Whitelaw & Co. - Voyage 2,760,871.5910 23.64%
P.O. Box 94777
Attn: Trust Mutual Funds
Cleveland, OH 44101-4777
Equity Income Fund (I)
OUTSTANDING SHARES PERCENTAGE
Sheldon & Co. 12,832,388.4030 52.16%
c/o National City Bank
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
c/o National City Bank 1,539,738.7840 6.26%
Sheldon & Co. - Pathway - 49
Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
National City Bank, Cleveland 2,842,039.8750 11.55%
Non-Contributory Retirement Trust
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
</TABLE>
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<PAGE> 344
<TABLE>
<CAPTION>
Small Cap Value Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Citicorp USA, Inc. 76,335.8780 8.73%
As Custodian for Marlboro
Equity Partners
One Sansome St., 24th Floor
San Francisco, CA 94104-4448
Citicorp USA Inc. 76,335.8780 8.73%
As Custodian for Suzanne Tito
One Sansome Street, 24th Floor
San Francisco, CA 94104-4448
International Equity Fund (A)
OUTSTANDING SHARES PERCENTAGE
Wheat First Securities, Inc. 2,563.2480 5.61%
9912 Young Road
Wattsburg, PA 16442-9529
Equity Growth Fund (A)
OUTSTANDING SHARES PERCENTAGE
State Street Bank & Trust 3,716,139.2020 85.63%
FBO First Energy Corp.
Savings Plan
200 Newport Avenue
North Quincey, MA 02171
</TABLE>
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<PAGE> 345
<TABLE>
<CAPTION>
Small Cap Growth Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Capital Network Services 5,863.9560 14.39%
One Bush Street, 11th Floor
San Francisco, CA 94104-4425
Schweizer Dipple Inc. (401k Plan) 2,528.9690 6.20%
James G. Dwyer
Attn: Lynn E. Ulrich
7227 Division Street
Oakwood Village, OH 44146-5405
Schweizer Dipple Inc. (401k Plan) 2,428.3170 5.96%
James G. Dwyer
Attn: Lynn E. Ulrich
7227 Division Street
Oakwood Village, OH 44146-5405
</TABLE>
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<PAGE> 346
<TABLE>
<CAPTION>
Core Equity Fund (A)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat First FBO 5,039.7710 9.79%
Vincent A. DiGirolamo &
Nancy S. DiGirolamo
2002 Fox Trace Trail
Cuyahoga Falls, OH 44223-3738
Charles W. Edwards, Jr. 2,577.3200 5.01%
570 Bennett Way
Florence, AL 35634-2604
Wheat First Securities, Inc. 10,662.2800 20.71%
FBO Everette M. Bride
RD #1 Box 155 B1
SEI Trust Company for the 3,710.9890 7.21%
Rollover of Macklin H. Thomas
2418 E. 91st Street
Indianapolis, IN 46240-2010
Wheat, First Securities, Inc. 3,572.5260 6.94%
122 Oberlin Dr.
Butler, PA 16001-1710
Wheat, First Securities, Inc. 3,073.4670 5.97%
Erskine X-Press Inc.
John R. Swab, Sr.
6210 Center Road
Lowellville, OH 44436-9521
</TABLE>
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<PAGE> 347
<TABLE>
<CAPTION>
International Equity Fund (B)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities 1,655.8570 93.64%
1190 Parkside Drive
Limestone, NY 14753-9704
SEI Investments Co. 107.5270 6.08%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
Core Equity Fund (B)
OUTSTANDING SHARES PERCENTAGE
Richard P. Nover 176.8350 25.69%
Kathleen Cain Nover
3146 Sable Ridge Place
Greenwood, IN 46142-9773
James H. Turner 173.1600 25.16%
137 Vanderbilt Drive
Lexington, KY 40517-1540
SEI Trust Company 146.0190 21.21%
Custodian for the IRA of
Jack Lewis
10099 Meadville St., Lot 31
Cranesville, PA 16410-9331
SEI Investments Co. 96.9930 14.09%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
Wheat, First Securities, Inc. 90.9220 13.21%
802 Broad Street
New Bethlehem, PA 16242-1108
</TABLE>
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<PAGE> 348
<TABLE>
<CAPTION>
Equity Growth Fund (B)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities, Inc. 2,099.6960 33.33%
1190 Parkside Drive
Limestone, NY 14753-9704
Wheat, First Securities, Inc. 1,158.4800 18.39%
12435 Pearl Road
Chardon, OH 44024-9125
Wheat, First Securities, Inc. 1,090.1560 17.31%
John K. Wojchowski IRA
Box 48 West Street
Mt. Pleasant, OH 43939-0048
Wheat, First Securities, Inc. 499.0930 7.92%
1016 Westgate Place
Louisville, KY 40207-2327
</TABLE>
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<PAGE> 349
<TABLE>
<CAPTION>
Equity Income Fund (B)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities, Inc. 3,134.3780 43.78%
1190 Parkside Drive
Limestone, NY 14753-9704
Wheat, First Securities, Inc. 1,435.1320 20.05%
12435 Pearl Road
Chardon, OH 44024-9125
Wheat, First Securities, Inc. 1,170.2750 16.35%
4314 Churchill Rd.
Louisville, KY 40207-4047
Wheat, First Securities, Inc. 458.7160 6.41%
72 Birchwood Drive
Transfer, PA 16154-2406
Small Cap Growth Fund (B)
SEI Investments Co. 93.8090 95.66%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
</TABLE>
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<PAGE> 350
<TABLE>
<CAPTION>
Small Cap Value Fund (B)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities, Inc. 2,262.5880 21.36%
John K. Wojchowski IRA
WFS AS Custodian
Box 48, West Street
Mount Pleasant, OH 43939-0048
Wheat, First Securities, Inc. 1,239.6540 11.70%
1190 Parkside Drive
Limestone, NY 14753-9704
Wheat, First Securities, Inc. 873.3290 8.24%
Daniel P. Schultz IRA
WFS AS Custodian
7917 Conifer Drive
Louisville, KY 40258-2236
Wheat, First Securities, Inc. 743.7460 7.02%
1016 Westgate Place
Louisville, KY 40207-2327
Wheat, First Securities, Inc. 597.6780 5.64%
8123 Shobe Lane
Louisville, KY 40228-2274
</TABLE>
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<PAGE> 351
<TABLE>
<CAPTION>
Tax Managed Equity Fund (B)
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat, First Securities, Inc. 5,928.8540 35.21%
6706 Old Healey Road
Louisville, KY 40299-5206
Wheat, First Securities, Inc. 3,622.7540 21.52%
Anna M. Kusner
3501 Executive Parkway
Apt. 729
Toledo, OH 43606-5523
Wheat, First Securities, Inc. 2,516.7600 14.95%
Indar M. Jhamb MD. PSP & TR
Indar M. Jhamb MD. TTEE
FBO Indarr M. Jhamb MD.
1228 Ashley Circle
Wheat, First Securities, Inc. 2,366.1010 14.05%
Lois S. Wood
266 Windemere Place
Westerville, OH 43082-6349
Wheat, First Securities, Inc. 2,272.7270 13.50%
10 Jordan Drive
Norwich, OH 43767-9770
Wheat, First Securities, Inc. 566.0940 5.34%
19645 Detroit Rd., Box 238
Rocky River, OH 44116-1811
Wheat, First Securities, Inc. 562.8520 5.31%
Linda D. Musick
Lisa A. Skaggs
2779 Stuart Road
Rockbridge, OH 43149
</TABLE>
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<PAGE> 352
FINANCIAL STATEMENTS
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1998 are hereby incorporated herein by
reference. Copies of the Funds' annual report may be obtained by calling the
Trust at 1-800-622-FUND (3863) or by writing to the Trust, One Freedom Valley
Drive, Oaks, Pennsylvania 19456.
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<PAGE> 353
APPENDIX A
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's. 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.
"BB," "B," "CCC," "CC" and "C" - Debt is 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.
"BB" - Debt is less vulnerable to non-payment 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" - Debt is more vulnerable to non-payment 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" - Debt is currently vulnerable to non-payment, 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.
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"CC" - An obligation rated "CCC" 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" - An obligation rated "D" is in payment default. This
rating is used when payments on an obligation are not made on the date due, even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
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"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 operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
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"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of
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principal and interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of
interest and/or principal seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
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"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
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COMMERCIAL PAPER RATINGS
A Standard & Poor's ("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" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default. The "D" rating category
is used when interest payments of principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
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.
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"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
effects of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and 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 highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify 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 ensure 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.
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Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
"LOC" - The symbol "LOC" indicates that the rating is based on
a letter of credit issued by a commercial bank.
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:
"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.
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"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.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of "A1+" is assigned.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by an adequate capacity for
timely repayment such capacity is more susceptible to adverse changes in
business, economic, or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic, or financial
conditions.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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APPENDIX B
As stated in the Prospectus, the Small Cap Value, Equity
Growth, Equity Income, Small Cap Growth, International Equity, Equity Index and
Tax Managed Equity Funds (the "Funds") may enter into certain futures
transactions and options for hedging purposes. Such transactions are described
in this Appendix.
Index Futures Contracts
GENERAL. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's Ratings Group 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes or indexes based on an industry or market
segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
The Equity Index Fund will purchase index futures contracts in
anticipation of purchases of securities. A long futures position may be
terminated without a corresponding purchase of securities.
A Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund may do so either to hedge the value of the Fund as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its Fund holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the Fund will decline prior to the time of sale.
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Margin Payments
Unlike purchases or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with the Custodian an amount of cash or cash equivalents, known as
initial margin, based on the value of the contract. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Adviser may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by the Funds as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, a Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, a Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility over
a particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by the Adviser. Conversely, a Fund may buy
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or sell fewer futures contracts if the volatility over a particular time period
of the prices of the instruments being hedged is less than the volatility over
such time period of the futures contract being used, or if otherwise deemed to
be appropriate by the Adviser. It is also possible that, where a Fund has sold
futures to hedge its Fund against a decline in the market, the market may
advance and the value of instruments held in the Fund may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities.
When futures are purchased to hedge against a possible
increase in the price of securities before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Funds will continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
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Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if a Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Funds will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Funds because the
maximum amount at risk is the premium paid for the
D-4
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options (plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
B-5
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CROSS REFERENCE SHEET
---------------------
Ohio Tax Exempt Fund
Pennsylvania Municipal Fund
National Tax Exempt Fund
<TABLE>
<CAPTION>
Form N-1A Part B Item Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
1. Cover Page......................................Cover Page
2. Table of Contents...............................Table of Contents
3. General Information and History.................Statement of Additional Information
4. Investment Objectives and Policies..............Risk Factors, Investment Objectives and
Policies
5. Management of Registrant........................Trustees and Officers
6. Control Persons and Principal
Holders of Securities ..........................Description of Shares
7. Investment Advisory and Other
Services Management.............................Advisory, Administration,
Distribution, Custody and
Transfer Agency Agreements
8. Brokerage Allocation and Other
Practices.......................................Risk Factors, Investment
Objectives and Policies
9. Capital Stock and Other Securities..............Additional Purchase and
Redemption Information
10. Purchase, Redemption and Pricing
of Securities Being Offered.....................Additional Purchase and
Redemption Information
11. Tax Status......................................Additional Information
Concerning Taxes
12. Underwriters....................................Not Applicable
13. Calculation of Performance Data.................Yield and Performance
Information
14. Financial Statements............................Financial Statements
</TABLE>
<PAGE> 369
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 18, 1998
OHIO TAX EXEMPT FUND
PENNSYLVANIA MUNICIPAL FUND
NATIONAL TAX EXEMPT FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Funds of Armada Funds
(the "Trust"), dated September 18, 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.
<PAGE> 370
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION..............................................................................1
INVESTMENT OBJECTIVES AND POLICIES...............................................................................1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................................15
DESCRIPTION OF SHARES...........................................................................................18
ADDITIONAL INFORMATION CONCERNING TAXES.........................................................................19
TRUSTEES AND OFFICERS...........................................................................................22
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS................................................................................27
SHAREHOLDER SERVICES PLAN.......................................................................................32
PORTFOLIO TRANSACTIONS..........................................................................................33
AUDITORS....................................................................................................... 34
COUNSEL....................................................................................................... 34
YIELD AND PERFORMANCE INFORMATION...............................................................................35
MISCELLANEOUS...................................................................................................40
FINANCIAL STATEMENTS............................................................................................42
APPENDIX A.....................................................................................................A-1
</TABLE>
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<PAGE> 371
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Ohio Tax Exempt, Pennsylvania Municipal and National Tax Exempt Funds (the
"Funds"). The information contained in this Statement of Additional Information
expands upon matters discussed in the Prospectus. No investment in shares of a
Fund should be made without first reading the Prospectus.
The Pennsylvania Municipal Fund commenced operations on August
10, 1994 as a separate investment portfolio (the "Predecessor fund to the
Pennsylvania Municipal Fund") of Inventor Funds, Inc., which was organized as a
Maryland corporation. On September 9, 1996, the Predecessor fund to the
Pennsylvania Municipal Fund was reorganized as a new portfolio of the Trust.
Prior to the reorganization, the Predecessor fund to the Pennsylvania Municipal
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, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, and Moody's for Municipal Securities and other securities which may be
held by the Funds.
MUNICIPAL SECURITIES
As described in the Prospectus, the two principal
classifications of Municipal Securities consist of "general obligation" and
"revenue" issues. The Funds also may invest in "moral obligation" issues, which
are normally issued by special purpose authorities. Municipal Bonds include debt
obligations issued by governmental entities to obtain funds for various public
purposes, including the construction of a wide range of public facilities, the
refunding of outstanding obligations, and the extension of loans to public
institutions and facilities. Private activity bonds may be purchased if the
interest paid is excludable from federal income tax. Private activity bonds are
issued by or on behalf of states or political subdivisions thereof to finance
privately owned or operated facilities for business and manufacturing, housing,
sports, and pollution control and to finance activities of and 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.
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<PAGE> 372
Ohio and Pennsylvania Municipal Securities that are payable
only from the revenues derived from a particular facility may be adversely
affected by federal or state 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.
Similarly, 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 Tax Exempt or
Pennsylvania Municipal Funds will invest from time to time or predicting the
nature or extent of future judicial interpretations or changes in existing laws
or regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such laws,
regulations and judicial interpretations on the securities in which the Ohio Tax
Exempt or Pennsylvania Municipal Fund may invest and, therefore, on the shares
of the 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, the general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Rating Agencies represent
their opinions as to the quality of Municipal 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 a Fund, an issue of Municipal Securities may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
the Funds. The Funds' adviser will consider such an event in determining whether
they should continue to hold the obligation.
The payment of principal and interest on most Municipal
Securities purchased by the 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 or the principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
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<PAGE> 373
Certain Municipal Securities held by the Funds may be insured
at the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer or original purchaser
of the Municipal Securities at the time of their original issuance. In the event
that the issuer defaults on interest or principal payments, the insurer of the
obligation 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 Funds may invest include, but are
not limited to, general obligation notes, tax anticipation notes (notes sold to
finance working capital or capital facilities needs of the issuer in
anticipation of receiving taxes on a future date), revenue anticipation notes
(notes sold to provide needed cash prior to receipt of expected non-tax revenues
from a specific source), bond anticipation notes, certificates of indebtedness,
demand notes and construction loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
Investments by the Funds in tax-exempt commercial paper will
be limited to investments in obligations which are rated at least A-2 by S&P,
F-2 by Fitch or Prime-2 by Moody's at the time of investment or which are of
equivalent quality as determined by their adviser. Investments in floating rate
instruments will normally involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate) at a major commercial bank, and
that the investing Fund can demand payment of the obligation at all times or at
stipulated dates on short notice (not to exceed 30 days) at par plus accrued
interest. A Fund must use the shorter of the period required before it is
entitled to prepayment under such obligations or the period remaining until the
next interest rate adjustment date for purposes of determining the maturity.
Such obligations are frequently secured by letters of credit or other credit
support arrangements provided by banks. The quality of the underlying credit or
of the bank, as the case may be, must, in the opinion of the Funds' adviser be
equivalent to the long-term bond or 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
Each Fund may acquire stand-by commitments (also known as put
options) with respect to Municipal Securities held in its portfolio. The Funds
expect that stand-by commitments will generally be available without the payment
of any direct or indirect consideration. However, if necessary or advisable, a
Fund may pay for a stand-by commitment either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). A Fund will not acquire a stand-by commitment unless immediately
after the acquisition, not more than 5% of its total assets will be invested in
instruments subject to a demand feature, or in stand-by commitments, with the
same institution.
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<PAGE> 374
The Funds' right to exercise stand-by commitments will be
unconditional and unqualified. A stand-by commitment will be transferable only
with the underlying Municipal 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 a 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 Fund values the underlying Municipal Securities on an amortized cost
basis. Accordingly, the amount payable by a dealer upon exercise of a stand-by
commitment will normally be substantially the same as the portfolio value of the
underlying Municipal Securities.
Each Fund intends to enter into stand-by commitments only,
with dealers, banks and broker-dealers which, in the adviser's opinion, present
minimal credit risks. A Fund's reliance upon the credit of these dealers, banks
and broker-dealers will be secured by the value of the underlying Municipal
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
Each Fund 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 a Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment, marked to market daily. It is likely that a Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When the Funds engage in when-issued transactions, they rely
on the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
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<PAGE> 375
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment
companies which invest in high quality, short term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. Each Fund currently intends to limit such investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 5% of the value of its total assets will be invested in the securities
of any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund; and (d) not more than 10% of the
outstanding voting stock of any one investment company will be owned in the
aggregate by the Fund and other investment companies advised by the adviser.
TAXABLE MONEY MARKET INSTRUMENTS
As consistent with its investment objective and policies, each
Fund may invest in various Taxable Money Market Instruments such as bank
obligations, commercial paper, repurchase agreements and U.S. Government
Obligations. The Funds may also invest in guaranteed investment contracts
("GICs").
Bank obligations include bankers' acceptances generally having
a maturity of six months or less, negotiable certificates of deposit, and
non-negotiable time deposits issued for a definite period of time and earning a
specified return by a U.S. bank which is a member of the Federal Reserve System.
Bank obligations also include U.S. dollar denominated bankers' acceptances,
certificates of deposit and, with respect to the Ohio Tax Exempt Fund, time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. The Funds
may also make interest bearing savings deposits in commercial and savings banks
not in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of the Fund's total assets at the time of
purchase.
Investments include commercial paper and other short term
promissory notes issued by corporations, municipalities and other entities
(including variable and floating rate instruments). In addition, the Funds may
invest in Canadian Commercial Paper ("CCP"), which is commercial paper issued by
a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer. The Funds may also acquire zero coupon obligations, which have greater
price volatility than coupon obligations and which will not result in the
payment of interest until maturity.
Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund purchases
securities from financial institutions such as banks and broker-dealers which
the Fund's adviser deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the 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
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<PAGE> 376
not less than the repurchase price (including accrued interest). If the seller
were to default on its repurchase obligation or become insolvent, the Fund
holding such obligation would suffer a loss to the extent that the proceeds from
a sale of the underlying portfolio securities were less than the repurchase
price under the agreement, or to the extent that the disposition of such
securities by the Fund were delayed pending court action. Although there is no
controlling legal precedent confirming that the Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, the Board of Trustees of the Trust believes
that, under the regular procedures normally in effect for custody of the Fund's
securities subject to repurchase agreements and under federal laws, a court of
competent jurisdiction would rule in favor of the Trust if presented with the
question. Securities subject to repurchase agreements will be held by the
Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by the Fund under the 1940 Act.
Each Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Funds will invest in the obligations of such
agencies or instrumentalities only when the adviser believes that the credit
risk with respect thereto is minimal.
The Funds may make limited investments in GICs issued by U.S.
insurance companies. Each Fund will purchase a GIC only when the 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 one or more Rating Agencies.
VARIABLE AND FLOATING RATE OBLIGATIONS
The Funds may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between a Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, the investing Fund may demand
payment of principal and accrued interest at a time specified in the instrument
or may resell them to a third party. Such obligations may be backed by bank
letters of credit or guarantees issued by banks, other financial institutions or
the U.S. Government, its
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<PAGE> 377
agencies or instrumentalities. The quality of any letter of credit or guarantee
will be rated high quality or, if unrated, will be determined to be of
comparable quality by the adviser. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, the Funds might be
unable to dispose of the instrument because of the absence of a secondary market
and could, for this or other reasons, suffer a loss to the extent of the
default.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase or sell real estate, except that the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with its
investment objective and policies the Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation, those
relating to indices; (b) purchase and sell options on futures contracts or
indices; (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.
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<PAGE> 378
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 15% of its net assets in illiquid
securities.
6. Purchase securities while its outstanding borrowings
(including reverse repurchase agreements) are in excess of 5% of its total
assets. Securities held in escrow or in separate accounts in connection with a
Fund's investment practices described in its Prospectus or Statement of
Additional Information are not deemed to be pledged for purposes of this
limitation.
With respect to each of the Ohio Tax Exempt and Pennsylvania
Municipal Funds, at the end of each quarter of its taxable year, (i) at least
50% of the market value of its total assets will be invested in cash, U.S.
Government securities, securities of other regulated investment companies and
other securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
its total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its total assets will be invested in
the securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies).
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making decisions.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN OHIO MUNICIPAL SECURITIES
As described in the Prospectus, the Ohio Tax Exempt Fund will
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions (Ohio Obligations). The Ohio Tax Exempt
Fund is therefore susceptible to general or particular economic, political or
regulatory factors that may affect issuers of Ohio Obligations. The following
information constitutes only a brief summary of some of the many complex factors
that may have an effect. The information does not apply to "conduit" obligations
on which the public issuer itself has no financial
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<PAGE> 379
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 Obligations of local
issuers is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply
in connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio
Obligations has been guaranteed by bond insurance purchased by the issuers, the
Ohio Tax Exempt Fund or other parties. Those Ohio Obligations may not be subject
to the factors referred to in this section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count
of 10,847,000 indicated a 0.5% population increase from 1980. The Census
estimate for 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 Obligations held in the Ohio Tax Exempt Fund or the ability of particular
obligors to make timely payments of debt service on (or lease payments relating
to) those Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal
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<PAGE> 380
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.
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.
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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 fund.
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 previously 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 prior
$500 million outstanding authorization, and authorizes not more than $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
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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-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 referred to 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
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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 totaled $41.1 million for 28 districts in FY 1994, $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), $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 its 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 is in
preliminary "fiscal watch" status). As of July 30, 1998, the 1996 school
district "fiscal emergency" provision had been applied to six districts, and ten
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.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA SECURITIES
Potential shareholders should consider the fact that the
Pennsylvania Municipal Fund's portfolio consists primarily of securities issued
by the Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize that the Fund's performance is closely tied to
general economic conditions within the Commonwealth as a whole and to economic
conditions within particular industries and geographic areas located within the
Commonwealth.
Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases have resulted in surpluses the last
four years; as of June 30, 1996, the General Fund had a surplus of $635.2
million.
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<PAGE> 384
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU, and the parties are proceeding with discovery; (ii) in 1987, the Supreme
Court of Pennsylvania held the statutory scheme for county funding of the
judicial system to be in conflict with the constitution of the Commonwealth, but
it stayed judgment pending enactment by the legislature of funding consistent
with the opinion, and the legislature has yet to consider legislation
implementing the judgment. In 1992, a new action in mandamus was filed seeking
to compel the Commonwealth to comply with the original decision. The Court
issued a writ in mandamus and appointed a special master in 1996 to submit a
plan for implementation, which it intended to require by January 1, 1998. In
January 1997, the Court established a committee, consisting of the special
master and representatives of the Executive and Legislative branches, to develop
an implementation plan; (iii) litigation was filed in both state and federal
court by an association of rural and small schools and several individual school
districts and parents challenging the constitutionality of the Commonwealth's
system for funding local school districts -- the federal case has been stayed
pending the resolution of the state case; a trial in the state case commenced in
January 1997 and has recessed; no briefing schedule or date for oral argument
has yet been set; (iv) Envirotest/Synterra Partners ("Envirotest") filed suit
against the Commonwealth asserting that it sustained damages in excess of $350
million, as a result of investments it made in reliance on a contract to conduct
emissions testing before the emission testing program was suspended. Envirotest
has entered into a Standstill Agreement with the Commonwealth pursuant to which
Envirotest will receive $145 million, with interest at 6 percent per annum; and
(v) in 1995, the Commonwealth, the Governor of Pennsylvania, the City of
Philadelphia and the Mayor of Philadelphia were joined as additional respondents
in an enforcement action commenced in Commonwealth Court in 1973 by the
Pennsylvania Human Relations Commission against the School District of
Philadelphia pursuant to the Pennsylvania Human Relations Act. The Commonwealth
and the City were joined to determine their liability, if any, to pay additional
costs necessary to remedy segregation-related conditions found to exist in
Philadelphia public schools. In January 1997, the Pennsylvania Supreme Court
ordered the parties to brief certain issues, but no decision by the Supreme
Court has been issued.
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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 1996. PICA's power to issue further
bonds to finance capital projects expired on December 31, 1994. PICA's authority
to issue bonds to finance cash flow deficits expired on December 31, 1996, but
its authority to refund existing debt will not expire.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co. (the "Distributor"), which has agreed to use
appropriate efforts to solicit all purchase orders. The issuance of shares is
recorded on the books of the Trust. To change the commercial bank or account
designated to receive redemption proceeds, a written request must be sent to an
investor's financial institution at its principal office. Such requests must be
signed by each shareholder, with each signature guaranteed by a U.S. commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory and "Signature Guaranteed"
must appear with the signature. An investor's financial institution may request
further documentation from corporations, executors, administrators, trustees or
guardians, and will accept other suitable verification arrangements from foreign
investors, such as consular verification.
The Trust may suspend the right of redemption or postpone the
date of payment for shares for more than seven days for shares during any period
when: (a) trading on the Exchange is restricted by applicable rules and
regulations of the SEC; (b) the Exchange is closed for other than customary
weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC.
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As described in the Prospectus, I shares of the Funds are sold
to certain qualified investors at their net asset value without a sales charge.
A shares of the Funds are sold to public investors at the public offering price
based on the Fund's net asset value plus a front-end load or sales charge as
described in the Prospectus. B shares of the Funds are sold to public investors
subject to a contingent deferred sales charge. There is no sales load or
contingent deferred sales charge imposed for shares acquired through the
reinvestment of dividends or distributions on such shares.
For the fiscal year ended May 31, 1998, sales loads paid by
shareholders of the Ohio Tax Exempt Fund and Pennsylvania Municipal Fund totaled
$7,179 and $0, respectively.
For the period from April 9, 1998 (inception) until May 31,
1998, shareholders of the National Tax Exempt Fund paid a total of $0 in sales
charges.
Automatic investment programs such as the monthly savings
program ("Planned Investment Program") described in the Prospectus permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
protect against losses in a declining market, or prevent a loss if an investor
ultimately redeems his or her shares at a price which is lower than their
purchase price. An investor may want to consider his or her financial ability to
continue purchases through periods of low price levels. From time to time, in
advertisements, sales literature, communications to shareholders and other
materials ("Materials") the Trust may illustrate the effects of dollar cost
averaging through use of or comparison to an index such as the S&P 500 Index.
OFFERING PRICE PER A SHARE OF THE FUNDS
An illustration of the computation of the offering price per A
share of the Funds, based on each Fund's net asset value and number of
outstanding shares on May 31, 1998, follows:
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<TABLE>
<CAPTION>
TABLE
-----
OHIO TAX EXEMPT FUND
--------------------
<S> <C>
Net Assets of A shares................................................................................. $4,037,305
Outstanding A shares................................................................................... 363,904
Net Asset Value Per Share
($4,037,305 / 363,904)................................................................................. 11.09
Sales Charge, 3.00% of
offering price (3.07% of
net asset value per share)............................................................................. .34
Offering to Public..................................................................................... 11.43
PENNSYLVANIA MUNICIPAL FUND
---------------------------
Net Assets of A shares................................................................................. $124,897
Outstanding A shares................................................................................... 11,951
Net Asset Value Per Share
($124,897 / 11,951).................................................................................... 10.45
Sales Charge, 3.00% of
offering price (3.06% of
net asset value per share)............................................................................. .32
Offering to Public..................................................................................... 10.77
</TABLE>
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.
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 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
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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 set forth in the Prospectus, including nine classes or
series, which represent interests in the Ohio Tax Exempt Fund (Class K, Class K
- -Special Series 1 and Class K - Special Series 2), Pennsylvania Municipal Fund
(Class T, Class T - Special Series 1 and Class T - Special Series 2) and the
National Tax Exempt Fund (Class L, Class L-Special Series 1 and Class L-Special
Series 2) are described in this Statement of Additional Information and the
related Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of the Fund are entitled to
receive the assets available for distribution belonging to the particular Fund,
and a proportionate distribution, based upon the relative asset values of the
respective Fund, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
class in a particular investment fund have equal voting rights except that only
I and A shares of an investment fund will be entitled to vote on matters
submitted to a vote of shareholders (if 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.
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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 advisers with
specific reference to their own tax situation.
IN GENERAL
As described above and in the Prospectus, each Fund is
designed to provide investors with tax-exempt interest income. The Funds are not
intended to constitute a balanced investment program and are not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of the Funds would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and IRAs since such plans and
accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the Funds' dividends being tax-exempt.
The policy of the Funds is to pay each year as federal
exempt-interest dividends substantially all the Funds' Municipal Securities
interest income net of certain deductions. In order for the Funds to pay federal
exempt-interest dividends with respect to any taxable year, at the close of each
taxable quarter at least 50% of the aggregate value of their respective
portfolios must consist of tax-exempt obligations. An exempt-interest dividend
is any dividend or part
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<PAGE> 390
thereof (other than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by a Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by a Fund with respect to any taxable year which qualifies as federal
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the Funds. A "substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his 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 shares of the Funds is not deductible for federal income tax purposes
if the Funds distribute exempt-interest dividends during the shareholder's
taxable year. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six months holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus and above, certain requirements with respect to the
source of its income during a taxable year. At least 90% of the gross income of
each Fund must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks, securities
or foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a Fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a Fund from a partnership or trust is treated
as derived with respect to the Fund's business of investing in stock, securities
or currencies only to the extent that such income is attributable to items of
income
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<PAGE> 391
which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.
The Trust will designate any distribution of long-term capital
gains of a Fund as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Trust's taxable year.
Shareholders should note that, upon the sale or exchange of such Fund's shares,
if the shareholder has not held such shares for at least six months, any loss on
the sale or exchange of those shares will be treated as long-term capital loss
to the extent of the capital gain dividends received with respect to the shares.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Securities)
would be taxable as ordinary income to the Fund's shareholders to the extent of
the Fund's current and accumulated earnings and profits, and would be eligible
for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or gross proceeds
realized upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
Depending upon the extent of the Funds' activities in states
and localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under federal income tax laws. Shareholders are
advised to consult their tax advisers concerning the application of state and
local taxes.
STATE AND LOCAL TAXES - OHIO TAX EXEMPT FUND
The Ohio Tax Exempt Fund is not subject to the Ohio personal
income tax, or school district or municipal income taxes in Ohio. The Ohio Tax
Exempt Fund is not subject to
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the Ohio corporation franchise tax or the Ohio dealers in intangibles tax,
provided that, if there is a sufficient nexus between the State of Ohio and such
entity that would enable the State to tax such entity, the Fund timely files the
annual report required by Section 5733.09 of the Ohio Revised Code. The Ohio Tax
Commissioner has waived the annual filing requirement for every tax year since
1990, the first year to which such requirement applied.
Shareholders of the Fund otherwise subject to Ohio personal
income tax, or municipal or school district income taxes in Ohio imposed on
individuals and estates will not be subject to such taxes on distributions with
respect to shares of the Fund ("Distributions") to the extent that such
Distributions are properly attributable to interest on or gain from the sale of
Ohio Municipal Securities as such term is defined in the Prospectus.
Shareholders otherwise subject to the Ohio corporation
franchise tax will not be required to include Distributions in their tax base
for purposes of calculating the Ohio corporation franchise tax on the net income
basis to the extent that such distributions either (a) are properly attributable
to interest on or gain from the sale of Ohio Municipal Securities, (b) represent
"exempt-interest dividends" for federal income tax purposes, or (c) are
described in both (a) and (b). Shares of the Fund will be included in a
Shareholder's tax base for purposes of computing the Ohio corporation franchise
tax on the net worth basis.
Distributions that consist of interest on obligations of the
United States or its territories or possessions or of any authority, commission,
or instrumentality of the United States that is exempt from state income taxes
under the laws of the United States (including obligations issued by the
governments of Puerto Rico, the Virgin Islands or Guam and their authorities or
municipalities) ("Territorial Obligations") are exempt from the Ohio personal
income tax, and municipal and school district income taxes in Ohio, and,
provided, in the case of Territorial Obligations, such interest is excluded from
gross income for federal income tax purposes, are excluded from the net income
base of the Ohio corporation franchise tax.
It is assumed for purposes of this discussion of State and
Local Taxes that the Fund will continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and that at all
times at least 50% of the value of the total assets of the Fund consists of Ohio
Municipal Securities or similar obligations of other states or their
subdivisions.
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
</TABLE>
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<PAGE> 393
<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>
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<PAGE> 394
<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> 395
- --------------------
* Messrs. Carter and Martens are considered by the Trust to be
"interested persons" of the Trust as defined in the 1940 Act.
Each trusteee of the Trust serves as a trustee of The
Parkstone Group of Funds ("Parkstone") and The Parkstone Advantage Fund
("Parkstone Advantage"), registered investmetn companies.
Herbert R. Martens, Jr. is employed by National City
Corporation, the parent corporation to IMC, 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 Advanatage,
each trustee receives an 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 fiscal 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.
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<PAGE> 396
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>
* The "Fund Complex" consists of Armada Funds, The Parkstone Group of
Funds and The Parkstone Advantage Funds. Each of the Trustees serves as
Trustee to all three investment companies. The Trustees became Trustees
of The Parkstone Group of Funds and The Parkstone Advantage Fund
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> 397
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 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 or she may be
involved or with which he or she 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 or she been a
trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS
-----------------------------------------------------------
ADVISORY AGREEMENT
IMC serves as investment adviser to the Ohio Tax Exempt and
Pennsylvania Municipal Funds under an Advisory Agreement dated November 19, 1997
and to the National Tax Exempt Fund under an Advisory Agreement dated April 9,
1998. Prior to such dates, National City Bank, served as investment adviser to
the Funds (except as noted below) . Both companies are affiliates of National
City Corporation, a bank holding company with $72 billion in assets, and
headquarters in Cleveland, Ohio and nearly 1,000 branch offices in six states.
From time to time, the adviser may voluntarily waive fees or reimburse the Trust
for expenses.
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<PAGE> 398
Pursuant to the advisory agreements in effect for the
following periods, the Trust incurred with respect to the Ohio Tax Exempt Fund
advisory fees of $0 (after waivers of $649,247), $490,179 and $443,670, and the
adviser waived such amounts, for the fiscal years ended May 31, 1998, 1997 and
1996.
Pursuant to the advisory agreements in effect for the fiscal
year ended May 31, 1998, the Trust incurred with respect to the Pennsylvania
Municipal Fund advisory fees of $150,120 (after waivers of $56,245). For the
period from September 9, 1996 (date of reorganization of the predecessor fund to
the Pennsylvania Municipal Fund) until May 31, 1997, National City Bank, the
then adviser of the Pennsylvania Municipal Fund, earned advisory fees of
$147,646 and waived fees in the amount of $2,684 with respect to that Fund. For
the period from June 1, 1996 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 to the
Pennsylvania Municipal Fund, earned advisory fees of $73,107, $23,057 and
$264,836, and Integra waived fees in the amounts of $26,413, $6,792 and $44,126,
respectively.
For the fiscal period from April 9, 1998 (commencement of
operations) through May 31, 1998, the Trust incurred with respect to the
National Tax Exempt Fund advisory fees of $0 (after waivers of $62,113).
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder.
The Advisory Agreement relating to the Funds was approved by
the shareholders of the Ohio Tax Exempt and Pennsylvania Municipal Funds on
November 19, 1997 and by the sole shareholder of the National Tax Exempt Fund as
of the day prior to the day it commenced operations. Unless sooner terminated,
the Advisory Agreement will continue in effect with respect to a Fund 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 Prospectus) and a majority of the
trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. The Advisory Agreement may be terminated by the Trust or the
advisers on 60 days written notice, and will terminate immediately in the event
of its assignment.
ADMINISTRATION AGREEMENT AND SUB-ADMINISTRATION AGREEMENT
The Trust and SEI Fund Resources (the "Administrator") have
entered into an administration agreement (the "Administration Agreement")
effective May 1, 1998.
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<PAGE> 399
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.
The Administrator, a Delaware business trust, has its
principal business offices at One Freedom Valley Drive, 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, I share 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.
The Administrator is entitled to receive with respect to the
Funds, an administrative fee, computed daily and paid monthly, at an annual rate
of .07% of the aggregate average daily net assets of all of the investment funds
of Armada up to the first eighteen (18) billion dollars in assets, and .06% of
the aggregate average daily net assets of over eighteen (18) billion dollars in
assets, and is entitled to be reimbursed for its out-of-pocket expenses incurred
on behalf of the Funds.
For the period from May 1, 1998 (April 9, 1998 in the case of
the National Tax Exempt Fund pursuant to an agreement substantially identical to
the Administration Agreement), the Administrator earned administration fees of
$9,113, $2,069 and $8,247 with respect to the Ohio Tax Exempt, Pennsylvania
Municipal and National Tax Exempt Funds (after waivers of $0, $0 and $0),
respectively.
Prior to May 1, 1998, PFPC served as the administrator and
accounting agent to the Ohio Tax Exempt and Pennsylvania Municipal Funds.
Pursuant to the Administration and Accounting Services Agreement, the Trust
incurred the following fees to PFPC for the period ended April 30, 1998, and
fiscal years ended May 31 1997 and 1996 with respect to the Ohio Tax Exempt Fund
(i) $105,026, $89,124 and $81,680, respectively, for the Ohio Tax Exempt Fund;
and (ii) $36,010, for the fiscal period end April 30, 1998 with respect to the
Pennsylvania Municipal Fund. For the period from September 9, 1996 (date or
reorganization of the Predecessor Fund) until May 31, 1997, PFPC earned
administration fees of
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<PAGE> 400
$26,845 with respect to the Pennsylvania Municipal Fund. For the period from
June 1, 1996 until September 9, 1996, for the one-month period ended May 31,
1996, for the fiscal year ended April 30, 1996 and for the period from August
10, 1994 (commencement of operations) through April 30, 1995, SEI Financial
Management Corporation, a wholly-owned subsidiary of SEI Corporation, served as
administrator to the Predecessor Fund and earned the following fees: $18,799,
$68,101 and $23,985, respectively, and waived fees of $0, $9,681 and $19,188
respectively.
IMC serves as sub-administrator for each Fund and provides
certain services as may be requested by the Administrator from time to time. For
its services as Sub-Administrator, IMC receives, from the Administrator,
pursuant to its Sub-Administration Agreement with the Administrator, a fee,
computed daily and paid monthly, at the annual rate of .01% of the aggregate
average daily net assets of all of the investment funds of Armada up to the
first $ 15 billion, and .015% of the aggregate average daily net assets over $15
billion.
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
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 either 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
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<PAGE> 401
Distribution 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.
The Distribution Plans have been approved by the Board of
Trustees, and will continue in effect for successive one year periods provided
that such continuance is specifically approved by (1) the vote of a majority of
the trustees who are not parties to either Plan or interested persons of any
such party and who have no direct or indirect financial interest in either Plan
and (2) the vote of a majority of the entire Board of Trustees.
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 the approximate amounts of $69,000, $7,000 and $7,000 with respect
to the Ohio Tax Exempt, Pennsylvania Municipal and National Tax Exempt Funds
under the A and I Shares Plan and B Shares Plan for its distribution services
and shareholder service assistance.
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
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<PAGE> 402
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.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan relating to each Fund's A shares and the B Shares Plan
for each Fund's 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 .10% for the Ohio
Tax Exempt and Pennsylvania Municipal Funds and .25% for the National Tax Exempt
Fund (on an annualized basis) of the net asset value of such respective 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 Funds; (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 the Advisory Agreement relating to the Funds,
National City is responsible for making decisions with respect to and placing
orders for all purchases and sales of portfolio securities for the Fund. The
adviser purchases portfolio securities either directly from
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<PAGE> 403
the issuer or from an underwriter or dealer making a market in the securities
involved. Purchases from an underwriter of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers may include the spread between the bid and
asked price. Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up.
For the fiscal years ended May 31, 1998, 1997 and 1996, the
Ohio Tax Exempt Fund did not pay any brokerage commissions.
For the fiscal year ended May 31, 1998, the Pennsylvania
Municipal Fund paid $0 in brokerage commission. For the period from September 9,
1996 (date of reorganization of the Predecessor fund to the Pennsylvania
Municipal Fund) until May 31, 1997, the Pennsylvania Municipal Fund paid
brokerage commissions of $0. For the period from June 1, 1996 until September 9,
1996, for the one-month period ended May 31, 1996, and for the fiscal year ended
April 30, 1996, the Pennsylvania Municipal Fund paid no brokerage commissions.
For the fiscal period from April 9, 1998 (date of commencement of operations)
until May 31, 1998, the National Tax Exempt Fund paid brokerage commissions of
$0.
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 Agreement, 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 the Funds. Information so received is in
addition to and not in lieu of services required to be performed by the adviser
and does not reduce the fees payable to it by the 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.
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.
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
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<PAGE> 404
adviser. Such other Fund's investment companies and accounts may also invest in
the same securities as such Fund. When a purchase or sale of the same security
is made at substantially the same time on behalf of a Fund and another
investment company or account, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner which the adviser
believes to be equitable to the Fund and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or sold
by such Fund. In connection therewith, and to the extent permitted by law, and
by the Advisory Agreement 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 periods ended May 31, 1998 and May 31, 1997 for the Ohio Tax
Exempt, the Pennsylvania Municipal and the National 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 to the Pennsylvania Municipal Fund,
which are incorporated by reference in this Statement of Additional Information,
were audited by Coopers & Lybrand, L.L.P., independent accountants for the
Predecessor fund to the Pennsylvania Municipal 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 section of this Statement
of Additional Information entitled "Additional Information Concerning Taxes -
State and Local Taxes -Ohio Tax Exempt Fund" and the Prospectus entitled "Taxes
- - State and Local Taxes - Ohio Taxes."
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<PAGE> 405
YIELD AND PERFORMANCE INFORMATION
---------------------------------
Each Fund's "yield" described in the Prospectus is calculated
by dividing the Fund's net investment income per share earned during a 30-day
period (or another period permitted by the rules of the SEC) by the net asset
value per share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. A Fund's
net investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b 6
Yield = 2 [(----) - 1]
cd+1
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
Each Fund calculates interest earned on debt obligations held
in its portfolio by computing the yield to maturity of each obligation held by
it based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each 30-day
period, or, with respect to obligations purchased during the 30-day period, the
purchase price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30-day period that the obligation is in the Fund.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
Interest earned on tax-exempt obligations that are issued
without original issue discount and have a current market discount is calculated
by using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that exceed the
then-remaining portion of the original issue discount (market discount), the
yield to maturity is the imputed rate based on the original issue discount
calculation. On the other hand, in the case of tax-exempt obligations that are
issued with original issue discount but which have discounts based on current
market value that are less than the then-remaining portion of the original issue
discount (market premium), the yield to maturity is based on the market value.
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<PAGE> 406
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of A shares" and
"Sales Charges Applicable to Purchases of B Shares" in the Prospectus.
The "tax-equivalent yield" is computed by dividing the portion
of a Fund's yield (calculated as above) that is exempt from federal income tax
by one minus a stated federal income tax rate and adding that figure to that
portion, if any, of the Fund's yield that is not exempt from federal income tax.
For the 30-day period ended May 31, 1998, the respective
yields of the A and I shares of the Ohio Tax Exempt, Pennsylvania Municipal and
National Tax Exempt Funds were: 4.08% and 4.31% ; 3.92% and 4.15%; and 0% and
4.30%, respectively. The tax equivalent yields (assuming a 39.6% federal tax
rate and 6.799% Ohio tax rate for 1998) for the Ohio Tax Exempt Fund's A and I
shares for the same period were 6.76% and 7.13%, respectively. The tax
equivalent yields (assuming a 39.6% federal tax rate and a 2.8% Pennsylvania tax
rate) for the Pennsylvania Municipal Fund's A and I shares for the same period
were 6.81% and 7.20%, respectively. The tax equivalent yield (assuming a 39.6%
federal tax rate) for the National Tax Exempt Fund's I shares for the same
period was 7.12%.
Each Fund computes its average annual total returns by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of
a hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation,
expressed in terms of years
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<PAGE> 407
Each Fund computes its aggregate total returns by determining
its aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) -1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Fund's mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all contingent deferred sales charges and other nonrecurring
charges at the end of the measuring period covered by the computation.
The average annual total returns for the Ohio Tax Exempt Fund
for the one year period ending May 31, 1998 were 4.21% (after taking into
account the sales load) and 7.39% (without taking into account any sales load)
for the A shares and 7.43% for the I shares. The average annual total returns
since the Fund's commencement of operations through May 31, 1998 were 5.72%
(after taking into account the sales load) and 6.17% (without taking into
account any sales load) for the A shares and 6.06% for the I shares. The Ohio
Tax Exempt Fund commenced investment operations on January 5, 1990.
The average annual total returns for the fiscal year ending
May 31, 1998 for the Pennsylvania Municipal Fund were 3.60%, (after taking into
account the sales load) and 6.84% (without taking into account any sales load)
for the A shares and 6.95% for the I shares. The average annual total returns
since the predecessor fund to the Pennsylvania Municipal Fund's commencement of
operations through May 31, 1998 were 4.73% (after taking into account the sales
load) and 6.59% (without taking into account any sales load) for the A shares
and 5.67% for the I shares. The predecessor fund to the Pennsylvania Municipal
Fund commenced investment operations on August 10, 1994.
The average annual total return since the predecessor fund to
the National Tax Exempt Funds commencement of operations through May 31, 1998
was 164.04% for the I shares. The predecessor fund to the National Tax Exempt
commenced investment operations on August 16, 1964.
Each Fund may also advertise the "aggregate total return" for
its Shares which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
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<PAGE> 408
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per Share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.
Aggregate Aggregate
Total Return Total Return
From From
Inception Inception
Through Through
5/31/98 (with 5/31/98
Deduction of (without Inception
Maximum Sales Deduction for Date
Charge) Any Sales
Charge)
Armada Ohio Tax Exempt Fund
Class A 48.63% 53.19% 04/15/91
Class I N/A 63.90% 01/05/90
B Shares N/A N/A
Armada Pennsylvania Municipal
Fund
Class A 8.26% 11.58% 09/11/96
Class I N/A 23.33% 08/10/94
B Shares N/A N/A
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the
-40-
<PAGE> 409
investment from the ending value and by dividing the remainder by the beginning
value. A Fund does not, for these purposes, deduct from the initial value
invested or the ending value redeemed any amount representing sales charges. A
Fund will, however, disclose the maximum sales charge and will also disclose
that the performance data do not reflect sales charges and that inclusion of
sales charges would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments, economic conditions,
the relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical performance
of various asset classes, including but not limited to, stocks, bonds and
Treasury securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the 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
-------------
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
that particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
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<PAGE> 410
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the respective liabilities in respect of that
Fund.
The Trust bears all costs in connection with its organization,
including the fees of registering and qualifying its shares for distribution
under federal and state securities regulations. All organizational expenses are
amortized on the straight-line method over a period of five years from the date
of the commencement of operations.
As of August 24, 1998, the following persons owned of record 5
percent or more of the shares of the Funds of the Trust:
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<PAGE> 411
<TABLE>
<CAPTION>
Ohio Tax Exempt Fund (I shares)
<S> <C> <C>
OUTSTANDING SHARES PERCENTAGE
Sheldon and Co. (Cash) 13,320,724.6050 81.53%
National City Bank
Trust Mutual Funds-5312
P.O. Box 94984
Cleveland, OH 44101-4984
Pennsylvania Municipal Fund (I shares)
OUTSTANDING SHARES PERCENTAGE
National City Bank 3,501,681.2510 96.36%
Sheldon & Co. Pathway-49
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
National Tax Exempt Fund (I shares)
OUTSTANDING SHARES PERCENTAGE
Sheldon & Co. 7,899,788.1950 98.44%
c/o National City Bank
Trust Mutual Funds
P.O. Box 94984
Cleveland, OH 44101-4984
Ohio Tax Exempt Fund (A shares)
OUTSTANDING SHARES PERCENTAGE
Wheat First FBO David J. 94,449.6610 24.74%
Beverly & Pamela C. Beverly
1128 Laguna Drive
Huron, OH 44839-2605
</TABLE>
-43-
<PAGE> 412
<TABLE>
OUTSTANDING SHARES PERCENTAGE
<S> <C> <C>
Wheat First Securities, Inc. 47,269.6530 12.38%
FBO Edward B. Brandon &
Phyllis P. Brandon
Lakepoint Office Park
3201 Enterprise Parkway, Suite
470
Beachwood, OH 44122-7320
</TABLE>
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<PAGE> 413
<TABLE>
<CAPTION>
Pennsylvania Municipal Fund (A shares)
<S> <C> <C>
OUTSTANDING SHARES PERCENTAGE
Helen M. Weyer 5,921.1750 36.52%
James N. Weyer
2600 Mohawk Drive
White Oak, PA 15131-3121
1,142.5150 7.05%
Robert H. Rhone
C/O Michael Rhone
P.O. Box 175
Rew, PA 16744-0175
8,564.8150 52.82%
Wheat, First Securities, Inc.
304 Michigan Avenue
Lower Burrell, PA 15068-2936
National Tax Exempt Fund (A shares)
OUTSTANDING SHARES PERCENTAGE
JJB Hilliard WL Lyons, Inc. 3,853.1120 98.36%
Frederick W. Krieg
Attn: James H. Watson MSO4
120 Hilliard Lyons Center
Louisville, KY 40202
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1998 are hereby incorporated herein by
reference. Copies of the annual report may be obtained by calling the Trust at
1-800-622-FUND (3863) or by writing to the Trust, One Freedom Valley Drive,
Oaks, Pennsylvania 19456.
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<PAGE> 414
APPENDIX A
----------
TAX-EXEMPT 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" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default. The "D" rating category
is used when interest payments of principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
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
A-1
<PAGE> 415
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
effects of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and 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 highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify 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 ensure 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 short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
A-2
<PAGE> 416
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
"LOC" - The symbol "LOC" indicates that the rating is based on
a letter of credit issued by a commercial bank.
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:
"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
A-3
<PAGE> 417
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.
"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.
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"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 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
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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 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.
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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.
"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.
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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.
"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:
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"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:
"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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FORM N-1A
---------
Part C - Other Information
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
A. Financial Statements
1. Included in Part A of the Registration Statement are the
following audited financial statements:
(a) Financial Highlights for the Total Return Advantage
Fund for the period July 7, 1994 (commencement of
operations) to May 31, 1995, and the fiscal years
ended May 31, 1996, 1997 and 1998;
(b) Financial Highlights for the Intermediate Bond Fund
for the period from December 20, 1989 (commencement
of operations) to May 31, 1990, and the fiscal years
ended May 31, 1991, 1992, 1993, 1994, 1995, 1996,
1997 and 1998;
(c) Financial Highlights for the Enhanced Income Fund
for the period July 7, 1994 (commencement of
operations) to November 30, 1994, and the fiscal
years ended May 31, 1995, 1996, 1997 and 1998;
(d) Financial Highlights for the GNMA Fund for the
period from August 10, 1994 (commencement of
operations) to April 30, 1995, the fiscal year ended
April 30, 1996, the period from May 1, 1996 to May
31, 1996 and the fiscal years ended May 31, 1997 and
1998;
(e) Financial Highlights for the Bond Fund for the
period from August 10, 1994 (commencement of
operations) to April 30, 1995, the year ended April
30, 1996, the period from May 1, 1996 to May 31,
1996 and the fiscal years ended May 31, 1997 and
1998;
(f) Financial Highlights for the International Equity
Fund for the period from August 1, 1997
(commencement of operations) to May 31, 1998;
(g) Financial Highlights for the Small Cap Growth Fund
for the period from August 1, 1997 (commencement of
operations) to May 31, 1998;
(h) Financial Highlights for the Small Cap Value Fund
for the period from July 26, 1994 (commencement of
operations) to May 31, 1995, and the fiscal years
ended May 31, 1996, 1997 and 1998;
(i) Financial Highlights for the Equity Growth Fund for
the period from December 20, 1989 (commencement of
operations) to May 31, 1990,
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and the fiscal years ended May 31, 1991, 1992, 1993,
1994, 1995, 1996, 1997 and 1998;
(j) Financial Highlights for the Tax Managed Equity Fund
for the period from April 9, 1998 (commencement of
operations) to May 31, 1997;
(k) Financial Highlights for the Core Equity Fund for
the period from August 1, 1997 (commencement of
operations) to May 31, 1998;
(l) Financial Highlights for the Equity Income Fund for
the period from July 1, 1994 (commencement of
operations) to May 31, 1995, and the fiscal years
ended May 31, 1996, 1997 and 1998;
(m) Financial Highlights for the Ohio Tax Exempt Fund
for the period from January 5, 1990 (commencement of
operations) to May 31, 1990, and the fiscal years
ended May 31, 1991, 1992, 1993, 1994, 1995, 1996,
1997 and 1998; and
(n) Financial Highlights for the Pennsylvania Municipal
Fund for the period from August 10, 1994
(commencement of operations) to April 30, 1995, the
fiscal year ended April 30, 1996, the period from
May 1, 1996 to May 31, 1996 and the fiscal years
ended May 31, 1997 and 1998.
(o) Financial Highlights for the National Tax Exempt
Fund for the period from April 9, 1998 (commencement
of operations) to May 31, 1998.
2. Incorporated by reference in Parts B of the Registration
Statement are the following audited financial statements
contained in the Annual Reports of Registrant for the
fiscal year ended May 31, 1998:
(a) For the International Equity, Small Cap Growth,
Small Cap Value, Equity Growth, Tax Managed Equity,
Core Equity and Equity Income Funds:
Portfolio of Investments - May 31, 1998.
Statement of Assets and Liabilities - May 31, 1998.
Statement of Operations - for the year ended May 31,
1998.
Statements of Changes in Net Assets - for the year
ended May 31, 1998.
Notes to Financial Statements.
(b) For the Total Return Advantage, Intermediate Bond,
Enhanced Income, GNMA and Bond Funds:
Portfolio of Investments - May 31, 1998.
Statement of Assets and Liabilities - May 31, 1998.
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Statement of Operations - for the year ended May 31,
1998. Statements of Changes in Net Assets - for the
year ended May 31, 1998.
(c) For the Ohio Tax Exempt, Pennsylvania Municipal and
National Tax Exempt Funds:
Portfolio of Investments - May 31, 1998.
Statement of Assets and Liabilities - May 31, 1998.
Statement of Operations - for the year ended May 31,
1998.
Statement of Changes in Net Assets - for the year
ended May 31, 1998.
Notes to Financial Statements.
B. Exhibits
1. Declaration of Trust dated January 28, 1986 is incorporated
herein by reference to Exhibit 1 to Post-Effective
Amendment No. 1 to Registrant's Registration Statement
filed on December 16, 1986 ("PEA No. 1").
(a) Amendment No. 1 to Declaration of Trust is
incorporated herein by reference to Exhibit 1(a) to
Post-Effective Amendment No. 6 to Registrant's
Registration Statement filed on August 1, 1989 ("PEA
No. 6").
(b) Amendment No. 2 to Declaration of Trust is
incorporated herein by reference to Exhibit 1(b) to
Post-Effective Amendment No. 23 to Registrant's
Registration Statement filed on May 11, 1995 ("PEA
No. 23").
(c) Certificate of Classification of Shares reflecting
the creation of the Tax Exempt Portfolio (Trust) as
filed with the Office of Secretary of State of
Massachusetts on October 16, 1989 is incorporated
herein by reference to Exhibit 1(c) to
Post-Effective Amendment No. 26 to Registrant's
Registration Statement filed on May 15, 1996 ("PEA
No. 26").
(d) Certificate of Classification of Shares reflecting
the creation of Special Series 1 in the Money
Market, Government Money Market (formerly,
"Government Fund"), Treasury Money Market (formerly,
"Treasury Fund"), Tax Exempt Money Market (formerly,
"Tax Exempt Fund"), Equity Growth (formerly "Equity
Fund"), Intermediate Bond (formerly, "Fixed Income
Fund" or "Bond Fund") and Ohio Tax Exempt Funds as
filed with the Office of Secretary of State of
Massachusetts on December 11, 1989 is incorporated
herein by reference to Exhibit 1(d) to PEA No. 26.
(e) Certificate of Classification of Shares reflecting
the creation of Special Series 1 in the Money
Market, Government Money Market, Treasury
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Money Market, Tax Exempt Money Market, Equity
Growth, Intermediate Bond and Ohio Tax Exempt Funds
as filed with the Office of the Secretary of State
of Massachusetts on September 12, 1990 is
incorporated herein by reference to Exhibit 1(e) to
PEA No. 26.
(f) Certificate of Classification of Shares reflecting
the creation of Class L and Class L-Special Series 1
shares, Class M and Class M-Special Series 1, Class
N and Class N-Special Series 1, Class O and Class
O-Special Series 1, and Class P and Class P-Special
Series 1 representing interests in the National Tax
Exempt Fund, Equity Income Fund, Small Cap Value
(formerly, "Mid Cap Regional Equity Fund"), Enhanced
Income Fund and Total Return Advantage Fund,
respectively, as filed with the Office of Secretary
of State of Massachusetts on June 30, 1994 is
incorporated herein by reference to Exhibit 1(e) to
PEA No. 26.
(g) Certificate of Classification of Shares reflecting
the creation of Class Q and Class Q-Special Series 1
shares, Class R and Class R-Special Series 1, Class
S and Class S-Special Series 1 shares, and Class T
and Class T-Special Series 1 shares representing
interests in the Pennsylvania Tax Exempt Money
Market (formerly, "Pennsylvania Tax Exempt Fund"),
Bond (formerly, "Intermediate Government Fund"),
GNMA and Pennsylvania Municipal Funds, respectively,
as filed with the Office of the Secretary of State
of Massachusetts on September 10, 1996 is
incorporated herein by reference to Exhibit 1(g) to
Post-Effective Amendment No. 33 to Registrant's
Registration Statement filed on April 11, 1997 ("PEA
No. 33").
(h) Certificate of Classification of Shares reflecting
the creation of Class U and Class U-Special Series 1
shares, Class V and Class V-Special Series 1 shares
and Class W and Class W-Special Series 1 shares
representing interests in the International Equity,
Equity Index and Core Equity Funds, respectively, as
filed with the Office of the Secretary of State of
Massachusetts on June 27, 1997 is incorporated
herein by reference to Exhibit 1(h) to
Post-Effective Amendment No. 35 to Registrant's
Registration Statement filed on July 22, 1997 ("PEA
No. 35").
(i) Certificate of Classification of Shares reflecting
the creation of Class X and Class X-Special Series 1
shares and Class Y and Class Y-Special Series 1
shares representing interests in the Small Cap
Growth Fund and Real Return Advantage Funds,
respectively, as filed with the Office of the
Secretary of State of Massachusetts on June 27, 1997
is incorporated herein by reference to Exhibit 1(i)
to PEA No. 35.
(j) Certificate of Classification of Shares reflecting
the creation of Special Series 2 Shares representing
interests in the Money Market, Tax Exempt Money
Market, Equity Growth, Equity Income, Small Cap
Value, Enhanced Income, Total Return Advantage,
Intermediate Bond, Ohio
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Tax Exempt, National Tax Exempt, Money Market, Bond,
GNMA, Pennsylvania Municipal, International Equity,
Equity Index, Core Equity, Small Cap Growth and Real
Return Advantage Funds, as filed with the Office of
the Secretary of State of Massachusetts on December
29, 1997 and with the City of Boston, Office of the
City Clerk on December 26, 1997.
(k) Certificate of Classification of Shares reflecting
the creation of Class Z, Class Z-Special Series 1
and Class Z - Special Series 2, Class AA, Class AA
Special Series 1 and Class AA - Special Series 2
representing interests in the Tax Managed Equity and
Balanced Allocation Funds, respectively, as filed
with the Office of the Secretary of State of
Massachusetts and with the City of Boston, Office of
the City Clerk on July 13, 1998.
(l) Certificate of Classification of Shares reflecting
the creation of Class BB and Class BB - Special
Series 1 shares in the Ohio Municipal Money Market
Fund, as filed with the Office of the Secretary of
State and with the City of Boston, Office of the
City Clerk on September 15, 1998, is incorporated
herein by reference to Exhibit 1(k) to
Post-Effective Amendment No. 43 to Registrant's
Registration Statement filed on September 15, 1998
("PEA No. 43"), as filed with the Office of the
Secretary of State of Massachusetts and with the
City of Boston, Office of the City Clerk on
September 15, 1998.
2. Code of Regulations as approved and adopted by Registrant's
Board of Trustees on January 28, 1986 is incorporated
herein by reference to Exhibit 2 to Pre-Effective Amendment
No. 2 to Registrant's Registration Statement filed on
January 30, 1986 ("Pre-Effective Amendment No. 2").
(a) Amendment No. 1 to Code of Regulations is
incorporated herein by reference to Exhibit 2(a) to
PEA No. 6.
(b) Amendment No. 2 to Code of Regulations as approved
and adopted by Registrant's Board of Trustees on
July 17, 1997 is incorporated herein by reference to
Exhibit 2(b) to PEA No. 35.
3. None.
4. (a) Specimen copy of share certificate for Class A units
of beneficial interest is incorporated herein by
reference to Exhibit 4(a) to Pre-Effective Amendment
No. 2.
(b) Specimen copy of share certificate for Class A -
Special Series 1 units of beneficial interest is
incorporated herein by reference to Exhibit 4(b) to
Post-Effective Amendment No. 13 to the Registrant's
Registration Statement filed on July 27, 1990 ("PEA
No. 13").
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(c) Specimen copy of share certificate for Class B units
of beneficial interest is incorporated herein by
reference to Exhibit 4(b) to Pre-Effective Amendment
No. 2.
(d) Specimen copy of share certificate for Class B -
Special Series 1 units of beneficial interest is
incorporated herein by reference to Exhibit 4(d) to
PEA No. 13.
(e) Specimen copy of share certificate for Class C units
of beneficial interest is incorporated herein by
reference to Exhibit 4(c) to Pre-Effective Amendment
No. 2.
(f) Specimen copy of share certificate for Class C -
Special Series 1 units of beneficial interest is
incorporated herein by reference to Exhibit 4(f) to
PEA No. 13.
(g) Specimen copy of share certificates for Class D
units of beneficial interest is incorporated herein
by reference to Exhibit 4(d) to Pre-Effective
Amendment No. 2.
(h) Specimen copy of share certificate for Class D -
Special Series 1 units of beneficial interest is
incorporated hereby by reference to Exhibit 4(h) to
PEA No. 13.
(i) Specimen copy of share certificate for Class H units
of beneficial interest is incorporated herein by
reference to Exhibit 4(i) to Post-Effective
Amendment No. 10 to Registrant's Registration
Statement filed on April 17, 1990 ("PEA No. 10").
(j) Specimen copy of share certificate for Class H -
Special Series 1 units of beneficial interest is
incorporated herein by reference to Exhibit 4(j) to
PEA No. 10.
(k) Specimen copy of share certificate for Class I units
of beneficial interest is incorporated herein by
reference to Exhibit 4(k) to PEA No. 10.
(l) Specimen copy of share certificate for Class I -
Special Series 1 units of beneficial interest is
incorporated herein by reference to Exhibit 4(l) to
PEA No. 10.
(m) Specimen copy of share certificate for Class K units
of beneficial interest is incorporated herein by
reference to Exhibit 4(m) to PEA No. 10.
(n) Specimen copy of share certificate for Class K -
Special Series 1 units of beneficial interest is
incorporated herein by reference to Exhibit 4(n) to
PEA No. 10.
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5. (a) Advisory Agreement for the Money Market,
Treasury Money Market, Government Money Market, Tax
Exempt Money Market, Pennsylvania Tax Exempt Money
Market, National Tax Exempt, Intermediate Bond,
GNMA, Bond, Equity Growth, Equity Income, Small Cap
Value, Ohio Tax Exempt and Pennsylvania Municipal
Funds between Registrant and National City Bank, as
dated November 19, 1997.
(b) Interim Advisory Agreement for the Enhanced Income
and Total Return Advantage Funds between Registrant
and National Asset Management Corporation dated
March 6, 1998.
(c) Interim Advisory Agreement for the Core Equity Fund
between Registrant and National Asset Management
Corporation dated March 6, 1998.
(d) New Advisory Agreement for the Core Equity, Enhanced
Income and Total Return Advantage Funds between
Registrant and National City Bank dated March 6,
1998.
(e) Sub-Advisory Agreement for the Core Equity and Total
Return Advantage Funds between Registrant and
National Asset Management Corporation dated March 6,
1998.
(f) Advisory Agreement for the International Equity,
Small Cap Value, Small Cap Growth, Equity Index,
Real Return Advantage, Tax Managed Equity, Balanced
Allocation and Ohio Municipal Money Market Funds
between Registrant and National City Bank dated
April 9, 1998 is incorporated herein by reference to
Exhibit 5(m) to PEA No. 43.
6. Distribution Agreement between Registrant and SEI
Investments Distribution Co., dated May 1, 1998.
7. None.
8. (a) Custodian Services Agreement between Registrant and
National City Bank, dated November 7, 1994, is
incorporated herein by reference to Exhibit 8(a) to
Post-Effective Amendment No. 22 to Registrant's
Registration Statement filed on December 30, 1994
("PEA No. 22").
(b) Sub-Custodian Agreement between National City Bank
and The Bank of California, National Association,
dated November 7, 1994, is incorporated herein by
reference to Exhibit 8(a) to PEA No. 22.
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(c) Exhibit A to the Custodian Services Agreement
between Registrant and National City Bank dated July
31, 1997 is incorporated herein by reference to
Exhibit 8(c) to PEA No. 36.
(d) Form of Amended Exhibit A to the Custodian Services
Agreement between Registrant and National City Bank
is incorporated herein by reference to Exhibit 8(d)
to PEA No. 41.
9. (a) Interim Administration Agreement between Registrant
and SEI Fund Resources, dated April 1, 1998.
(b) Administration Agreement between Registrant and SEI
Fund Resources, dated May 1, 1998.
(c) Sub-Administration Agreement between SEI Fund
Resources and National City Bank, dated May 1, 1998.
(d) Transfer Agency and Service Agreement (the "Transfer
Agency Agreement") between Registrant and State
Street Bank and Trust Company, dated March 1, 1997,
is incorporated herein by reference to Exhibit 9(d)
to PEA No. 33.
(e) Form of Addendum No. 1 to Amended and Restated
Transfer Agency and Dividend Disbursement Agreement
between Registrant and State Street Bank and Trust
Company is incorporated herein by reference to
Exhibit 9(d) to PEA No. 41.
(f) Revised Shareholder Services Plan and Servicing
Agreement adopted by the Board of Trustees on
February 15, 1997, is incorporated herein by
reference to Exhibit 9(e) to PEA No. 33.
(g) Blue Sky Services Agreement between the Registrant
and SEI Fund Resources, dated December 2, 1996, is
incorporated herein by reference to Exhibit 9(f) to
PEA No. 33.
10. (a) Opinion and consent of Drinker Biddle & Reath LLP as
counsel to Registrant.
(b) Opinion of Squire, Sanders & Dempsey L.L.P.
11. (a) Consent of Drinker Biddle & Reath LLP.
(b) Consent of Squire, Sanders & Dempsey L.L.P.
(c) Consent of Ernst & Young L.L.P.
(d) Consent of PricewaterhouseCoopers LLP.
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12. Inapplicable.
13. Purchase Agreements between Registrant and McDonald &
Company Securities, Inc. are incorporated herein by
reference to Exhibit 13 to PEA No. 1.
(a) Purchase Agreement between Registrant and McDonald &
Company Securities, Inc. with respect to the Tax
Exempt Portfolio dated July 19, 1988 is incorporated
by reference to Exhibit 13(a) to Post-Effective
Amendment No. 5 to Registrant's Registration
Statement filed on January 19, 1989 ("PEA No. 5").
(b) Purchase Agreement between Registrant and McDonald &
Company Securities, Inc. with respect to the Tax
Exempt Portfolio (Trust), dated October 17, 1989, is
incorporated herein by reference to Exhibit 13(b) to
PEA No. 13.
(c) Purchase Agreement between Registrant and McDonald &
Company Securities, Inc. with respect to the Equity
Portfolio and Bond Portfolio, dated December 20,
1989, is incorporated herein by reference to Exhibit
13(c) to PEA No. 13.
(d) Purchase Agreement between Registrant and McDonald &
Company Securities, Inc. with respect to the Ohio
Tax Exempt Portfolio, dated January 5, 1990, is
incorporated herein by reference to Exhibit 13(d) to
PEA No. 13.
(e) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the Enhanced
Income Fund, dated July 5, 1994, is incorporated
herein by reference to Exhibit 13(e) to PEA No. 21.
(f) Purchase Agreement between Registrant and
Allmerica Investments, Inc. with respect to the
Equity Income Portfolio, dated June 30, 1994, is
incorporated herein by reference to Exhibit 13(g) to
PEA No. 21.
(g) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the Mid Cap
Regional Equity Portfolio, dated July 25, 1994, is
incorporated herein by reference to Exhibit 13(h) to
PEA No. 21.
(h) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the Total Return
Advantage Fund, dated July 5, 1994, is incorporated
herein by reference to Exhibit 13(f) to PEA No. 21.
(i) Purchase Agreement between Registrant and Allmerica
Investments, Inc. with respect to the National Tax
Exempt Portfolio is incorporated herein by reference
to Exhibit 13(e) to PEA No. 20.
(j) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the
Pennsylvania Tax Exempt Money Market Fund,
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dated September 6, 1996, is incorporated herein by
reference to Exhibit 13(j) to PEA No. 33.
(k) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the
Intermediate Government Money Market Fund, dated
September 6, 1996, is incorporated herein by
reference to Exhibit 13(k) to PEA No. 33.
(l) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the
GNMA Fund, dated September 6, 1996, is incorporated
herein by reference to Exhibit 13(l) to PEA No. 33.
(m) Purchase Agreement between Registrant and 440
Financial Distributors, Inc. with respect to the
Pennsylvania Municipal Fund, dated September 6,
1996, is incorporated herein by reference to Exhibit
13(m) to PEA No. 33.
(n) Purchase Agreement between Registrant and SEI
Investments Distribution Co., ("SIDC") with respect
to the Core Equity Fund is incorporated herein by
reference to Exhibit 13(n) to PEA No. 36.
(o) Purchase Agreement between Registrant and SIDC with
respect to the International Equity Fund is
incorporated herein by reference to Exhibit 9(o) to
PEA No. 36.
(p) Form of Purchase Agreement between Registrant and
SEI with respect to the Equity Index Fund is
incorporated herein by reference to Exhibit 13(p) to
PEA No. 33.
(q) Form of Purchase Agreement between Registrant and
SEI with respect to the Real Return Advantage Fund
is incorporated herein by reference to Exhibit 13(q)
to PEA No. 33.
(r) Purchase Agreement between Registrant and SEI with
respect to the Small Cap Growth Fund is incorporated
herein by reference to Exhibit 13(r) to PEA No. 36.
(s) Form of Purchase Agreement between Registrant and
SEI Investments Distribution Co. with respect to
Special Series 2 shares for each Fund is
incorporated herein by reference to Exhibit 13(s) to
PEA No. 38.
(t) Form of Purchase Agreement between Registrant and
SEI Investments Distribution Co. with respect to the
Aggressive Allocation, Balanced Allocation and
Conservative Allocation Funds is incorporated herein
by reference to Exhibit 13(t) to PEA No. 41.
(u) Form of Purchase Agreement between Registrant and
SEI Investments Distribution Co. with respect to the
Ohio Municipal Money Market Fund.
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14. None.
15. (a) Service and Distribution Plan for A (formerly,
Retail) and I (formerly, Institutional) Share
Classes is incorporated herein by reference to
Exhibit 15(a) to PEA No. 38.
(b) B shares distribution and servicing plan is
incorporated herein by reference to Exhibit 15(b) to
PEA No. 38.
16. (a) Schedules for Computation of Performance
Quotations are incorporated herein by reference to
Exhibit 16 to Post-Effective Amendment No. 15 to
Registrant's Registration Statement filed on
September 18, 1992 ("PEA No. 15").
(b) Schedules for Computation of Performance Quotations
for the Treasury, Mid Cap Regional, Equity Growth
and Equity Income Portfolios and the Enhanced Income
and Total Return Advantage Funds and the
Pennsylvania Tax Exempt, the Pennsylvania Municipal,
the Intermediate Government and the GNMA Funds are
incorporated herein by reference to Exhibit 16 to
PEA No. 22.
17. (a) None.
18. Revised Plan Pursuant to Rule 18f-3 for Operation of a
Triple-Class System is incorporated herein by reference to
Exhibit 18 to PEA No. 41.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is controlled by its Board of Trustees.
McDonald & Company Securities, Inc. ("McDonald"), the former
distributor of Registrant, provided its initial capitalization.
Item 26. NUMBER OF HOLDERS OF SECURITIES. The following information is as
of August 31, 1998:
<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders I Shares A Shares B Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A units of beneficial interest (Money Market 85,457 18,096 67,356 5
Fund)
Class B units of beneficial interest (Government 10,087 2,447 7,640 _
Money Market Fund)
Class C units of beneficial interest (Treasury 2,638 2,251 387 _
Money Market Fund)
</TABLE>
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<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders I Shares A Shares B Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class D units of beneficial interest (Tax Exempt 5,136 2,136 3,000 0
Money Market Fund)
Class H units of beneficial interest (Equity 9,972 8,612 1,331 29
Growth Fund)
Class I units of beneficial interest (Intermediate 3,411 3,075 327 9
Bond Fund)
Class K units of beneficial interest (Ohio Tax 1,354 1,253 101 0
Exempt Fund)
Class L units of beneficial interest (National Tax 740 738 1 1
Exempt Fund)
Class M units of beneficial interest (Equity Income 7,095 6,472 603 20
Fund)
Class N units of beneficial interest (Small Cap 6,301 4,880 1,385 36
Value Fund)
Class O units of beneficial interest (Enhanced 527 499 28 0
Income Fund)
Class P units of beneficial interest (Total Return 1,649 1,513 136 0
Advantage Fund)
Class Q units of beneficial interest (Pennsylvania 866 668 198 0
Tax Exempt Money Market Fund)
Class R units of beneficial interest (Bond Fund) 6,924 6,861 54 9
Class S units of beneficial interest (GNMA Fund) 3,216 2,945 271 0
Class T units of beneficial interest (Pennsylvania 391 383 8 0
Municipal Fund)
Class U units of beneficial interest (International 2,662 2,450 209 3
Equity Fund)
Class V units of beneficial interest (Equity Index 132 132 0 0
Fund)
Class W units of beneficial interest (Core Equity 230 146 77 7
Fund)
</TABLE>
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<TABLE>
<CAPTION>
Total
Number of Record
Title of Class Holders I Shares A Shares B Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class X units of beneficial interest (Small Cap 990 793 194 3
Growth Fund)
Class Y units of beneficial interest (Real Return 0 0 0 0
Advantage Fund)
Class Z units of beneficial interest (Tax Managed 734 710 14 10
Equity Fund)
Class AA units of beneficial interest (Balanced 117 114 3 0
Allocation Fund)
Class BB units of beneficial interest (Ohio 0 0 0 0
Municipal Money Market Fund)
</TABLE>
Item 27. INDEMNIFICATION.
Indemnification of Registrant's principal underwriter,
custodian and transfer agent against certain losses is provided for,
respectively, in Article 6 of the Distribution Agreement, incorporated by
reference as Exhibit (6) hereto, and Sections 12 and 6, respectively, of the
Custodian Services and Transfer Agency Agreements, incorporated by reference as
Exhibits (8)(a) and (9)(h) hereto. In Article 6 of the Distribution Agreement,
the Trust agrees to indemnify and hold harmless the Distributor and each of its
directors and officers and each person, if any, who controls the Distributor
within the meaning of Section 15 of the 1933 Act against any loss, liability,
claim, damages or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damages or expense and reasonable
counsel fees and disbursements incurred in connection therewith), arising by
reason of any person acquiring any Shares, based upon the ground that the
registration statement, prospectus, Shareholder reports or other information
filed or made public by the Trust (as from time to time amended) included an
untrue statement of a material fact or omitted to state a material fact required
to be stated or necessary in order to make the statements made not misleading.
However, the Trust does not agree to indemnify the Distributor or hold it
harmless to the extent that the statements or omission was made in reliance
upon, and in conformity with, information furnished to the Trust by or on behalf
of the Distributor.
In addition, Section 9.3 of Registrant's Declaration of Trust
dated January 28, 1986, incorporated by reference as Exhibit (1) hereto,
provides as follows:
9.3 INDEMNIFICATION OF TRUSTEES, REPRESENTATIVES AND EMPLOYEES.
The Trust shall indemnify each of its Trustees against all
liabilities and expenses (including amounts paid in satisfaction
of judgments, in compromise, as fines and penalties, and as
counsel fees) reasonably incurred by him in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with
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which he may be threatened, while as a Trustee or thereafter, by
reason of his being or having been such a Trustee EXCEPT with
respect to any matter as to which he shall have been adjudicated
to have acted in bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties, PROVIDED that as to any
matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be
provided unless the Trust shall have received a written opinion
from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of bad
faith had been adjudicated, it would in the opinion of such
counsel have been adjudicated in favor of such person. The rights
accruing to any person under these provisions shall not exclude
any other right to which he may be lawfully entitled, PROVIDED
that no person may satisfy any right of indemnity or reimbursement
hereunder except out of the property of the Trust. The Trustees
may make advance payments in connection with the indemnification
under this Section 9.3, PROVIDED that the indemnified person shall
have provided a secured written undertaking to reimburse the Trust
in the event it is subsequently determined that he is not entitled
to such indemnification.
The Trustees shall indemnify representatives and employees of the
Trust to the same extent that Trustees are entitled to
indemnification pursuant to this Section 9.3.
Section 12 of Registrant's Custodian Services Agreement provides
as follows:
12. INDEMNIFICATION. The Trust, on behalf of each of the Funds,
agrees to indemnify and hold harmless the Custodian and its
nominees from all taxes, charges, expenses, assessments, claims
and liabilities (including, without limitation, liabilities
arising under the 1933 Act, the 1934 Act, the 1940 Act, the CEA,
and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation)
reasonable attorneys' fees and disbursements, arising directly or
indirectly from any action which the Custodian takes or does not
take (i) at the request or on the direction of or in reliance on
the advice of the Fund or (ii) upon Oral or Written Instructions.
Neither the Custodian, nor any of its nominees, shall be
indemnified against any liability to the Trust or to its
shareholders (or any expenses incident to such liability) arising
out of the Custodian's or its nominees' own willful misfeasance,
bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
In the event of any advance of cash for any purpose made by the
Custodian resulting from Oral or Written Instructions of the
Trust, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in respect of the Trust or any Fund in
connection with the performance of this Agreement, except such as
may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any Property at
any time held for the account of the relevant Fund or the Trust
shall be security therefor.
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<PAGE> 437
Section 6 of Registrant's Transfer Agency Agreement provides as
follows:
6. INDEMNIFICATION
6.1 The Bank shall not be responsible for, and the Fund shall
on behalf of the applicable Portfolio indemnify and hold
the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions of the Bank or its agents or
subcontractors required to be taken pursuant to this
Agreement, provided that such actions are taken in
good faith and without negligence or willful
misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any
representation or warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or
services which (i) are received by the Bank or its
agents or subcontractors, and (ii) have been
prepared, maintained or performed by the Fund or any
other person or firm on behalf of the Fund including
but not limited to any previous transfer agent or
registrar.
(d) The reliance on, or the carrying out by the Bank or
its agents or subcontractors of any instructions or
requests of the Fund on behalf of the applicable
Portfolio.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or
regulations or the securities laws or regulations of
any state that such Shares be registered in such
state or in violation of any stop order or other
determination or ruling by any federal agency or any
state with respect to the offer or sale of such
Shares in such state.
(f) The negotiations and processing of checks made
payable to prospective or existing Shareholders
tendered to the Bank for the purchase of Shares,
such checks are commonly known as "third party
checks."
6.2 At any time the Bank may apply to any officer of the Fund
for instructions, and may consult with legal counsel with
respect to any matter arising in connection with the
services to be performed by the Bank tinder this Agreement,
and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund oil behalf of
the applicable Portfolio for any action taken or omitted by
it in reliance upon such instructions or upon the opinion
of such counsel (provided such counsel is reasonably
satisfactory to the Fund). The Bank, its
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<PAGE> 438
agents and subcontractors shall be protected and indemnified in
acting upon any paper or document, reasonably believed to be
genuine and to have been signed by the proper person or persons,
or upon any instruction, information, data, records or documents
provided the Bank or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means
authorized by the Fund, and shall not be held to have notice of
any change of authority of any person, until receipt of written
notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signatures of the officers of
the Fund, and the proper countersignature of any former transfer
agent or former registrar, or of a co-transfer agent or
co-registrar.
6.3 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its
control, or other causes reasonably beyond its control, such party
shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such
causes.
6.4 In order that the indemnification provisions contained in this
Section 6 shall apply, upon the assertion of a claim for which the
Fund may be required to indemnify the Bank, the Bank shall
promptly notify the Fund of such assertion, and shall keep the
Fund advised with respect to all developments concerning such
claim. The Fund shall have the option to participate with the Bank
in the defense of such claim or to defend against said claim in
its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the
Fund may be required to indemnify the Bank except with the Fund's
prior written consent.
Registrant has obtained from a major insurance carrier a
directors' and officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its trustees, officers,
employees or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith or gross negligence
in the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office or under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release No. 11330 under the Investment Company Act of 1940 in
connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of Registrant in
the successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
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<PAGE> 439
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Investment Adviser: National City Investment Management
Company ("IMC")
IMC performs investment advisory services for Registrant and
certain other investment advisory customers. IMC is an indirect wholly owned
subsidiary of National City Corporation (the "Corporation"). The Corporation
recently consolidated its mutual fund investment management operations under
IMC, a registered investment adviser. As of August 5, 1998, IMC assumed National
City Bank's rights, responsibilities, liabilities and obligations under its
Advisory Agreements with the Registrant relating to each of the Funds, its
Sub-Advisory Agreement with National Asset Management Corporation relating to
the Core Equity Fund, and its Sub-Administration Agreement with SEI Fund
Resources relating to each of the Funds. As of August 1, 1998, Wellington
Management Company LLP (the "sub-adviser") ceased serving as the sub-adviser to
the Small Cap Growth Fund under a sub-advisory agreement with National City Bank
and the Small Cap Growth Team of National City Bank's Asset Management Group
began making the investment decisions for the Fund.
To the knowledge of Registrant, none of the directors or officers
of IMC, except those set forth below, is or has been, at any time during the
past two calendar years, engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain directors and officers
also hold various positions with, and engage in business for, the Corporation,
which owns all the outstanding stock of First America Bank, N.A., which in turn
owns all the outstanding stock of IMC, or other subsidiaries of the Corporation.
Set forth below are the names and principal businesses of the directors and
certain of the senior executive officers of IMC who are engaged in any other
business, profession, vocation or employment of a substantial nature.
NATIONAL CITY INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
National
City Investment
Management Other Business Type of
Name Company Connections Business
- ---- --------------- ----------- --------
<S> <C> <C> <C>
Kathleen T. Barr Managing National City Bank Bank
Director, Sales
and Marketing
James R. Kirk Managing National City Bank Bank
Director,
Portfolio
Management
</TABLE>
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<PAGE> 440
<TABLE>
<CAPTION>
Position with
National
City Investment
Management Other Business Type of
Name Company Connections Business
- ---- --------------- ----------- --------
<S> <C> <C> <C>
Robert M. Leggett Vice Chairman of National City Bank Bank
the Board,
President and
Managing
Director
Donald L. Ross Chief Investment National City Bank Bank
Officer and
Managing
Director
Harold B. Todd, Jr. Chairman of the Executive Vice Bank holding
Board and President, National company; bank
Managing City Corporation; affiliate
Director Executive Vice
President,
Institutional Trust
and Asset
Management,
National City Bank
</TABLE>
(b) Sub-Investment Adviser: National Asset Management
Corporation ("NAM").
NAM performs sub-investment advisory services for the Registrant's
Total Return Advantage and Core Equity Funds. NAM is an investment adviser
registered under the Investment Advisers Act of 1940 (the "Advisers Act").
To the knowledge of Registrant, none of the directors or officers
of NAM, except those set forth below, is or has been at any time during the past
two calendar years engaged in any other business, profession, vocation or
employment of a substantial nature. Set forth below are the names and principal
business of the directors and certain of the senior executive officers of NAM
who are engaged in any other business, profession, vocation, or employment of a
substantial nature.
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<PAGE> 441
NATIONAL ASSET MANAGEMENT CORPORATION
<TABLE>
<CAPTION>
Position with Other
National Asset Business Type of
Name Management Connections Business
- ---- ---------- ----------- --------
<S> <C> <C> <C>
William F. Chandler Director, None
Managing Director
and Principal
Carl W. Hafele Director, None
Managing Director
and Principal
Michael C. Heyman Principal None
David B. Hiller Managing None
Director
and Principal
Stephen G. Mullins Principal None
Larry J. Walker Principal None
John W. Ferreby Principal None
Catherine R. Stodghill Senior None
Investment Manager
Erik N. Evans Investment None
Manager
Brent A. Bell Investment None
Manager
Randall T. Zipfel Manager, None
Information Systems
</TABLE>
Item 29. PRINCIPAL UNDERWRITER
(a) Furnish the name of each investment company (other than
the Registrant) for which each principal underwriter currently
distributing securities of the Registrant also acts as a principal
underwriter, distributor or investment advisor.
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Registrant's distributor, SEI Investments Distribution Co.
("SIDC"), acts as distributor for:
<TABLE>
<S> <C> <C>
SEI Daily Income Trust July 14, 1982
SEI Liquid Asset Trust November 29, 1982
SEI Tax Exempt Trust December 3, 1982
SEI Index Funds July 10, 1985
SEI Institutional Managed Trust January 22, 1987
SEI Institutional International Trust August 30, 1988
The Pillar Funds February 28, 1992
CUFUND May 1, 1992
STI Classic Funds May 29, 1992
PBHG Insurance Series Fund, Inc. April 1, 1997
Tip Institutional Funds January 1, 1998
Oak Associates Funds February 27, 1998
The Nevis Funds, Inc. June 29, 1998
The Parkstone Group of Funds September 14, 1998
First American Funds, Inc. November 1, 1992
First American Investment Funds, Inc. November 1, 1992
The Arbor Fund January 28, 1993
Boston 1784 Funds(R) June 1, 1993
The PBHG Funds, Inc. July 16, 1993
Morgan Grenfell Investment Trust January 3, 1994
The Achievement Funds Trust December 27, 1994
Bishop Street Funds January 27, 1995
CrestFunds, Inc. March 1, 1995
STI Classic Variable Trust August 18, 1995
ARK Funds November 1, 1995
Monitor Funds January 11, 1996
SEI Asset Allocation Trust April 1, 1996
TIP Funds April 30, 1996
SEI Institutional Investments Trust June 14, 1996
First American Strategy Funds, Inc. October 1, 1996
HighMark Funds February 15, 1997
Armada Funds March 8, 1997
Expedition Funds June 9, 1997
</TABLE>
SIDC provides numerous financial services to investment
managers, pension plan sponsors, and bank trust departments.
These services include portfolio evaluation, performance
measurement and consulting services ("Funds Evaluation") and
automated execution, clearing and settlement of securities
transactions ("MarketLink").
(b) Furnish the information required by the following table
with respect to each director, officer or partner of each
principal underwriter named in the answer to Item 21 of Part B.
Unless otherwise noted, the principal business address of each
director or officer is Oaks, PA 19456.
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<PAGE> 443
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman of the Board of Directors --
Henry H. Greer Director --
Carmen V. Romeo Director --
Mark J. Held President & Chief Operating Officer --
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President --
Dennis J. McGonigle Executive Vice President --
Robert M. Silvestri Chief Financial Officer & Treasurer --
Carl A. Guarino Senior Vice President --
Larry Hutchison Senior Vice President --
Jack May Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President --
Kevin P. Robins Senior Vice President & General Counsel & Secretary --
Patrick K. Walsh Senior Vice President --
Robert Aller Vice President --
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Secretary --
S. Courtney E. Collier Vice President & Assistant Secretary --
Robert Crudup Vice President & Managing Director --
Barbara Doyne Vice President --
Jeff Drennen Vice President --
Vic Galef Vice President & Managing Director --
Lydia A. Gavalis Vice President & Assistant Secretary --
Greg Gettinger Vice President & Assistant Secretary --
Kathy Heilig Vice President & --
Treasurer
Jeff Jacobs Vice President --
Samuel King Vice President --
Kim Kirk Vice President & Managing Director --
</TABLE>
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<PAGE> 444
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
John Krzeminski Vice President & Managing Director --
Carolyn McLaurin Vice President & Managing Director --
W. Kelso Morrill Vice President --
Mark Nagle Vice President --
Joanne Nelson Vice President --
Joseph M. O'Donnell Vice President & Assistant Secretary --
Sandra K. Orlow Vice President & Assistant Secretary --
Cynthia M. Parrish Vice President & Assistant Secretary
Kim Rainey Vice President --
Rob Redican Vice President --
Maria Rinehart Vice President --
Mark Samuels Vice President & Managing Director --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary Assistant Treasurer
Lynda J. Striegel Vice President & Assistant Secretary --
Lori L. White Vice President & Assistant Secretary --
Wayne M. Withrow Vice President & Managing Director --
</TABLE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS
1. National City Investment Management Company, 1900 East
Ninth Street, Cleveland, Ohio, 44114-3484, and National
City Bank, Trust Operations, 4100 West 150th Street,
Cleveland, Ohio 44135, (records relating to their functions
as investment adviser and custodian); and National Asset
Management Corporation, 101 South Fifth Street, Louisville,
KY 40202.
2. SEI Investments Distribution Co., One Freedom Valley Drive,
Oaks, Pennsylvania 19456 (records relating to its function
as distributor, accounting agent and administrator).
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<PAGE> 445
3. 440 Financial Distributors, Inc., 290 Donald Lynch
Boulevard, Marlboro, Massachusetts 01752 (records relating
to its former functions as distributor).
4. Allmerica Investments, Inc., 440 Lincoln Street, Worcester,
Massachusetts 01653 (records relating to its former
functions as distributor).
5. Drinker Biddle & Reath LLP, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496 (Registrant's
Declaration of Trust, Code of Regulations, and Minute
Books).
6. PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 (records relating to its
former functions as custodian).
7. PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its former functions as accounting
agent and administrator).
8. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 (records relating to its
function as transfer agent).
9. First Data Investor Services Group, Inc., 4400 Computer
Drive, Westboro, Massachusetts 02109 (records relating to
its former functions as transfer agent).
10. First Data Investor Services Group (formerly The
Shareholder Services Group, Inc. d/b/a 440 Financial) 4400
Computer Drive, Westboro, Massachusetts 02109 (records
relating to its former functions as transfer agent).
11. Weiss, Peck & Greer, LLC, One New York Plaza, New York, New
York 10004 (records relating its former functions as
sub-adviser).
12. Wellington Management Company, LLP, 75 State Street,
Boston, Massachusetts 02109 (records relating to its former
functions as sub-adviser).
13. National Asset Management Corporation, 101 South Fifth
Street, Louisville, KY 40202 (records relating to its
former functions as investment adviser).
Item 31. MANAGEMENT SERVICES
Inapplicable.
Item 32. UNDERTAKINGS
Registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's most recent annual report to
shareholders, upon request and without charge.
C-23
<PAGE> 446
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
No. 44 to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 44
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Philadelphia, Commonwealth of
Pennsylvania, on the 18th day of September, 1998.
ARMADA FUNDS
Registrant
*Robert D. Neary
---------------------------------
Trustee and Chairman of the Board
Robert D. Neary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 44 to Registrant's Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Carol L. Rooney Treasurer September 18, 1998
- --------------------
Carol L. Rooney
*Leigh Carter Trustee September 18, 1998
- --------------------
Leigh Carter
*John F. Durkott Trustee September 18, 1998
- --------------------
John F. Durkott
*Robert J. Farling Trustee September 18, 1998
- ---------------------
Robert J. Farling
*Richard E. Furst Trustee September 18, 1998
- --------------------
Richard W. Furst
*Gerald Gherlein Trustee September 18, 1998
Gerald Gherlein
*Herbert Martens President and Trustee September 18, 1998
- --------------------
Herbert Martens
* Robert D. Neary Trustee and Chairman September 18, 1998
Robert D. Neary of the Board
</TABLE>
C-24
<PAGE> 447
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* J. William Pullen Trustee September 18, 1998
- --------------------
J. William Pullen
</TABLE>
*By: /s/ W. Bruce McConnel, III
--------------------------
W. Bruce McConnell, III
Attorney-in-Fact
C-25
<PAGE> 448
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Robert
D. Neary, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of Armada Funds, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorneys shall have full power and authority
to do and perform in his name and on his behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as he might or could do in person, said acts of
said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ Robert D. Neary
- -------------------------------
Robert D. Neary
<PAGE> 449
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Leigh
Carter, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of Armada Funds, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorneys shall have full power and authority
to do and perform in his name and on his behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as he might or could do in person, said acts of
said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ Leigh Carter
- -------------------------------
Leigh Carter
<PAGE> 450
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, John F.
Durkott, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of Armada Funds, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorneys shall have full power and authority
to do and perform in his name and on his behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as he might or could do in person, said acts of
said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ John F. Durkott
- -------------------------------
John F. Durkott
<PAGE> 451
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Richard
W. Furst, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of Armada Funds, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorneys shall have full power and authority
to do and perform in his name and on his behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as he might or could do in person, said acts of
said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ Richard W. Furst
- -------------------------------
Richard W. Furst
<PAGE> 452
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Robert
J. Farling, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of Armada Funds, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and said attorneys shall have full power and authority
to do and perform in his name and on his behalf, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as he might or could do in person, said acts of
said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ Robert J. Farling
- -------------------------------
Robert J. Farling
<PAGE> 453
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, J.
William Pullen, hereby constitutes and appoints Herbert R. Martens, Jr. and W.
Bruce McConnel, III, his true and lawful attorneys, to execute in his name,
place, and stead, in his capacity as Trustee or officer, or both, of Armada
Funds, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and said attorneys shall have full power and
authority to do and perform in his name and on his behalf, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as he might or could do in
person, said acts of said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ J. William Pullen
- -------------------------------
J. William Pullen
<PAGE> 454
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Herbert
R. Martens, Jr. , hereby constitutes and appoints W. Bruce McConnel, III, his
true and lawful attorney, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of Armada Funds, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorney shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorney being hereby ratified and approved.
DATED: November 19, 1997
/s/ Herbert R. Martens, Jr.
- -------------------------------
Herbert R. Martens, Jr.
<PAGE> 455
ARMADA FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Gerald
L. Gherlein, hereby constitutes and appoints Herbert R. Martens, Jr. and W.
Bruce McConnel, III, his true and lawful attorneys, to execute in his name,
place, and stead, in his capacity as Trustee or officer, or both, of Armada
Funds, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and said attorneys shall have full power and
authority to do and perform in his name and on his behalf, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as he might or could do in
person, said acts of said attorneys being hereby ratified and approved.
DATED: November 19, 1997
/s/ Gerald L. Gherlein
- -------------------------------
Gerald L. Gherlein
<PAGE> 456
EXHIBIT INDEX
(1)(j) Certificate of Classification of Shares reflecting the
creation of Special Series 2 Shares representing interests in
the Money Market, Tax Exempt Money Market, Equity Growth,
Equity Income, Small Cap Value, Enhanced Income, Total Return
Advantage, Intermediate Bond, Ohio Tax Exempt, National Tax
Exempt, Money Market, Bond, GNMA, Pennsylvania Municipal,
International Equity, Equity Index, Core Equity, Small Cap
Growth and Real Return Advantage Funds, as filed with the
Office of the Secretary of State of Massachusetts on December
29, 1997 and with the City of Boston, Office of the City Clerk
on December 26, 1997.
(1)(k) Certificate of Classification of Shares reflecting the
creation of Class Z, Class Z-Special Series 1 and Class Z -
Special Series 2, Class AA, Class AA - Special Series 1 and
Class AA - Special Series 2 representing interests in the Tax
Managed Equity and Balanced Allocation Funds, respectively, as
filed with the Office of the Secretary of State of
Massachusetts and with the City of Boston, Office of the City
Clerk on July 13, 1998.
(5)(a) Advisory Agreement for the Money Market, Treasury Money
Market, Government Money Market, Tax Exempt Money Market,
Pennsylvania Tax Exempt Money Market, National Tax Exempt,
Intermediate Bond, GNMA, Bond, Equity Growth, Equity Income,
Small Cap Value, Ohio Tax Exempt and Pennsylvania Municipal
Funds between Registrant and National City Bank, as dated
November 19, 1997.
(5)(b) Interim Advisory Agreement for the Enhanced Income and Total
Return Advantage Funds between Registrant and National Asset
Management Corporation dated March 6, 1998.
(5)(c) Interim Advisory Agreement for the Core Equity Fund between
Registrant and National Asset Management Corporation dated
March 6, 1998.
(5)(d) New Advisory Agreement for the Core Equity, Enhanced Income
and Total Return Advantage Funds between Registrant and
National City Bank dated March 6, 1998.
(5)(e) Sub-Advisory Agreement for the Core Equity, Enhanced Income
and Total Return Advantage Funds between Registrant and
National Asset Management Corporation dated March 6, 1998.
<PAGE> 457
(6)(a) Distribution Agreement between Registrant and SEI Investments
Distribution Co., dated May 1, 1998.
(9)(a) Interim Administration Agreement between Registrant and SEI
Fund Resources, dated April 1, 1998.
(9)(b) Administration Agreement between Registrant and SEI Fund
Resources, dated May 1, 1998.
(9)(c) Sub-Administration Agreement between SEI Fund Resources and
National City Bank, dated May 1, 1998.
(10) Opinion and Consent of Drinker Biddle & Reath LLP as counsel
to Registrant.
(11)(a) Consent of Drinker Biddle & Reath LLP.
(11)(b) Consent of Squire, Sanders & Dempsey L.L.P.
(11)(c) Consent of Ernst & Young L.L.P.
(11)(d) Consent of PricewaterhouseCoopers L.L.P.
(17)(a) Financial Data Schedule as of May 31, 1998 for the Equity
Growth Fund (I Shares).
(b) Financial Data Schedule as of May 31, 1998 for the Equity
Growth Fund (A Shares).
(c) Financial Data Schedule as of May 31, 1998 for the Equity
Growth Fund (B Shares).
(d) Financial Data Schedule as of May 31, 1998 for the
Intermediate Bond Fund (I Shares).
(e) Financial Data Schedule as of May 31, 1998 for the
Intermediate Bond Fund (A Shares).
(f) Financial Data Schedule as of May 31, 1998 for the
Intermediate Bond Fund (B Shares).
(g) Financial Data Schedule as of May 31, 1998 for the Equity
Income Fund (I Shares).
(h) Financial Data Schedule as of May 31, 1998 for the Equity
Income Fund (A Shares).
-2-
<PAGE> 458
(i) Financial Data Schedule as of May 31, 1998 for the Equity
Income Fund (B Shares).
(j) Financial Data Schedule as of May 31, 1998 for the Small Cap
Value Fund (I Shares).
(k) Financial Data Schedule as of May 31, 1998 for the Small Cap
Value Fund (A Shares).
(l) Financial Data Schedule as of May 31, 1998 for the Small Cap
Value Fund (B Shares).
(m) Financial Data Schedule as of May 31, 1998 for Enhanced
Income Fund (I Shares).
(n) FinancialData Schedule as of May 31, 1998 for Enhanced Income
Fund (A Shares).
(o) Financial Data Schedule as of May 31, 1998 for the Total
Return Advantage Fund (I Shares).
(p) Financial Data Schedule as of May 31, 1998 for the Total
Return Advantage Fund (A Shares).
(q) Financial Data Schedule as of May 31, 1998 for the Ohio Tax
Exempt Fund (I Shares).
(r) FinancialData Schedule as of May 31, 1998 for the Ohio Tax
Exempt Fund (A Shares).
(s) Financial Data Schedule as of May 31, 1998 for the GNMA
Fund (I Shares).
(t) Financial Data Schedule as of May 31, 1998 for the GNMA Fund
(Retail Class)
(u) Financial Data Schedule as of May 31, 1998 for the Bond
Fund (I Shares).
(v) Financial Data Schedule as of May 31, 1998 for the Bond
Fund (A Shares).
(w) Financial Data Schedule as of May 31, 1998 for the Bond
Fund (B Shares).
(x) Financial Data Schedule as of May 31, 1998 for the
Pennsylvania Municipal Fund (I Shares).
(y) FinancialData Schedule as of May 31, 1998 for the Pennsylvania
Municipal Fund (A Shares).
-3-
<PAGE> 459
(3) Financial Data Schedule as of May 31, 1998 for the
International Equity Fund (I Shares).
(aa) Financial Data Schedule as of May 31, 1998 for the
International Equity Fund (A Shares).
(bb) FinancialData Schedule as of May 31, 1998 for the
International Equity Fund (B Shares).
(cc) Financial Data Schedule as of May 31, 1998 for the Small Cap
Growth Fund (I Shares).
(dd) Financial Data Schedule as of May 31, 1998 for the Small Cap
Growth Fund (A Shares).
(ee) Financial Data Schedule as of May 31, 1998 for the Small Cap
Growth Fund (B Shares).
(ff) Financial Data Schedule as of May 31, 1998 for the National
Tax Exempt Fund (I Shares).
(gg) Financial Data Schedule as of May 31, 1998 for the Tax
Managed Equity Fund (I Shares).
(hh) Financial Data Schedule as of May 31, 1998 for the Tax
Managed Equity Fund (A Shares).
(ii) Financial Data Schedule as of May 31, 1998 for the Tax
Managed Equity Fund (B Shares).
(jj) Financial Data Schedule as of May 31, 1998 for the Core
Equity Fund (I Shares).
(kk) Financial Data Schedule as of May 31, 1998 for the Core
Equity Fund (A Shares).
(ll) Financial Data Schedule as of May 31, 1998 for the Core
Equity Fund (B Shares).
-4-
<PAGE> 1
Exhibit 1(j)
ARMADA FUNDS
(A MASSACHUSETTS BUSINESS TRUST)
CERTIFICATE OF CLASSIFICATION OF SHARES
I, W. Bruce McConnel, III, do hereby certify as follows:
(1) That I am the duly elected Secretary of Armada Funds (the
"Trust");
(2) That in such capacity I have examined the records of actions
taken by the Board of Trustees of the Trust;
(3) That the Board of Trustees of the Trust duly adopted the
following resolutions at a Regular Meeting of the Board of Trustees held on
September 17, 1997:
CREATION OF NEW SERIES OF B SHARES.
- -----------------------------------
CREATION OF SPECIAL SERIES 2 WITHIN CERTAIN CLASSES OF SHARES.
--------------------------------------------------------------
RESOLVED, that the Board determines that the proposal to offer
a series of B Shares representing interests in each of the Money Market
Fund, Tax Exempt Fund, Equity Growth Fund, Equity Income Fund, Mid Cap
Regional Fund, Total Return Advantage Fund, Fixed Income Fund, Enhanced
Income Fund, GNMA Fund, Intermediate Government Fund, Pennsylvania
Municipal Fund, Ohio Tax Exempt Fund, Real Return Advantage Fund,
International Equity Fund, Core Equity Fund, Small Cap Growth Fund,
Equity Index Fund and National Tax Exempt Fund is in the best interest
of the Trust and its shareholders and that such proposal is approved;
FURTHER RESOLVED, that pursuant to Section 5.1 of the Trust's
Declaration of Trust, an unlimited number of authorized, unissued and
unclassified shares of beneficial interest in the Trust (no par value)
be, and hereby are, classified and designated as Class A-Special Series
2, Class D-Special Series 2, Class H-Special Series 2, Class I-Special
Series 2, Class K-Special Series 2, Class L-Special Series 2, Class
M-Special Series 2, Class N-Special Series 2, Class O-Special Series 2,
Class P-Special Series 2, Class R-Special Series 2, Class S-Special
Series 2, Class T-Special Series 2, Class U-Special Series 2, Class
V-Special Series 2, Class W-Special Series 2, Class X-Special Series 2
and Class Y-Special Series 2 shares of beneficial interest (each,
"Special Series 2");
<PAGE> 2
FURTHER RESOLVED, that all consideration received by the Trust
for the issue or sale of all Class (Institutional) shares, Special
Series 1 (Retail) shares and Special Series 2 (B) shares with the same
alphabetical designation, irrespective of class designation
(collectively, a "Class Group") shall be invested and reinvested with
the consideration received by the Trust for the issue and sale of all
other shares of that Class Group together with all income, earnings,
profits and proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation thereof, any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may
be, and any general assets of the Trust allocated to shares of that
Class Group or such other shares by the Board of Trustees in accordance
with the Trust's Declaration of Trust; and each series included in each
Class Group shall share on the basis of relative net asset values with
such other series of shares in such Class Group in such consideration
and other assets, income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation
thereof, and any assets derived from any reinvestment of such proceeds
in whatever form;
FURTHER RESOLVED, that each share of each series included in
each Class Group shall be charged in proportion to its net asset value
with each other share of that Class Group, irrespective of series
designation, with the expenses and liabilities of the Trust in respect
of that Class Group and in respect of any general expenses and
liabilities of the Trust allocated to such Class Group by the Board of
Trustees in accordance with the Declaration of Trust, except that to
the extent permitted by rule or order of the Securities and Exchange
Commission and as may be from time to time determined by the Board of
Trustees:
only the Class A-Special Series 1, Class D-Special
Series 1, Class H-Special Series 1, Class I-Special
Series 1, Class K-Special Series 1, Class L-Special
Series 1, Class M-Special Series 1, Class N-Special
Series 1, Class O-Special Series 1, Class P-Special
Series 1, Class R-Special Series 1, Class S-Special
Series 1, Class T-Special Series 1, Class U-Special
Series 1, Class V-Special Series 1, Class W-Special
Series 1, Class X-Special Series 1 and Class Y-Special
Series 1 shares shall bear: (1) the expenses and liabilities
of payments to institutions under any agreements entered into
by or on behalf of the Trust which provide for services by the
institutions exclusively for their customers who beneficially
own such shares; (2) the expenses and liabilities arising from
transfer agency services that are directly attributable to
such shares; and (3) such other expenses and liabilities as
the Board of Trustees may from time to time determine are
directly attributable
-2-
<PAGE> 3
to such shares and which should therefore be borne solely by
such shares;
only the Special Series 2 shares of each Class Group shall
bear: (1) the expenses and liabilities of payments to
institutions under any agreements entered into by or on behalf
of the Trust which provide for services by the institutions
exclusively for their customers who beneficially own such
shares; (2) the expenses and liabilities arising from transfer
agency services that are directly attributable to such shares;
(3) the expenses and liabilities of distribution fees payable
under the Trust's Distribution and Shareholder Services Plan
for Special Series 2 shares; and (4) such other expenses and
liabilities as the Board of Trustees may from time to time
determine are directly attributable to such shares and which
should therefore be borne solely by such shares; and
only the Class A, Class D, Class H, Class I, Class K, Class L,
Class M, Class N, Class O, Class P, Class R, Class S, Class T,
Class U, Class V, Class W, Class X and Class Y shares shall
bear: (1) the expenses and liabilities arising from transfer
agency services that are directly attributable to such shares;
and (2) such other expenses and liabilities as the Board of
Trustees may from time to time determine are directly
attributable to such shares and which should therefore be
borne solely by such shares;
FURTHER RESOLVED, that, except as otherwise provided by these
resolutions, each share of a Class Group shall have all the
preferences, conversion and other rights, voting powers, restrictions,
limitations, qualifications and terms and conditions of redemption as
set forth in the Declaration of Trust and shall also have the same
preferences, conversion and other rights, voting powers, restrictions,
limitations, qualifications and terms and conditions of redemption as
each other share of the particular Class Group, except to the extent
permitted by rule or order of the Securities and Exchange Commission:
(A) on any matter that pertains to the agreements or
expenses and liabilities described in clause (1) of paragraph
(a) or (b) of the immediately preceding resolution (or to any
plan or other document adopted by the Trust relating to said
agreements, expenses or liabilities); and
(B) on any matter that pertains to the expenses and
liabilities of distribution fees described in clause (3) of
paragraph (b) of the immediately preceding resolution (or to
any plan or other document
-3-
<PAGE> 4
adopted by the Trust relating to such distribution fees,
expenses or liabilities);
and in the case of clause (A) or (B) immediately above is submitted to
a vote of shareholders of the Trust, only shares of Special Series 1 or
Special Series 2 of that Class Group, respectively, shall be entitled
to vote, except that:
(i) if said matter affects shares of beneficial interest
in the Trust other than shares of that Special Series
1 or Special Series 2, as the case may be, such other
affected shares of beneficial interest in the Trust
shall also be entitled to vote, and in such case the
shares of that Special Series 1 or Special Series 2
shall be voted in the aggregate together with such
other affected shares and not by class or series
except where otherwise required by law or permitted
by the Board of Trustees of the Trust; and
(ii) if said matter does not affect the shares of that
Special Series 1 or Special Series 2, respectively,
said shares shall not be entitled to vote (except
where otherwise required by law or permitted by the
Board of Trustees) even though the matter is
submitted to a vote of the holders of shares of
beneficial interest in the Trust other than shares of
Special Series 1 or Special Series 2.
IDENTIFICATION OF SHARES WITH FUNDS
-----------------------------------
RESOLVED, that the Trust's classes or series of shares shall
represent interests in the investment fund of the Trust as follows:
Class of Shares Investment Fund
--------------- ---------------
Class H-Special Series 2 Equity Growth Fund
Class I-Special Series 2 Fixed Income Fund
Class K-Special Series 2 Ohio Tax Exempt Fund
Class L-Special Series 2 National Tax Exempt Fund
Class M-Special Series 2 Equity Income Fund
Class N-Special Series 2 Mid Cap Regional Fund
Class O-Special Series 2 Enhanced Income Fund
Class P-Special Series 2 Total Return Advantage Fund
Class R-Special Series 2 Intermediate Government Fund
-4-
<PAGE> 5
Class S-Special Series 2 GNMA Fund
Class T-Special Series 2 Pennsylvania Municipal Fund
Class U-Special Series 2 International Equity Fund
Class V-Special Series 2 Equity Index Fund
Class W-Special Series 2 Core Equity Fund
Class X-Special Series 2 Small Cap Growth Fund
Class Y-Special Series 2 Real Return Advantage Fund
Class A-Special Series 2 Money Market Fund
Class D-Special Series 2 Tax Exempt Fund
AUTHORIZATION OF ISSUANCE OF SHARES TO INVESTORS
------------------------------------------------
RESOLVED, that the appropriate officers of the Trust be, and each
of them hereby is, authorized, at any time after the effective date and
time of Post-Effective Amendment No. 38 to the Trust's Registration
Statement relating to the B Shares of the above-referenced Funds to
issue and redeem from time to time shares of each of the
above-referenced Special Series 2 representing interests in the
above-referenced Funds, in accordance with the Registration Statement
under the Securities Act of 1933, as the same may from time to time be
amended, and the requirements of the Trust's Declaration of Trust and
applicable law, and that such shares, when issued for the consideration
described in such amended Registration Statement, shall be validly
issued, fully paid and non-assessable by the Trust.
IMPLEMENTATION OF RESOLUTIONS
-----------------------------
RESOLVED, that the officers of the Trust be, and each of them
hereby is, authorized and empowered to execute, seal, and deliver any
and all documents, instruments, papers and writings, including but not
limited to, any instrument to be filed with the State Secretary of the
Commonwealth of Massachusetts or the Boston City Clerk, and to do any
and all other acts, including but not limited to, changing the
foregoing resolutions upon advice of Trust counsel prior to filing said
any and all documents, instruments, papers, and writings, in the name
of the Trust and on its behalf, as may be necessary or desirable in
connection with or in furtherance of the foregoing resolutions, such
determination
-5-
<PAGE> 6
to be conclusively evidenced by said officers taking any such
actions.
(4) That the foregoing resolutions remain in full force and
effect as of the date hereof.
/s/ W. Bruce McConnel, III
--------------------------------
W. Bruce McConnel, III
Dated: December 23, 1997
Subscribed and sworn to before
me this 23rd day of December, 1997.
/s/ Georgeanna Griffith
- ---------------------------------
[Notary Seal]
-6-
<PAGE> 1
Exhibit 1(k)
ARMADA FUNDS ("ARMADA")
(A MASSACHUSETTS BUSINESS TRUST)
CERTIFICATE OF CLASSIFICATION OF SHARES
I, W. Bruce McConnel, III, do hereby certify as follows:
(1) That I am the duly elected Secretary of Armada Funds ("Armada");
(2) That in such capacity I have examined the records of actions taken
by the Board of Trustees of Armada;
(3) That the Board of Trustees of Armada duly adopted the following
resolutions at the Regular Meeting of the Board of Trustees held on February 17,
1998:
CREATION OF NEW SERIES OF SHARES
- --------------------------------
1. CREATION OF CLASS Z, CLASS Z-SPECIAL SERIES 1 AND CLASS
-------------------------------------------------------
Z-SPECIAL SERIES 2 SHARES REPRESENTING INTERESTS IN THE TAX
-----------------------------------------------------------
MANAGED EQUITY FUND.
-------------------
RESOLVED, that pursuant to Section 5.1 of Armada's
Declaration of Trust, an unlimited number of authorized,
unissued and unclassified shares of beneficial interest in
Armada (no par value) be, and hereby are, classified and
designated as Class Z shares of beneficial interest;
FURTHER RESOLVED, that pursuant to Section 5.1 of
Armada's Declaration of Trust, an unlimited number of
authorized, unissued and unclassified shares of beneficial
interest in Armada (no par value) be, and hereby are,
classified and designated as Class Z-Special Series 1 shares;
FURTHER RESOLVED, that pursuant to Section 5.1 of
Armada's Declaration of Trust, an unlimited number of
authorized, unissued and unclassified shares of beneficial
interest in Armada (no par value) be, and hereby are,
classified and designated as Class Z-Special Series 2 shares;
FURTHER RESOLVED, that all consideration received by
Armada for the issue or sale of Class Z shares, Class
Z-Special Series 1 shares and Class Z-Special Series 2 shares
shall be invested and reinvested with the consideration
received by Armada for the issue and sale of Class Z shares,
Class Z-Special Series 1 shares, Class Z-Special Series 2
shares and any other
<PAGE> 2
shares of beneficial interest in Armada hereafter designated
as Class Z shares (irrespective of whether said shares have
been designated as part of a series of said class and, if so
designated, irrespective of the particular series designation)
(collectively, the "Class Group"), together with all income,
earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation thereof, any
funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, and any general
assets of Armada allocated to shares of the Class Group by the
Board of Trustees in accordance with Armada's Declaration of
Trust; and each series included in the Class Group shall share
on the basis of relative net asset values with such other
series of shares in the Class Group in such consideration and
other assets, income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or
liquidation thereof, and any assets derived from any
reinvestment of such proceeds in whatever form;
FURTHER RESOLVED, that each share of each series
included in the Class Group shall be charged in proportion to
its net asset value with each other share of the Class Group,
irrespective of series designation, with the expenses and
liabilities of Armada in respect of the Class Group and in
respect of any general expenses and liabilities of Armada
allocated to the Class Group by the Board of Trustees in
accordance with the Declaration of Trust, except that to the
extent permitted by rule or order of the Securities and
Exchange Commission and as may be from time to time determined
by the Board of Trustees:
(a) only the Class Z shares shall bear: (1) the
expenses and liabilities arising from transfer agency services
that are directly attributable to such shares; and (2) such
other expenses and liabilities as the Board of Trustees may
from time to time determine are directly attributable to such
shares and which should therefore be borne solely by such
shares;
(b) only the Class Z-Special Series 1 shares shall
bear: (1) the expenses and liabilities of payments to
institutions under any agreements entered into by or on behalf
of Armada which provide for services by the institutions
exclusively for their customers who beneficially own such
shares; (2) the expenses and liabilities arising from transfer
agency services that are directly attributable to such shares;
and (3) such other expenses and liabilities as the Board of
Trustees may from time to time determine are directly
attributable to such shares and which should therefore be
borne solely by such shares;
<PAGE> 3
(c) only the Class Z-Special Series 2 shares shall
bear: (1) the expenses and liabilities of payments to
institutions under any agreements entered into by or on behalf
of Armada which provide for services by the institutions
exclusively for their customers who beneficially own such
shares; (2) the expenses and liabilities arising from transfer
agency services that are directly attributable to such shares;
(3) the expenses and liabilities of distribution fees payable
under Armada's Distribution and Shareholder Services Plan for
Special Series 2 shares; and (4) such other expenses and
liabilities as the Board of Trustees may from time to time
determine are directly attributable to such shares and which
should therefore be borne solely by such shares;
FURTHER RESOLVED, that, except as otherwise provided
by these resolutions, each share of the Class Group shall have
all the preferences, conversion and other rights, voting
powers, restrictions, limitations, qualifications and terms
and conditions of redemption as set forth in the Declaration
of Trust and shall also have the same preferences, conversion
and other rights, voting powers, restrictions, limitations,
qualifications and terms and conditions of redemption as each
other share of the Class Group, except to the extent permitted
by rule or order of the Securities and Exchange Commission:
(A) on any matter that pertains to the
agreements or expenses and liabilities described in
clause (1) of paragraph (b) or (c) of the immediately
preceding resolution (or to any plan or other
document adopted by Armada relating to said
agreements, expenses or liabilities); and
(B) on any matter that pertains to the
expenses and liabilities of distribution fees
described in clause (3) of paragraph (c) of the
immediately preceding resolution (or to any plan or
other document adopted by Armada relating to such
distribution fees, expenses or liabilities);
and in the case of clause (A) or (B) immediately above is
submitted to a vote of shareholders of Armada, only shares of
Special Series 1 or Special Series 2 of the Class Group,
respectively, shall be entitled to vote, except that:
(i) if said matter affects shares of beneficial interest
in Armada other than shares of that Special Series 1
or Special Series 2, as the case may be, such other
affected shares of beneficial
<PAGE> 4
interest in Armada shall also be entitled to vote,
and in such case the shares of that Special Series 1
or Special Series 2 shall be voted in the aggregate
together with such other affected shares and not by
class or series except where otherwise required by
law or permitted by the Board of Trustees of the
Trust; and
(ii) if said matter does not affect the shares of that
Special Series 1 or Special Series 2, respectively,
said shares shall not be entitled to vote (except
where otherwise required by law or permitted by the
Board of Trustees) even though the matter is
submitted to a vote of the holders of shares of
beneficial interest in the Trust other than shares of
Special Series 1 or Special Series 2.
2. CREATION OF CLASS AA, CLASS AA-SPECIAL SERIES 1 AND CLASS
---------------------------------------------------------
AA-SPECIAL SERIES 2 SHARES REPRESENTING INTERESTS IN THE
--------------------------------------------------------
BALANCED ALLOCATION FUND.
-------------------------
RESOLVED, that pursuant to Section 5.1 of Armada's
Declaration of Trust, an unlimited number of authorized,
unissued and unclassified shares of beneficial interest in
Armada (no par value) be, and hereby are, classified and
designated as Class AA shares of beneficial interest;
FURTHER RESOLVED, that pursuant to Section 5.1 of
Armada's Declaration of Trust, an unlimited number of
authorized, unissued and unclassified shares of beneficial
interest in Armada (no par value) be, and hereby are,
classified and designated as Class AA-Special Series 1 shares;
FURTHER RESOLVED, that pursuant to Section 5.1 of
Armada's Declaration of Trust, an unlimited number of
authorized, unissued and unclassified shares of beneficial
interest in Armada (no par value) be, and hereby are,
classified and designated as Class AA-Special Series 2 shares;
FURTHER RESOLVED, that all consideration received by
Armada for the issue or sale of Class AA shares, Class
AA-Special Series 1 shares and Class AA-Special Series 2
shares shall be invested and reinvested with the consideration
received by Armada for the issue and sale of Class AA shares,
Class AA-Special Series 1 shares, Class AA-Special Series 2
shares and any other shares of beneficial interest in Armada
hereafter designated as Class AA shares (irrespective of
whether said shares have been designated as part of a series
of said class and, if so designated, irrespective of the
<PAGE> 5
particular series designation) (collectively, the "Class
Group"), together with all income, earnings, profits and
proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation thereof, any funds or payments
derived from any reinvestment of such proceeds in whatever
form the same may be, and any general assets of Armada
allocated to shares of the Class Group by the Board of
Trustees in accordance with Armada's Declaration of Trust; and
each series included in the Class Group shall share on the
basis of relative net asset values with such other series of
shares in the Class Group in such consideration and other
assets, income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or
liquidation thereof, and any assets derived from any
reinvestment of such proceeds in whatever form;
FURTHER RESOLVED, that each share of each Series
included in the Class Group shall be charged in proportion to
its net asset value with each other share of the Class Group,
irrespective of series designation, with the expenses and
liabilities of Armada in respect of the Class Group and in
respect of any general expenses and liabilities of Armada
allocated to the Class Group by the Board of Trustees in
accordance with the Declaration of Trust, except that to the
extent permitted by rule or order of the Securities and
Exchange Commission and as may be from time to time determined
by the Board of Trustees:
(a) only the Class AA shares shall bear: (1) the
expenses and liabilities arising from transfer agency services
that are directly attributable to such shares; and (2) such
other expenses and liabilities as the Board of Trustees may
from time to time determine are directly attributable to such
shares and which should therefore be borne solely by such
shares;
(b) only the Class AA-Special Series 1 shares shall
bear: (1) the expenses and liabilities of payments to
institutions under any agreements entered into by or on behalf
of Armada which provide for services by the institutions
exclusively for their customers who beneficially own such
shares; (2) the expenses and liabilities arising from transfer
agency services that are directly attributable to such shares;
and (3) such other expenses and liabilities as the Board of
Trustees may from time to time determine are directly
attributable to such shares and which should therefore be
borne solely by such shares;
(c) only the Class AA-Special Series 2 shares shall
bear: (1) the expenses and liabilities of payments to
institutions under any agreements entered
<PAGE> 6
into by or on behalf of Armada which provide for services by
the institutions exclusively for their customers who
beneficially own such shares; (2) the expenses and liabilities
arising from transfer agency services that are directly
attributable to such shares; (3) the expenses and liabilities
of distribution fees payable under Armada's Distribution and
Shareholder Services Plan for Special Series 2 shares; and (4)
such other expenses and liabilities as the Board of Trustees
may from time to time determine are directly attributable to
such shares and which should therefore be borne solely by such
shares;
FURTHER RESOLVED, that, except as otherwise provided
by these resolutions, each share of the Class Group shall have
all the preferences, conversion and other rights, voting
powers, restrictions, limitations, qualifications and terms
and conditions of redemption as set forth in the Declaration
of Trust and shall also have the same preferences, conversion
and other rights, voting powers, restrictions, limitations,
qualifications and terms and conditions of redemption as each
other share of the Class Group, except to the extent permitted
by rule or order of the Securities and Exchange Commission:
(A) on any matter that pertains to the
agreements or expenses and liabilities described in
clause (1) of paragraph (b) or (c) of the immediately
preceding resolution (or to any plan or other
document adopted by Armada relating to said
agreements, expenses or liabilities); and
(B) on any matter that pertains to the
expenses and liabilities of distribution fees
described in clause (3) of paragraph (c) of the
immediately preceding resolution (or to any plan or
other document adopted by Armada relating to such
distribution fees, expenses or liabilities);
and in the case of clause (A) or (B) immediately above is
submitted to a vote of shareholders of Armada, only shares of
Special Series 1 or Special Series 2 of the Class Group,
respectively, shall be entitled to vote, except that:
(i) if said matter affects shares of beneficial interest
in Armada other than shares of that Special Series 1
or Special Series 2, as the case may be, such other
affected shares of beneficial interest in Armada
shall also be entitled to vote, and in such case the
shares of that Special Series 1 or Special Series 2
shall be voted in the aggregate together with such
other affected shares
<PAGE> 7
and not by class or series except where otherwise
required by law or permitted by the Board of Trustees
of the Trust; and
(ii) if said matter does not affect the shares of that
Special Series 1 or Special Series 2, respectively,
said shares shall not be entitled to vote (except
where otherwise required by law or permitted by the
Board of Trustees) even though the matter is
submitted to a vote of the holders of shares of
beneficial interest in the Trust other than shares of
Special Series 1 or Special Series 2.
IDENTIFICATION OF SHARES WITH FUNDS.
------------------------------------
RESOLVED, that Armada's classes or series of shares shall
represent interests in the investment funds of Armada as follows:
Class of Shares Investment Fund
--------------- ---------------
Class Z Tax Managed Equity Fund
Class Z-Special Series 1
Class Z-Special Series 2
Class AA Balanced Allocation Fund
Class AA-Special Series 1
Class AA-Special Series 2
AUTHORIZATION OF ISSUANCE OF SHARES TO INVESTORS.
-------------------------------------------------
RESOLVED, that the appropriate officers of Armada be,
and each of them hereby is, authorized, at any time after the
effective date and time of Post-Effective Amendment No. 39 and
No. 41 to Armada's Registration Statement relating to the Tax
Managed Equity and Balanced Allocation Funds, respectively, to
issue and redeem from time to time Class Z shares, Class
Z-Special Series 1 and Class Z-Special Series 2 shares
representing interests in the Tax Managed Equity Fund; and
Class AA shares, Class AA-Special Series 1 shares and Class
AA-Special Series 2 shares representing interests in the
Balanced Allocation Fund, in accordance with the Registration
Statement under the Securities Act of 1933, as the same may
from time to time be amended, and the requirements of Armada's
Declaration of Trust and applicable law, and that such shares,
when issued for the consideration described in such amended
Registration Statement, shall be validly issued, fully paid
and non-assessable by Armada.
<PAGE> 8
IMPLEMENTATION OF RESOLUTIONS.
------------------------------
RESOLVED, that the officers of Armada be, and each of
them hereby is, authorized and empowered to execute, seal, and
deliver any and all documents, instruments, papers and
writings, including but not limited to, any instrument to be
filed with the State Secretary of the Commonwealth of
Massachusetts or the Boston City Clerk, and to do any and all
other acts, including but not limited to, changing the
foregoing resolutions upon advice of Counsel prior to filing
said any and all documents, instruments, papers, and writings,
in the name of Armada and on its behalf, as may be necessary
or desirable in connection with or in furtherance of the
foregoing resolutions, such determination to be conclusively
evidenced by said officers taking any such actions.
(4) That the foregoing resolutions remain in full force and
effect as of the date hereof.
/s/ W. Bruce McConnel, III
--------------------------
W. Bruce McConnel, III
Dated: April 6, 1998
Subscribed and sworn to before me this
6th day of April, 1998.
/s/ Georgeanna Griffith
- -----------------------
[Notary Seal]
<PAGE> 1
Exhibit 5(a)
ARMADA FUNDS
ADVISORY AGREEMENT
AGREEMENT made as of November 19, 1997 between ARMADA FUNDS, a
Massachusetts business trust, located in Oaks, Pennsylvania (the "Trust") and
NATIONAL CITY BANK, located in Cleveland, Ohio (the "Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser
to the Money Market, Treasury, Government, Tax Exempt, Pennsylvania Tax Exempt,
National Tax Exempt, Fixed Income, GNMA, Intermediate Government, Equity Growth,
Equity Income, Mid Cap Regional, Ohio Tax Exempt and Pennsylvania Municipal
Funds (individually, a "Fund" and collectively, the "Funds");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. DELIVERY OF DOCUMENTS. The Adviser acknowledges that it has received
copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the
State Secretary of the Commonwealth of Massachusetts
on January 29, 1986 and all amendments thereto (such
Declaration of Trust, as presently in effect and as
it shall from time to time be amended, is herein
called the "Declaration of Trust");
(b) The Trust's Code of Regulations, and amendments
thereto (such Code of Regulations, as presently in
effect and as it shall from time to time be amended,
is herein called the "Code of Regulations");
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser and
approving this Agreement;
(d) The Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") on September 26, 1985 and
all amendments thereto;
<PAGE> 2
(e) The Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended ("1933 Act")
(File No. 33-488) and under the 1940 Act as filed
with the SEC on September 26, 1985 and all amendments
thereto; and
(f) The Trust's most recent prospectuses and statements
of additional information with respect to the Funds
(such prospectuses and statements of additional
information, as presently in effect and all
amendments and supplements thereto are herein called
individually, a "Prospectus", and collectively, the
"Prospectuses").
The Trust will furnish the Adviser from time to time with
execution copies of all amendments of or supplements to the foregoing.
2. SERVICES. The Trust hereby appoints the Adviser to act as investment
adviser to the Funds for the period and on the terms set forth in this
Agreement. Intending to be legally bound, the Adviser accepts such
appointment and agrees to furnish the services required herein to the
Funds for the compensation hereinafter provided.
Subject to the supervision of the Trust's Board of Trustees,
the Adviser will provide a continuous investment program for each Fund,
including investment research and management with respect to all
securities and investments and cash equivalents in each Fund. The
Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by each Fund. The
Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of
Trustees applicable to such Fund.
3. SUBCONTRACTORS. It is understood that the Adviser may from time to
time employ or associate with itself such person or persons as the
Adviser may believe to be particularly fitted to assist in the
performance of this Agreement; provided, however, that the compensation
of such person or persons shall be paid by the Adviser and that the
Adviser shall be as fully responsible to the Trust for the acts and
omissions of any subcontractor as it is for its own acts and omissions.
Without limiting the generality of the foregoing, it is agreed that
investment advisory service to any Fund may be provided by a
subcontractor agreeable to the Adviser and approved in accordance with
the provisions of the 1940 Act. Any such sub-advisers are hereinafter
referred to as the "Sub-Advisers." In the event that any Sub-Adviser
appointed hereunder is terminated, the Adviser
<PAGE> 3
may provide investment advisory services pursuant to this Agreement to
the Funds involved without further shareholder approval.
Notwithstanding the employment of any Sub-Adviser, the Adviser shall in
all events: (a) establish and monitor general investment criteria and
policies for each Fund; (b) review investments in each Fund on a
periodic basis for compliance with its investment objective, policies
and restrictions as stated in the Prospectus; (c) review periodically
any Sub-Adviser's policies with respect to the placement of orders for
the purchase and sale of portfolio securities; (d) review, monitor,
analyze and report to the Board of Trustees on the performance of any
Sub-Adviser; (e) furnish to the Board of Trustees or any Sub-Adviser,
reports, statistics and economic information as may be reasonably
requested; and (f) recommend, either in its sole discretion or in
conjunction with any Sub-Adviser, potential changes in investment
policy.
4. COVENANTS BY ADVISER. The Adviser agrees with respect to the
services provided to each Fund that it:
(a) will comply with all applicable Rules and Regulations
of the SEC and will in addition conduct its
activities under this Agreement in accordance with
other applicable law;
(b) will use the same skill and care in providing such
services as it uses in providing services to similar
fiduciary accounts for which it has investment
responsibilities;
(c) will not make loans to any person to purchase or
carry shares in the Funds, or make interest-bearing
loans to the Trust or the Funds;
(d) will maintain a policy and practice of conducting its
investment management activities independently of the
Commercial Departments of all banking affiliates. In
making investment recommendations for the Funds,
personnel will not inquire or take into consideration
whether the issuers (or related supporting
institutions) of securities proposed for purchase or
sale for the Funds' accounts are customers of the
Commercial Department. In dealing with commercial
customers, the Commercial Department will not inquire
or take into consideration whether securities of
those customers are held by the Funds;
(e) will place orders pursuant to its investment
determinations for the Funds either directly with the
issuer or with any broker or dealer. In selecting
brokers or dealers for executing portfolio
transactions, the Adviser will use its
<PAGE> 4
best efforts to seek on behalf of the Trust and each
Fund the best overall terms available. In assessing
the best overall terms available for any transaction
the Adviser shall consider all factors it deems
relevant, including the breadth of the market in the
security, the price of the security, the financial
condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a
continuing basis. In evaluating the best overall
terms available, and in selecting the broker or
dealer to execute a particular transaction, the
Adviser may also consider the brokerage and research
services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934, as amended)
provided to any Fund and/or other accounts over which
the Adviser or any affiliate of the Adviser exercises
investment discretion. The Adviser is authorized,
subject to the prior approval of the Board, to
negotiate and pay to a broker or dealer who provides
such brokerage and research services a commission for
executing a portfolio transaction for any Fund which
is in excess of the amount of commission another
broker or dealer would have charged for effecting
that transaction if, but only if, the Adviser
determines in good faith that such commission was
reasonable in relation to the value of the brokerage
and research services provided by such broker or
dealer viewed in terms of that particular transaction
or in terms of the overall responsibilities of the
Adviser with respect to the accounts as to which it
exercises investment discretion. In no instance will
fund securities be purchased from or sold to the
Adviser, any Sub-Adviser, SEI Investments
Distribution Co. ("SEI") (or any other principal
underwriter to the Trust) or an affiliated person of
either the Trust, the Adviser, Sub-Adviser, or SEI
(or such other principal underwriter) unless
permitted by an order of the SEC or applicable rules.
In executing portfolio transactions for any Fund, the
Adviser may, but shall not be obligated to, to the
extent permitted by applicable laws and regulations,
aggregate the securities to be sold or purchased with
those of other Funds and its other clients where such
aggregation is not inconsistent with the policies set
forth in the Trust's registration statement. In such
event, the Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in the manner it considers to be the
most equitable and consistent
<PAGE> 5
with its fiduciary obligations to the Funds and such
other clients;
(f) will maintain all books and records with respect to
the securities transactions for the Funds and furnish
the Trust's Board of Trustees such periodic and
special reports as the Board may request; and
(g) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Funds and prior, present
or potential shareholders, and will not use such
records and information for any purpose other than
performance of its responsibilities and duties
hereunder (except after prior notification to and
approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be
withheld and will be deemed granted where the Adviser
may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to
divulge such information by duly constituted
authorities, or when so requested by the Trust).
5. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser
hereunder are deemed not to be exclusive, and the Adviser shall be free
to furnish similar services to others so long as its services under
this Agreement are not impaired thereby.
6. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all records which it
maintains for the Trust are the property of the Trust and further
agrees to surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
7. EXPENSES. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Funds.
8. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Adviser from the
assets belonging to the Funds and the Adviser will accept as full
compensation therefor fees, computed daily and paid monthly, at the
following annual rates: .35% of the average daily net assets of the
Money Market Fund; .35% of the average daily net assets of the
<PAGE> 6
Government Fund; .30% of the average daily net assets of the Treasury
Fund; .35% of the average daily net assets of the Tax Exempt Fund; .40%
of the average daily net assets of the Pennsylvania Tax Exempt Fund;
.55% of the average daily net assets of the Ohio Tax Exempt Fund; .55%
of the average daily net assets of the Pennsylvania Municipal Fund;
.55% of the average daily net assets of the Fixed Income Fund; .55% of
the average daily net assets of the GNMA Fund; .55% of the average
daily net assets of the Intermediate Government Fund; .75% of the
average daily net assets of the Mid Cap Regional Fund; .75% of the
average daily net assets of the Equity Growth Fund; and .75% of the
average daily net assets of the Equity Income Fund.
The fee attributable to each Fund shall be the several (and
not joint or joint and several) obligation of each Fund.
9. LIMITATION OF LIABILITY. The Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser
in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement.
10. DURATION AND TERMINATION. This Agreement will become effective with
respect to each Fund upon approval of this Agreement by vote of a
majority of the outstanding voting securities of each such Fund, and,
unless sooner terminated as provided herein, shall continue in effect
until September 30, 1998. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to a particular Fund for
successive twelve month periods ending on September 30, PROVIDED such
continuance is specifically approved at least annually (a) by the vote
of a majority of those members of the Trust's Board of Trustees who are
not interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b)
by the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund. Notwithstanding the
foregoing, this Agreement may be terminated as to any Fund at any time,
without the payment of any penalty, by the Trust (by the Trust's Board
of Trustees or by vote of a majority of the outstanding voting
securities of the particular Fund), or by the Adviser on 60 days'
written notice. This Agreement will immediately terminate in the event
of its assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested persons" and
"assignment" shall have the same meaning of such terms in the 1940
Act.)
<PAGE> 7
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought. No amendment of
this Agreement shall be effective with respect to a Fund until approved
by vote of a majority of the outstanding voting securities of that
Fund.
12. MISCELLANEOUS. The Adviser expressly agrees that notwithstanding
the termination of or failure to continue this Agreement with respect
to a particular Fund, the Adviser shall continue to be legally bound to
provide the services required herein for the other Funds for the period
and on the terms set forth in this Agreement. The captions in this
Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect
their construction or effect. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall
be governed by Delaware law.
13. NAMES. The names "ARMADA FUNDS" and "Trustees of ARMADA FUNDS"
refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
the Commonwealth of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the Trustees, shareholders, or representatives of the Trust
personally, but bind only the Trust property, and all persons dealing
with any class of shares of the Trust must look solely to the Trust
property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the
day and year first above written.
SIGNATURES OMITTED
<PAGE> 1
Exhibit 5(b)
INTERIM ADVISORY AGREEMENT
ARMADA FUNDS
ENHANCED INCOME FUND
TOTAL RETURN ADVANTAGE FUND
ADVISORY AGREEMENT
AGREEMENT made as of March 6, 1998 between ARMADA FUNDS, a
Massachusetts business trust, located in Oaks, Pennsylvania (the "Trust") and
NATIONAL ASSET MANAGEMENT CORPORATION, located in Louisville, Kentucky (the
"Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser
to the Enhanced Income and Total Return Advantage Funds (individually, a "Fund"
and collectively, the "Funds");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. DELIVERY OF DOCUMENTS. The Adviser acknowledges that
it has received copies of each of the following:
(a) The Trust's Declaration of Trust, as filed
with the State Secretary of the Commonwealth
of Massachusetts on January 29, 1986 and all
amendments thereto (such Declaration of
Trust, as presently in effect and as it
shall from time to time be amended, is
herein called the "Declaration of Trust");
(b) The Trust's Code of Regulations, and
amendments thereto (such Code of
Regulations, as presently in effect and as
it shall from time to time be amended, is
herein called the "Code of Regulations");
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser
and approving this Agreement;
(d) The Trust's Notification of Registration on
Form N-8A under the 1940 Act as filed with
the Securities and
<PAGE> 2
Exchange Commission ("SEC") on September 26,
1985 and all amendments thereto;
(e) The Trust's Registration Statement on Form
N-1A under the Securities Act of 1933, as
amended ("1933 Act") (File No. 33-488) and
under the 1940 Act as filed with the SEC on
September 26, 1985 and all amendments
thereto; and
(f) The Trust's most recent prospectuses and
statements of additional information with
respect to the Funds (such prospectuses and
statements of additional information, as
presently in effect and all amendments and
supplements thereto are herein called
individually, a "Prospectus", and
collectively, the "Prospectuses").
The Trust will furnish the Adviser from time to time with
execution copies of all amendments of or supplements to the foregoing.
2. SERVICES. The Trust hereby appoints the Adviser to
act as investment adviser to the Funds for the period
and on the terms set forth in this Agreement.
Intending to be legally bound, the Adviser accepts
such appointment and agrees to furnish the services
required herein to the Funds for the compensation
hereinafter provided.
Subject to the supervision of the Trust's Board of Trustees,
the Adviser will provide a continuous investment program for each Fund,
including investment research and management with respect to all
securities and investments and cash equivalents in each Fund. The
Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by each Fund. The
Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of
Trustees applicable to such Fund.
3. SUBCONTRACTORS. It is understood that the Adviser may
from time to time employ or associate with itself
such person or persons as the Adviser may believe to
be particularly fitted to assist in the performance
of this Agreement; provided, however, that the
compensation of such person or persons shall be paid
by the Adviser and that the Adviser shall be as fully
responsible to the Trust for the acts and omissions
of any subcontractor as it is for its own acts and
omissions. Without limiting the generality of the
foregoing, it is agreed that investment advisory
service to any Fund may be provided by a
subcontractor agreeable to the Adviser and approved
in accordance with the provision of the 1940 Act. Any
such sub-advisers are hereinafter referred to as the
"Sub-Advisers."
-2-
<PAGE> 3
In the event that any Sub-Adviser appointed hereunder
is terminated, the Adviser may provide investment
advisory services pursuant to this Agreement to the
Fund without further shareholder approval.
Not-withstanding the employment of any Sub-Adviser,
the Adviser shall in all events: (a) establish and
monitor general investment criteria and policies for
the fund; (b) review investments in each fund on a
periodic basis for compliance with its fund's
investment objective, policies and restrictions as
stated in the Prospectus; (c) review periodically any
Sub-Adviser's policies with respect to the placement
of orders for the purchase and sale of portfolio
securities; (d) review, monitor, analyze and report
to the Board of Trustees on the performance of any
Sub-Adviser; (e) furnish to the Board of Trustees or
any Sub-Adviser, reports, statistics and economic
information as may be reasonably requested; and (f)
recommend, either in its sole discretion or in
conjunction with any Sub-Adviser, potential changes
in investment policy.
4. COVENANTS BY ADVISER. The Adviser agrees with respect
to the services provided to each Fund that it:
(a) will comply with all applicable Rules and
Regulations of the SEC and will in addition
conduct its activities under this Agreement
in accordance with other applicable law;
(b) will use the same skill and care in
providing such services as it uses in
providing services to similar fiduciary
accounts for which it has investment
responsibilities;
(c) will not make loans to any person to
purchase or carry shares in the Funds, or
make interest-bearing loans to the Trust or
the Funds;
(d) will maintain a policy and practice of
conducting its investment management
activities independently of the Commercial
Departments of all banking affiliates. In
making investment recommendations for the
Funds, personnel will not inquire or take
into consideration whether the issuers (or
related supporting institutions) of
securities proposed for purchase or sale for
the Funds' accounts are customers of the
Commercial Department. In dealing with
commercial customers, the Commercial
Department will not inquire or take into
consideration whether securities of those
customers are held by the Funds;
-3-
<PAGE> 4
(e) will place orders pursuant to its investment
determinations for the Funds either directly
with the issuer or with any broker or
dealer. In selecting brokers or dealers for
executing portfolio transactions, the
Adviser will use its best efforts to seek on
behalf of the Trust and each Fund the best
overall terms available. In assessing the
best overall terms available for any
transaction the Adviser shall consider all
factors it deems relevant, including the
breadth of the market in the security, the
price of the security, the financial
condition and execution capability of the
broker or dealer, and the reasonableness of
the commission, if any, both for the
specific transaction and on a continuing
basis. In evaluating the best overall terms
available, and in selecting the broker or
dealer to execute a particular transaction,
the Adviser may also consider the brokerage
and research services (as those terms are
defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended) provided
to any Fund and/or other accounts over which
the Adviser or any affiliate of the Adviser
exercises investment discretion. The Adviser
is authorized, subject to the prior approval
of the Board, to negotiate and pay to a
broker or dealer who provides such brokerage
and research services a commission for
executing a portfolio transaction for any
Fund which is in excess of the amount of
commission another broker or dealer would
have charged for effecting that transaction
if, but only if, the Adviser determines in
good faith that such commission was
reasonable in relation to the value of the
brokerage and research services provided by
such broker or dealer viewed in terms of
that particular transaction or in terms of
the overall responsibilities of the Adviser
with respect to the accounts as to which it
exercises investment discretion. In no
instance will fund securities be purchased
from or sold to the Adviser, any
Sub-Adviser, SEI Investments Distribution
Co. ("SEI") (or any other principal
underwriter to the Trust) or an affiliated
person of either the Trust, the Adviser,
Sub-Adviser, or SEI (or such other principal
underwriter) unless permitted by an order of
the SEC or applicable rules. In executing
portfolio transactions for any Fund, the
Adviser may, but shall not be obligated to,
to the extent permitted by applicable laws
and regulations, aggregate the securities to
be sold or purchased with those of other
Funds and its other clients where such
aggregation is not inconsistent with the
policies set forth in the Trust's
registration statement. In such event, the
Adviser will allocate the securities so
purchased or sold, and the expenses incurred
in the transaction, in the manner
-4-
<PAGE> 5
it considers to be the most equitable and
consistent with its fiduciary obligations to
the Funds and such other clients;
(f) will maintain all books and records with
respect to the securities transactions for
the Funds and furnish the Trust's Board of
Trustees such periodic and special reports
as the Board may request; and
(g) will treat confidentially and as proprietary
information of the Trust all records and
other information relative to the Funds and
prior, present or potential shareholders,
and will not use such records and
information for any purpose other than
performance of its responsibilities and
duties hereunder (except after prior
notification to and approval in writing by
the Trust, which approval shall not be
unreasonably withheld and may not be
withheld and will be deemed granted where
the Adviser may be exposed to civil or
criminal contempt proceedings for failure to
comply, when requested to divulge such
information by duly constituted authorities,
or when so requested by the Trust).
5. SERVICES NOT EXCLUSIVE. The services furnished by the
Adviser hereunder are deemed not to be exclusive, and
the Adviser shall be free to furnish similar services
to others so long as its services under this
Agreement are not impaired thereby.
6. BOOKS AND RECORDS. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the
Adviser hereby agrees that all records which it
maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust
any of such records upon the Trust's request. The
Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under
the 1940 Act.
7. EXPENSES. During the term of this Agreement, the
Adviser will pay all expenses incurred by it in
connection with its activities under this Agreement
other than the cost of securities (including
brokerage commissions, if any) purchased for the
Funds.
8. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, the
Trust will pay the Adviser from the assets belonging
to the Funds and the Adviser will accept as full
compensation therefor fees, computed daily and paid
monthly, at the following annual rates: .45% of the
average daily
-5-
<PAGE> 6
net assets of the Enhanced Income Fund; and .55% of
the average daily net assets of the Total Return
Advantage Fund.
The fee attributable to each Fund shall be the several (and
not joint or joint and several) obligations of each Fund.
The fees payable under this Section 8 shall be maintained in
an interest-bearing escrow account until such Fund's shareholders'
approve the payment of such fees to the Adviser. If a Fund's
shareholders do not approve the payment to the Adviser of such fees for
such period, on or before July 6, 1998, the balance in the escrow
account shall be paid to such Fund.
The Funds will not pay the Adviser any fees other than
compensation permitted by the Order issued to the Trust and the Adviser
from the Securities and Exchange Commission related to such
compensation.
9. LIMITATION OF LIABILITY. The Adviser shall not be
liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with
the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services
or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser
in the performance of its duties or from reckless
disregard by it of its obligations and duties under
this Agreement.
10. DURATION AND TERMINATION. This Agreement will become
effective with respect to each Fund on March 6, 1998,
subject to approval of this Agreement by vote of a
majority of the outstanding voting securities of each
such Fund, and, unless sooner terminated as provided
herein, shall continue in effect until June 29, 1998.
Thereafter, if not terminated, this Agreement shall
continue in effect with respect to a particular Fund
for successive twelve month periods ending on June
29, PROVIDED such continuance is specifically
approved at least annually (a) by the vote of a
majority of those members of the Trust's Board of
Trustees who are not interested persons of any party
to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval, and (b)
by the Trust's Board of Trustees or by vote of a
majority of the outstanding voting securities of the
Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to any Fund at any time, without
the payment of any penalty, by the Trust (by the
Trust's Board of Trustees or by vote of a majority of
the outstanding voting securities of the particular
Fund), or by the Adviser on 60 days' written notice.
This Agreement will immediately terminate in the
event of its assignment. (As used in this Agreement,
the terms "majority of the
-6-
<PAGE> 7
outstanding voting securities", "interested persons"
and "assignment" shall have the same meaning of such
terms in the 1940 Act.)
11. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in
writing signed by the party against which enforcement
of the change, waiver, discharge or termination is
sought. No amendment of this Agreement shall be
effective with respect to a Fund until approved by
vote of a majority of the outstanding voting
securities of that Fund.
12. MISCELLANEOUS. The Adviser expressly agrees that
notwithstanding the termination of or failure to
continue this Agreement with respect to a particular
Fund, the Adviser shall continue to be legally bound
to provide the services required herein for the other
Funds for the period and on the terms set forth in
this Agreement. The captions in this Agreement are
included for convenience of reference only and in no
way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be
governed by Delaware law.
13. NAMES. The names "ARMADA FUNDS" and "Trustees of
ARMADA FUNDS" refer respectively to the Trust created
and the Trustees, as trustees but not individually or
personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is
hereby referred to and a copy of which is on file at
the office of the State Secretary of the Commonwealth
of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into
in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not
individually, but in such capacities, and are not
binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind
only the Trust property, and all persons dealing with
any class of shares of the Trust must look solely to
the Trust property belonging to such class for the
enforcement of any claims against the Trust.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
SIGNATURES OMITTED
-8-
<PAGE> 1
Exhibit 5(c)
INTERIM ADVISORY AGREEMENT
ARMADA FUNDS
CORE EQUITY FUND
ADVISORY AGREEMENT
AGREEMENT made as of March 6, 1998 between ARMADA FUNDS, a
Massachusetts business trust, located in Oaks, Pennsylvania (the "Trust") and
NATIONAL ASSET MANAGEMENT CORPORATION located in Louisville, Kentucky (the
"Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser
to the Core Equity Fund (the "Fund");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. DELIVERY OF DOCUMENTS. The Adviser acknowledges that it has received
copies of each of the following:
(a) The Trust's Declaration of Trust, as filed
with the State Secretary of the Commonwealth
of Massachusetts on January 29, 1986 and all
amendments thereto (such Declaration of
Trust, as presently in effect and as it
shall from time to time be amended, is
herein called the "Declaration of Trust");
(b) The Trust's Code of Regulations, and
amendments thereto (such Code of
Regulations, as presently in effect and as
it shall from time to time be amended, is
herein called the "Code of Regulations");
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser
and approving this Agreement;
<PAGE> 2
(d) The Trust's Notification of Registration on
Form N-8A under the 1940 Act as filed with
the Securities and Exchange Commission
("SEC") on September 26, 1985 and all
amendments thereto;
(e) The Trust's Registration Statement on Form
N-1A under the Securities Act of 1933, as
amended ("1933 Act") (File No. 33-488) and
under the 1940 Act as filed with the SEC on
September 26, 1985 and all amendments
thereto; and
(f) The Trust's most recent prospectus and
statement of additional information with
respect to the Fund (such prospectus and
statement of additional information, as
presently in effect and all amendments and
supplements thereto are herein called a
"Prospectus").
The Trust will furnish the Adviser from time to time with
execution copies of all amendments of or supplements to the foregoing.
2. SERVICES. The Trust hereby appoints the Adviser to
act as investment adviser to the Fund for the period
and on the terms set forth in this Agreement.
Intending to be legally bound, the Adviser accepts
such appointment and agrees to furnish the services
required herein to the Fund for the compensation
hereinafter provided.
Subject to the supervision of the Trust's Board of Trustees,
the Adviser will provide a continuous investment program for the Fund,
including investment research and management with respect to all
securities and investments and cash equivalents in the Fund. The
Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by the Fund. The
Adviser will provide the services under this Agreement in accordance
with the Fund's investment objective, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of
Trustees applicable to the Fund.
3. SUBCONTRACTORS. It is understood that the Adviser may
from time to time employ or associate with itself
such person or persons as the Adviser may believe to
be particularly fitted to assist in the performance
of this Agreement; provided, however, that the
compensation of such person or persons shall be paid
by the Adviser and that the Adviser shall be as fully
responsible to the Trust for the acts and omissions
of any subcontractor as it is for its own acts and
omissions. Without limiting the generality or the
foregoing, it is agreed that investment advisory
service to any Fund may be provided by a
subcontractor agreeable to the Adviser and approved
in accordance with the provision of the 1940 Act. Any
-2-
<PAGE> 3
such sub-advisers are hereinafter referred to as the
"Sub-Advisers." In the event that any Sub-Adviser
appointed hereunder is terminated, the Adviser may
provide investment advisory services pursuant to this
Agreement to the Fund without further shareholder
approval. Notwithstanding the employment of any
Sub-Adviser, the Adviser shall in all events: (a)
establish and monitor general investment criteria and
policies for the fund; (b) review investments in the
fund on a periodic basis for compliance with its
fund's investment objective, policies and
restrictions as stated in the Prospectus; (c) review
periodically any Sub-Adviser's policies with respect
to the placement of orders for the purchase and sale
of portfolio securities; (d) review, monitor, analyze
and report to the Board of Trustees on the
performance of any Sub-Adviser; (e) furnish to the
Board of Trustees or any Sub-Adviser, reports,
statistics and economic information as may be
reasonably requested; and (f) recommend, either in
its sole discretion or in conjunction with any
Sub-Adviser, potential changes in investment policy.
4. COVENANTS BY ADVISER. The Adviser agrees with respect
to the services provided to the Fund that it:
(a) will comply with all applicable Rules and
Regulations of the SEC and will in addition
conduct its activities under this Agreement
in accordance with other applicable law;
(b) will use the same skill and care in
providing such services as it uses in
providing services to similar fiduciary
accounts for which it has investment
responsibilities;
(c) will not make loans to any person to
purchase or carry shares in the Fund, or
make interest-bearing loans to the Trust or
the Fund;
(d) will maintain a policy and practice of
conducting its investment management
activities independently of the Commercial
Departments of all banking affiliates. In
making investment recommendations for the
Fund, personnel will not inquire or take
into consideration whether the issuers (or
related supporting institutions) of
securities proposed for purchase or sale for
the Fund's accounts are customers of the
Commercial Department. In dealing with
commercial customers, the Commercial
Department will not inquire or take into
consideration whether securities of those
customers are held by the Fund;
-3-
<PAGE> 4
(e) will place orders pursuant to its investment
determinations for the Fund either directly
with the issuer or with any broker or
dealer. In executing portfolio transactions
and selecting brokers or dealers, the
Adviser will use its best efforts to seek on
behalf of the Trust and the Fund the best
overall terms available. In assessing the
best overall terms available for any
transaction the Adviser shall consider all
factors it deems relevant, including the
breadth of the market in the security, the
price of the security, the financial
condition and execution capability of the
broker or dealer, and the reasonableness of
the commission, if any, both for the
specific transaction and on a continuing
basis. In evaluating the best overall terms
available, and in selecting the broker or
dealer to execute a particular transaction,
the Adviser may also consider the brokerage
and research services (as those terms are
defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended) provided
to any Fund and/or other accounts over which
the Adviser or any affiliate of the Adviser
exercises investment discretion. The Adviser
is authorized, subject to the prior approval
of the Board, to negotiate and pay to a
broker or dealer who provides such brokerage
and research services a commission for
executing a portfolio transaction for any
Fund which is in excess of the amount of
commission another broker or dealer would
have charged for effecting that transaction
if, but only if, the Adviser determines in
good faith that such commission was
reasonable in relation to the value of the
brokerage and research services provided by
such broker or dealer viewed in terms of
that particular transaction or in terms of
the overall responsibilities of the Adviser
to the particular Fund and to the Trust. In
no instance will fund securities be
purchased from or sold to the Adviser, any
Sub-Adviser, SEI Investments Distribution
Co. ("SEI") (or any other principal
underwriter to the Trust) or an affiliated
person of either the Trust, the Adviser,
Sub-Adviser, or SEI (or such other principal
underwriter) unless permitted by an order of
the SEC or applicable rules. In executing
portfolio transactions for any Fund, the
Adviser may, but shall not be obligated to,
to the extent permitted by applicable laws
and regulations, aggregate the securities to
be sold or purchased with those of other
Funds and its other clients where such
aggregation is not inconsistent with the
policies set forth in the Trust's
registration statement. In such event, the
Adviser will allocate the securities so
purchased or sold, and the expenses incurred
in the transaction, in the manner it
-4-
<PAGE> 5
considers to be the most equitable and
consistent with its fiduciary obligations to
the Fund and such other clients;
(f) will maintain all books and records with
respect to the securities transactions for
the Fund and furnish the Trust's Board of
Trustees such periodic and special reports
as the Board may request; and
(g) will treat confidentially and as proprietary
information of the Trust all records and
other information relative to the Fund and
prior, present or potential shareholders,
and will not use such records and
information for any purpose other than
performance of its responsibilities and
duties hereunder (except after prior
notification to and approval in writing by
the Trust, which approval shall not be
unreasonably withheld and may not be
withheld and will be deemed granted where
the Adviser may be exposed to civil or
criminal contempt proceedings for failure to
comply, when requested to divulge such
information by duly constituted authorities,
or when so requested by the Trust).
5. SERVICES NOT EXCLUSIVE. The services furnished by the
Adviser hereunder are deemed not to be exclusive, and
the Adviser shall be free to furnish similar services
to others so long as its services under this
Agreement are not impaired thereby.
6. BOOKS AND RECORDS. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the
Adviser hereby agrees that all records which it
maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust
any of such records upon the Trust's request. The
Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under
the 1940 Act.
7. EXPENSES. During the term of this Agreement, the
Adviser will pay all expenses incurred by it in
connection with its activities under this Agreement
other than the cost of securities (including
brokerage commissions, if any) purchased for the
Fund.
-5-
<PAGE> 6
8. COMPENSATION. For the services provided and the
expenses assumed pursuant to this Agreement, the
Trust will pay the Adviser from the assets belonging
to the Fund and the Adviser will accept as full
compensation therefor fees, computed daily and paid
monthly, at the following annual rate: .75% of the
average daily net assets of the Fund.
The fee attributable to the Fund shall be the several (and not
joint and several) obligations of the Fund.
The fees payable under this Section 8 shall be maintained in
an interest-bearing escrow account until the Fund's shareholders
approve the payment of such fees to the Adviser. If the Fund's
shareholders do not approve the payment to the Adviser of such fees for
such period, the balance in the escrow account shall be paid to such
Fund.
The Fund will not pay the Adviser any fees other than
compensation permitted by the Order issued to the Trust and the Adviser
from the Securities and Exchange Commission related to such
compensation.
9. LIMITATION OF LIABILITY. The Adviser shall not be
liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with
the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services
or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser
in the performance of its duties or from reckless
disregard by it of its obligations and duties under
this Agreement.
10. DURATION AND TERMINATION. This Agreement will become
effective with respect to the Fund on March 6, 1998,
subject to approval of this Agreement by vote of a
majority of the outstanding voting securities of the
Fund, and, unless sooner terminated as provided
herein, shall continue in effect until June 29, 1998.
Thereafter, if not terminated, this Agreement shall
continue in effect with respect to the Fund for
successive twelve month periods ending on June 29,
PROVIDED such continuance is specifically approved
at least annually (a) by the vote of a majority of
those members of the Trust's Board of Trustees who
are not interested persons of any party to this
Agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by
the Trust's Board of Trustees or by vote of a
majority of the outstanding voting securities of the
Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to the Fund at any time,
without the payment of any penalty, by the Trust (by
the Trust's Board of Trustees or by vote of a
majority of the outstanding voting securities of the
particular Fund), or by the
-6-
<PAGE> 7
Adviser on 60 days' written notice. This Agreement
will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the
same meaning of such terms in the 1940 Act.)
11. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in
writing signed by the party against which enforcement
of the change, waiver, discharge or termination is
sought. No amendment of this Agreement shall be
effective with respect to the Fund until approved by
vote of a majority of the outstanding voting
securities of the Fund.
12. MISCELLANEOUS. The Adviser expressly agrees that
notwithstanding the termination of or failure to
continue this Agreement with respect to the Fund, the
Adviser shall continue to be legally bound to provide
the services required herein for the other Funds for
the period and on the terms set forth in this
Agreement. The captions in this Agreement are
included for convenience of reference only and in no
way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be
governed by Delaware law.
13. NAMES. The names "ARMADA FUNDS" and "Trustees of
ARMADA FUNDS" refer respectively to the Trust created
and the Trustees, as trustees but not individually or
personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is
hereby referred to and a copy of which is on file at
the office of the State Secretary of the Commonwealth
of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into
in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not
individually, but in such capacities, and are not
binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind
only the Trust property, and all persons dealing with
any class of shares of the Trust must look solely to
the Trust property belonging to such class for the
enforcement of any claims against the Trust.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
SIGNATURES OMITTED
-8-
<PAGE> 1
Exhibit 5(d)
NEW ADVISORY AGREEMENT
ARMADA FUNDS
CORE EQUITY FUND, ENHANCED INCOME FUND AND
TOTAL RETURN ADVANTAGE FUND
ADVISORY AGREEMENT
AGREEMENT made as of March 6, 1998 between ARMADA FUNDS, a
Massachusetts business trust, located in Oaks, Pennsylvania (the "Trust") and
NATIONAL CITY BANK located in Cleveland, Ohio (the "Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser as investment adviser
to the Core Equity, Enhanced Income and Total Return Advantage Funds (the
"Funds");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. DELIVERY OF DOCUMENTS. The Adviser acknowledges that it has received
copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the
State Secretary of the Commonwealth of Massachusetts
on January 29, 1986 and all amendments thereto (such
Declaration of Trust, as presently in effect and as
it shall from time to time be amended, is herein
called the "Declaration of Trust");
(b) The Trust's Code of Regulations, and amendments
thereto (such Code of Regulations, as presently in
effect and as it shall from time to time be amended,
is herein called the "Code of Regulations");
(c) Resolutions of the Trust's Board of Trustees
authorizing the appointment of the Adviser and
approving this Agreement;
(d) The Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") on September 26, 1985 and
all amendments thereto;
<PAGE> 2
(e) The Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended ("1933 Act")
(File No. 33-488) and under the 1940 Act as filed
with the SEC on September 26, 1985 and all amendments
thereto; and
(f) The Trust's most recent prospectuses and statements
of additional information with respect to the Funds
(such prospectuses and statements of additional
information, as presently in effect and all
amendments and supplements thereto are herein called
individually, a "Prospectus", and collectively, the
"Prospectuses").
The Trust will furnish the Adviser from time to time with
execution copies of all amendments of or supplements to the foregoing.
2. SERVICES. The Trust hereby appoints the Adviser to act as investment
adviser to the Funds for the period and on the terms set forth in this
Agreement. Intending to be legally bound, the Adviser accepts such
appointment and agrees to furnish the services required herein to the
Funds for the compensation hereinafter provided.
Subject to the supervision of the Trust's Board of Trustees,
the Adviser will provide a continuous investment program for each Fund,
including investment research and management with respect to all
securities and investments and cash equivalents in each Fund. The
Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by each Fund. The
Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as
stated in the Prospectus and resolutions of the Trust's Board of
Trustees applicable to such Fund.
3. SUBCONTRACTORS. It is understood that the Adviser may from time to
time employ or associate with itself such person or persons as the
Adviser may believe to be particularly fitted to assist in the
performance of this Agreement; provided, however, that the compensation
of such person or persons shall be paid by the Adviser and that the
Adviser shall be as fully responsible to the Trust for the acts and
omissions of any subcontractor as it is for its own acts and omissions.
Without limiting the generality of the foregoing, it is agreed that
investment advisory service to any Fund may be provided by a
subcontractor agreeable to the Adviser and approved in accordance with
the provision of the 1940 Act. Any such sub-advisers are hereinafter
referred to as the "Sub-Advisers." In the event that any Sub-Adviser
appointed hereunder with respect to a Fund is terminated, the Adviser
may provide investment advisory services pursuant to this Agreement to
the Fund without further shareholder approval. Notwithstanding the
employment of any Sub-Adviser with respect to a Fund, the Adviser shall
in all events: (a) establish and monitor general investment criteria
and policies for the Fund; (b) review investments in the Fund on a
periodic basis for compliance with its investment objective, policies
and restrictions as stated in the Prospectus; (c) review periodically
any Sub-Adviser's policies with respect to the placement of orders for
the purchase and sale of portfolio securities; (d) review, monitor,
analyze and report to the Board of Trustees on
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<PAGE> 3
the performance of any Sub-Adviser; (e) furnish to the Board of
Trustees or any Sub-Adviser, reports, statistics and economic
information as may be reasonably requested; and (f) recommend, either
in its sole discretion or in conjunction with any Sub-Adviser,
potential changes in investment policy. Pursuant to this paragraph, on
the date hereof, the Adviser has entered into a Sub-Advisory Agreement
with National Asset Management Corporation with respect to the Core
Equity Fund and Total Return Advantage Fund.
4. COVENANTS BY ADVISER. The Adviser agrees with respect to the
services provided to each Fund that it:
(a) will comply with all applicable Rules and Regulations
of the SEC and will in addition conduct its
activities under this Agreement in accordance with
other applicable law;
(b) will use the same skill and care in providing such
services as it uses in providing services to similar
fiduciary accounts for which it has investment
responsibilities;
(c) will not make loans to any person to purchase or
carry shares in the Funds, or make interest-bearing
loans to the Trust or the Funds;
(d) will maintain a policy and practice of conducting its
investment management activities independently of the
Commercial Departments of all banking affiliates. In
making investment recommendations for the Funds,
personnel will not inquire or take into consideration
whether the issuers (or related supporting
institutions) of securities proposed for purchase or
sale for the Funds' accounts are customers of the
Commercial Department. In dealing with commercial
customers, the Commercial Department will not inquire
or take into consideration whether securities of
those customers are held by the Funds;
(e) will place orders pursuant to its investment
determinations for the Funds either directly with the
issuer or with any broker or dealer. In selecting
brokers or dealers for executing portfolio
transactions, the Adviser will use its best efforts
to seek on behalf of the Trust and each Fund the best
overall terms available. In assessing the best
overall terms available for any transaction the
Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security,
the price of the security, the financial condition
and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both
for the specific transaction and on a continuing
basis. In evaluating the best overall terms
available, and in selecting the broker or dealer to
execute a particular transaction, the Adviser may
also consider the brokerage and research services (as
those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided
to any Fund and/or other accounts over which the
Adviser or any affiliate of the
-3-
<PAGE> 4
Adviser exercises investment discretion. The Adviser
is authorized, subject to the prior approval of the
Board, to negotiate and pay to a broker or dealer who
provides such brokerage and research services a
commission for executing a portfolio transaction for
any Fund which is in excess of the amount of
commission another broker or dealer would have
charged for effecting that transaction if, but only
if, the Adviser determines in good faith that such
commission was reasonable in relation to the value of
the brokerage and research services provided by such
broker or dealer viewed in terms of that particular
transaction or in terms of the overall
responsibilities of the Adviser with respect to the
accounts as to which it exercises investment
discretion. In no instance will fund securities be
purchased from or sold to the Adviser, any
Sub-Adviser, SEI Investments Distribution Co. ("SEI")
(or any other principal underwriter to the Trust) or
an affiliated person of either the Trust, the
Adviser, Sub-Adviser, or SEI (or such other principal
underwriter) unless permitted by an order of the SEC
or applicable rules. In executing portfolio
transactions for any Fund, the Adviser may, but shall
not be obligated to, to the extent permitted by
applicable laws and regulations, aggregate the
securities to be sold or purchased with those of
other Funds and its other clients where such
aggregation is not inconsistent with the policies set
forth in the Trust's registration statement. In such
event, the Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in the manner it considers to be the
most equitable and consistent with its fiduciary
obligations to the Funds and such other clients;
(f) will maintain all books and records with respect to
the securities transactions for the Funds and furnish
the Trust's Board of Trustees such periodic and
special reports as the Board may request; and
(g) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Funds and prior, present
or potential shareholders, and will not use such
records and information for any purpose other than
performance of its responsibilities and duties
hereunder (except after prior notification to and
approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be
withheld and will be deemed granted where the Adviser
may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to
divulge such information by duly constituted
authorities, or when so requested by the Trust).
5. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser
hereunder are deemed not to be exclusive, and the Adviser shall be free
to furnish similar services to others so long as its services under
this Agreement are not impaired thereby.
-4-
<PAGE> 5
6. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all records which it
maintains for the Trust are the property of the Trust and further
agrees to surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
7. EXPENSES. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Funds.
8. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Adviser from the
assets belonging to the Fund and the Adviser will accept as full
compensation therefor fees, computed daily and paid monthly, at the
following annual rates: .75% of the average daily net assets of the
Core Equity Fund; .45% of the average daily net assets of the Enhanced
Income Fund; and .55% of the average daily net assets of the Total
Return Advantage Fund.
The fee attributable to each Fund shall be the several (and
not joint or joint and several) obligation of each Fund.
9. LIMITATION OF LIABILITY. The Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser
in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement.
10. DURATION AND TERMINATION. This Agreement will become effective with
respect to each Fund upon approval of this Agreement by vote of a
majority of the outstanding voting securities of the Fund, and, unless
sooner terminated as provided herein, shall continue in effect until
September 30, 1999. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to the Fund for successive twelve month
periods ending on September 30, PROVIDED such continuance is
specifically approved at least annually (a) by the vote of a majority
of those members of the Trust's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by
the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund. Notwithstanding the
foregoing, this Agreement may be terminated as to a Fund at any time,
without the payment of any penalty, by the Trust (by the Trust's Board
of Trustees or by vote of a majority of the outstanding voting
securities of the particular Fund), or by the Adviser on 60 days'
written notice. This Agreement will immediately terminate in the event
of its assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested persons" and
"assignment" shall have the same meaning of such terms in the 1940
Act.)
-5-
<PAGE> 6
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought. No amendment of
this Agreement shall be effective with respect to a Fund until approved
by vote of a majority of the outstanding voting securities of that
Fund.
12. MISCELLANEOUS. The Adviser expressly agrees that notwithstanding
the termination of or failure to continue this Agreement with respect
to a Fund, the Adviser shall continue to be legally bound to provide
the services required herein for the other Funds for the period and on
the terms set forth in this Agreement. The captions in this Agreement
are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their
construction or effect. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and shall be governed by
Delaware law.
13. NAMES. The names "ARMADA FUNDS" and "Trustees of ARMADA FUNDS"
refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
the Commonwealth of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the Trustees, shareholders, or representatives of the Trust
personally, but bind only the Trust property, and all persons dealing
with any class of shares of the Trust must look solely to the Trust
property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
SIGNATURES OMITTED
-6-
<PAGE> 1
Exhibit 5(e)
SUB-ADVISORY AGREEMENT
ARMADA FUNDS
CORE EQUITY FUND
TOTAL RETURN ADVANTAGE FUND
SUB-ADVISORY AGREEMENT
AGREEMENT made as of March 6, 1998 between NATIONAL CITY BANK (the
"Adviser"), and NATIONAL ASSET MANAGEMENT CORPORATION (the "Sub-Adviser").
WHEREAS, ARMADA FUNDS, a Massachusetts business trust (the "Trust"), is
registered as an open-end, management investment company under the Investment
Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, pursuant to an Advisory Agreement dated March 6, 1998 (the
"Advisory Agreement") by and between the Trust and the Adviser, the Trust has
appointed the Adviser to furnish the investment advisory and other services to
the Trust for its Core Equity and Total Return Advantage Funds and the Adviser
has agreed thereto; and
WHEREAS, the Advisory Agreement authorizes the Adviser to subcontract
investment advisory services with respect to the Funds to the Sub-Adviser; and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment advisory services to the Trust with respect to the Core Equity and
Total Return Advantage Funds (the "Funds") and the Sub-Adviser is willing to so
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT AND DELIVERY OF DOCUMENTS.
(a) Intending to be legally bound, the Adviser, with the
approval of the Trust, hereby appoints the
Sub-Adviser to act as investment adviser to the Funds
for the period and on the terms set forth in this
Agreement. Intending to be legally bound, the
Sub-Adviser accepts such appointment and agrees to
furnish the services herein set forth for the
compensation herein provided.
<PAGE> 2
(b) The Sub-Adviser acknowledges that it has received
copies of the Trust's most recent prospectuses and
statements of additional information with respect to
the Funds.
2. SERVICES OF SUB-ADVISER. The Sub-Adviser agrees that with
respect to each Fund it shall:
(a) Subject to the supervision of the Trust's Board of
Trustees, assist the Adviser in providing a
continuous investment program for each such Fund,
including investment research and management with
respect to all securities, investments, cash and cash
equivalents in the Funds. The Sub-Adviser will assist
the Adviser in determining from time to time what
securities and other investments will be purchased,
retained or sold by each such Fund. The Sub-Adviser
will provide the services rendered by it under this
Agreement in accordance with each Fund's investment
objective, policies, and restrictions as stated in
the Prospectus and Statement of Additional
Information and resolutions of the Trust's Board of
Trustees applicable to such Fund;
(b) Transmit trades to the Trust's custodian for proper
settlement;
(c) Prepare a quarterly broker security transaction
summary and monthly security transaction listing for
the Funds;
(d) Maintain all books and records with respect to the
Funds' securities transactions effected by it as
required by subparagraphs (b)(5), (6), (7), (9), (10)
and (11) and paragraph (f) of Rule 31a-1 under the
1940 Act; and
(e) Supply the Trust and its Board of Trustees with
reports and statistical data as reasonably requested.
3. OTHER COVENANTS. The Sub-Adviser agrees that it:
(a) will comply with all applicable Rules and Regulations
of the Securities and Exchange Commission and will in
addition conduct its activities under this Agreement
in accordance with other applicable law;
(b) will use the same skill and care in providing such
services as it uses in providing services to similar
fiduciary accounts for which it has investment
responsibilities;
(c) will not make loans to any person to purchase or
carry shares in the Funds or make interest-bearing
loans to the Trust or the Funds;
(d) will maintain a policy and practice of conducting its
investment advisory services hereunder independently
of the commercial banking operations of
-2-
<PAGE> 3
any affiliated person of the Adviser. In making
investment recommendations for the Funds, the
Sub-Adviser's personnel will not inquire or take into
consideration whether the issuers (or related
supporting institutions) of securities proposed for
purchase or sale for each such Fund's account are
customers of the commercial department of any
affiliated person of the Adviser;
(e) in connection with its duties under paragraph 2 of
this Agreement, will place orders pursuant to its
investment determinations for the Funds either
directly with the issuer or with any broker or
dealer. In selecting brokers or dealers for executing
portfolio transactions, the Sub-Adviser will use its
best efforts to seek on behalf of the Funds the best
overall terms available. In assessing the best
overall terms available for any transaction the
Sub-Adviser shall consider all factors it deems
relevant, including the breadth of the market in the
security, the price of the security, the financial
condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a
continuing basis. In evaluating the best overall
terms available, and in selecting the broker or
dealer to execute a particular transaction, the
Sub-Adviser may also consider the brokerage and
research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934,
as amended) provided to any Fund and/or other
accounts over which the Sub-Adviser or any affiliate
of the Sub-Adviser exercises investment discretion.
The Sub-Adviser is authorized, subject to the prior
approval of the Board, to negotiate and pay to a
broker or dealer who provides such brokerage and
research services a commission for executing a
portfolio transaction for the Funds which is in
excess of the amount of commission another broker or
dealer would have charged for effecting that
transaction if, but only if, the Sub-Adviser
determines in good faith that such commission was
reasonable in relation to the value of the brokerage
and research services provided by such broker or
dealer viewed in terms of that particular transaction
or in terms of the overall responsibilities of the
Sub-Adviser with respect to the accounts as to which
it exercises investment discretion. Notwithstanding
the foregoing, no prior approval by the Board shall
be required so long as the broker or dealer selected
by the Sub-Adviser provides best price and execution
on a particular transaction. In no instance will Fund
securities be purchased from or sold to the Adviser,
any Sub-Adviser, SEI Investments Distribution Co.
("SEI") (or any other principal underwriter to the
Trust) or an affiliated person of either the Trust,
the Adviser, Sub-Adviser, or SEI (or such other
principal underwriter) unless permitted by an order
of the SEC or applicable rules. In executing
portfolio transactions for the Funds, the Sub-Adviser
may, but shall not be obligated to, to the extent
permitted by applicable laws and regulations,
aggregate the securities to be sold or purchased with
those of other Funds and its other clients where such
aggregation is not inconsistent with the policies set
forth in the Trust's registration statement.
-3-
<PAGE> 4
In such event, the Sub-Adviser will allocate the
securities so purchased or sold, and the expenses
incurred in the transaction, in the manner it
considers to be the most equitable and consistent
with its fiduciary obligations to the Funds and such
other clients; and
(f) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Funds and prior, present
or potential shareholders, and will not use such
records and information for any purpose other than
performance of its responsibilities and duties
hereunder (except after prior notification to and
approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be
withheld and will be deemed granted where the
Sub-Adviser may be exposed to civil or criminal
comtempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities or when so requested by the
Trust).
4. SERVICES NOT EXCLUSIVE. The services furnished by the Sub-Adviser
hereunder are deemed not to be exclusive, and the Sub-Adviser shall be
free to furnish similar services to others so long as its services
under this Agreement are not impaired thereby. The Adviser acknowledges
that the Sub-Adviser may give advice and take action in the performance
of its duties with respect to any of its other clients which may differ
from advice given, or the time or nature of action taken, with respect
to the Funds.
5. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Adviser hereby agrees that all records
which it maintains for the Funds are the property of the Trust and
further agrees to surrender promptly to the Trust any of such records
upon the Trust's written request; provided, however, that the
Sub-Adviser may retain a copy of such records. The Sub-Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records required to be maintained by it pursuant to
paragraph 2(d) of this Agreement.
6. EXPENSES. During the term of this Agreement, the Sub-Adviser will
pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities, commodities and other
investments (including brokerage commissions and other transaction
costs, if any) purchased or sold for any Funds.
7. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Adviser will pay the Sub-Adviser and
the Sub-Adviser will accept as full compensation therefor a fee,
computed daily and payable monthly, of .32% and .16% of the average
daily net assets of the Core Equity Fund and the Total Return Advantage
Fund, respectively.
8. LIMITATION OF LIABILITY. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
-4-
<PAGE> 5
misfeasance, bad faith or gross negligence on the part of the
Sub-Adviser in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement.
9. DURATION AND TERMINATION. This Agreement will become effective with
respect to each Fund upon approval of this Agreement by vote of a
majority of the outstanding voting securities of each such Fund, and,
unless sooner terminated as provided herein, shall continue in effect
until September 30, 1999. Thereafter, if not terminated, this Agreement
shall automatically continue in effect as to a particular Fund for
successive twelve month periods ending on September 30, provided such
continuance is specifically approved at least annually (a) by the vote
of a majority of those members of the Trust's Board of Trustees who are
not interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b)
by the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the particular Fund. Notwithstanding
the foregoing, this Agreement may be terminated as to any Fund at any
time, without the payment of any penalty, by the Adviser or by the
Trust (by vote of the Trust's Board of Trustees or by vote of a
majority of the outstanding voting securities of the particular Fund)
on sixty days' written notice to the Sub-Adviser, or by the
Sub-Adviser, on sixty days' written notice to the Trust, provided that
in each such case, notice shall be given simultaneously to the Adviser.
In addition, notwithstanding anything herein to the contrary, in the
event of the termination of the Advisory Agreement with respect to a
particular Fund for any reason (whether by the Trust, by the Adviser or
by operation of law) this Agreement shall terminate with respect to the
same Fund upon the effective date of such termination of the Advisory
Agreement. This Agreement will immediately terminate in the event of
its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment"
shall have the same meaning as such terms have in the 1940 Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought. No amendment of
this Agreement shall be effective as to a particular Fund until
approved by vote of a majority of the outstanding voting securities of
such Fund.
11. MISCELLANEOUS. The Sub-Adviser expressly agrees that
notwithstanding the termination of or failure to continue this
Agreement with respect to a particular Fund, Sub-Adviser shall continue
to be legally bound to provide the services required herein for any
other Funds to which it is Sub-Adviser pursuant to this Agreement for
the period and on the terms set forth in this Agreement.
During the term of this Agreement, the Adviser agrees to
furnish the Sub-Adviser at its principal office all Prospectuses, proxy
statements, reports to shareholders, sales literature or other
materials prepared for distribution to shareholders of the Funds, the
Adviser, broker-dealers or the public that refer to the Sub-Adviser.
Sub-Adviser shall consent to such materials unless it reasonably
objects in writing within five business days
-5-
<PAGE> 6
(or such other period as may be mutually agreed) after receipt thereof.
The Sub-Adviser's right to object to such materials is limited to the
portions of the materials that expressly relate to the Sub-Adviser, its
services and its clients. The Adviser agrees to use its reasonable best
efforts to ensure that materials prepared by its employees or agents or
affiliates that refer to the Sub-Adviser or its clients in any way are
consistent with those materials previously approved by the Sub-Adviser.
The captions in the Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and shall be governed by Delaware law.
12. NAMES. The names "ARMADA FUNDS" and "Trustees of ARMADA FUNDS"
refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under a
Declaration of Trust dated January 28, 1986 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
the Commonwealth of Massachusetts and the principal office of the
Trust. The obligations of "ARMADA FUNDS" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the Trustees, shareholders or representatives of the Trust
personally, but bind only the Trust Property, and all persons dealing
with any class of shares of the Trust must look solely to the Trust
Property belonging to such class for the enforcement of any claims
against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
SIGNATURES OMITTED
-6-
<PAGE> 1
Exhibit (6)(a)
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 1st day of May, 1998 between Armada
Funds ("the Trust"), a Massachusetts business trust and SEI Investments
Distribution Co. (the "Distributor"), a Pennsylvania corporation.
WHEREAS, the Trust is registered as an investment company with the
Securities and Exchange Commission (the "SEC") under the Investment Company Act
of 1940, as amended (the "1940 Act"), and its shares are registered with the SEC
under the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Trust and Distributor hereby agree as follows:
ARTICLE 1. SALE OF SHARES. The Trust grants to the Distributor the
exclusive right to sell units (the"Shares") of the portfolios (the "Portfolios")
of the Trust at the net asset value per Share, plus any applicable sales charges
in accordance with the current prospectus, as agent and on behalf of the Trust,
during the term of this Agreement and subject to the registration requirements
of the 1933 Act, the rules and regulations of the SEC and the laws governing the
sale of securities in the various states ("Blue Sky Laws").
ARTICLE 2. SOLICITATION OF SALES. In consideration of these rights
granted to the Distributor, the Distributor agrees to use all reasonable
efforts, consistent with its other business, in connection with the distribution
of Shares of the Trust; provided, however, that the Distributor shall not be
prevented from entering into like arrangements with other issuers. The
provisions of this paragraph do not obligate the Distributor to register as a
broker or dealer under the Blue Sky Laws of any jurisdiction when it determines
it would be uneconomical for it to do so or to maintain its registration in any
jurisdiction in which it is now registered nor obligate the Distributor to sell
any particular number of Shares.
ARTICLE 3. AUTHORIZED REPRESENTATIONS. The Distributor is not
authorized by the Trust to give any information or to make any representations
other than those contained in the current registration statements and
prospectuses of the Trust filed with the SEC or contained in Shareholder reports
or other material that may be prepared by or on behalf of the Trust for the
Distributor's use. The Distributor may prepare and distribute sales literature
and other material as it may deem appropriate, provided that such literature and
materials have been approved by the Trust prior to their use.
ARTICLE 4. REGISTRATION OF SHARES. The Trust agrees that it will take
all action necessary to register Shares under the federal and state securities
laws so that there will be available for sale the number of Shares the
Distributor may reasonably be expected to sell and to
<PAGE> 2
pay all fees associated with said registration. The Trust shall make available
to the Distributor such number of copies of its currently effective prospectus
and statement of additional information as the Distributor may reasonably
request. The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares of the Trust.
ARTICLE 5. COMPENSATION. As compensation for providing the services
under this Agreement:
(a) The Distributor shall receive from the Trust:
(1) all distribution and service fees, as applicable, at the
rate and under the terms and conditions set forth in each
Distribution and Shareholder Services Plan adopted by the
appropriate class of shares of each of the Portfolios, as such
Plans may be amended from time to time, and subject to any
further limitations on such fees as the Board of Trustees of
the Trust may impose;
(2) all contingent deferred sales charges ("CDSCs") applied on
redemptions of CDSC Class Shares of each Portfolio on the
terms and subject to such waivers as are described in the
Trust's Registration Statement and current prospectuses, as
amended from time to time, or as otherwise required pursuant
to applicable law; and
(3) all front-end sales charges, if any, on purchases of Class
A Shares of each Portfolio sold subject to such charges as
described in the Trust's Registration Statement and current
prospectuses, as amended from time to time. The Distributor,
or brokers, dealers and other financial institutions and
intermediaries that have entered into sub-distribution
agreements with the Distributor, may collect the gross
proceeds derived from the sale of such Class A Shares, remit
the net asset value thereof to the Trust upon receipt of the
proceeds and retain the applicable sales charge.
(b) The Distributor may reallow any or all of the distribution or
service fees, contingent deferred sales charges and front-end sales
charges which it is paid by the Trust to such brokers, dealers and
other financial institutions and intermediaries as the Distributor may
from time to time determine.
ARTICLE 6. INDEMNIFICATION OF DISTRIBUTOR. The Trust agrees to
indemnify and hold harmless the Distributor and each of its directors and
officers and each person, if any, who controls the Distributor within the
meaning of Section 15 of the 1933 Act against any loss, liability, claim,
damages or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damages, or expense and reasonable counsel
fees and disbursements incurred in connection therewith), arising by reason of
any person acquiring any Shares, based upon the ground that the registration
statement, prospectus, Shareholder reports or other information filed or made
public by the Trust (as from time to time amended) included
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<PAGE> 3
an untrue statement of a material fact or omitted to state a material fact
required to be stated or necessary in order to make the statements made not
misleading. However, the Trust does not agree to indemnify the Distributor or
hold it harmless to the extent that the statements or omission was made in
reliance upon, and in conformity with, information furnished to the Trust by or
on behalf of the Distributor.
In no case (i) is the indemnity of the Trust to be deemed to protect
the Distributor against any liability to the Trust or its Shareholders to which
the Distributor or such person otherwise would be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Trust to be liable to the Distributor under the
indemnity agreement contained in this paragraph with respect to any claim made
against the Distributor or any person indemnified unless the Distributor or
other person shall have notified the Trust in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the
Distributor or such other person (or after the Distributor or the person shall
have received notice of service on any designated agent). However, failure to
notify the Trust of any claim shall not relieve the Trust from any liability
which it may have to the Distributor or any person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph.
The Trust shall be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity provision. If the Trust elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the Trust and satisfactory to the indemnified defendants in the suit
whose approval shall not be unreasonably withheld. In the event that the Trust
elects to assume the defense of any suit and retain counsel, the indemnified
defendants shall bear the fees and expenses of any additional counsel retained
by them. If the Trust does not elect to assume the defense of a suit, it will
reimburse the indemnified defendants for the reasonable fees and expenses of any
counsel retained by the indemnified defendants.
The Trust agrees to notify the Distributor promptly of the commencement
of any litigation or proceedings against it or any of its officers or Trustees
in connection with the issuance or sale of any of its Shares.
ARTICLE 7. INDEMNIFICATION OF TRUST. The Distributor covenants and
agrees that it will indemnify and hold harmless the Trust and each of its
Trustees and officers and each person, if any, who controls the Trust within the
meaning of Section 15 of the Act, against any loss, liability, damages, claim or
expense (including the reasonable cost of investigating or defending any alleged
loss, liability, damages, claim or expense and reasonable counsel fees incurred
in connection therewith) based upon the 1933 Act or any other statute or common
law and arising by reason of any person acquiring any Shares, and alleging a
wrongful act of the Distributor or any of its employees or alleging that the
registration statement, prospectus, Shareholder reports or other information
filed or made public by the Trust (as from time to time amended) included an
untrue statement of a material fact or omitted to state a material fact required
to be stated or necessary in order to make the statements not misleading,
insofar as the statement or omission
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<PAGE> 4
was made in reliance upon and in conformity with information furnished to the
Trust by or on behalf of the Distributor.
In no case (i) is the indemnity of the Distributor in favor of the
Trust or any other person indemnified to be deemed to protect the Trust or any
other person against any liability to which the Trust or such other person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement, or (ii) is the
Distributor to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Trust or any person
indemnified unless the Trust or person, as the case may be, shall have notified
the Distributor in writing of the claim within a reasonable time after the
summons or other first written notification giving information of the nature of
the claim shall have been served upon the Trust or upon any person (or after the
Trust or such person shall have received notice of service on any designated
agent). However, failure to notify the Distributor of any claim shall not
relieve the Distributor from any liability which it may have to the Trust or any
person against whom the action is brought otherwise than on account of its
indemnity agreement contained in this paragraph.
The Distributor shall be entitled to participate, at its own expense,
in the defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by the Distributor and satisfactory
to the indemnified defendants whose approval shall not be unreasonably withheld.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the defendants in the suit shall bear the fees and expenses of
any additional counsel retained by them. If the Distributor does not elect to
assume the defense of any suit, it will reimburse the indemnified defendants in
the suit for the reasonable fees and expenses of any counsel retained by them.
The Distributor agrees to notify the Trust promptly of the commencement
of any litigation or proceedings against it in connection with the issue and
sale of any of the Trusts' Shares.
ARTICLE 8. YEAR 2000 COMPLIANT. The Distributor warrants that all
software code owned by or under the Distributor's control, used in the
performance of the Distributor's obligations under this contract, will be Year
2000 compliant. For purposes of this paragraph, "Year 2000 Compliant" means that
the software will continue to operate beyond December 31, 1999 without creating
any logical or mathematical inconsistencies concerning any date after December
31, 1999 and without decreasing the functionality of the system applicable to
dates prior to January 1, 2000 including, but not limited to, making changes to
[a] date and data century recognition; [b] calculations which accommodate same-
and multi- century formulas and date values; and [c] input/output of date values
which reflect century dates. All changes described in this paragraph will be
made at no additional cost to the Trust.
ARTICLE 9. EFFECTIVE DATE. This Agreement shall be effective upon its
execution, and unless terminated as provided, shall continue in force for two
year(s) from the effective date
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<PAGE> 5
and thereafter from year to year, provided that such annual continuance is
approved by (i) either the vote of a majority of the Trustees of the Trust, or
the vote of a majority of the outstanding voting securities of the Trust, and
(ii) the vote of a majority of those Trustees of the Trust who are not parties
to this Agreement or the Trust's Distribution Plan or interested persons of any
such party ("Qualified Trustees"), cast in person at a meeting called for the
purpose of voting on the approval. This Agreement shall automatically terminate
in the event of its assignment. As used in this paragraph the terms "vote of a
majority of the outstanding voting securities", "assignment" and "interested
person" shall have the respective meanings specified in the 1940 Act. In
addition, this Agreement may at any time be terminated without penalty by SFS,
by a vote of a majority of Qualified Trustees or by vote of a majority of the
outstanding voting securities of the Trust upon not less than sixty days prior
written notice to the other party.
ARTICLE 10. NOTICES. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the last address furnished by the other party to the party giving
notice: if to the Trust, at 4100 West 150th Street, Cleveland, Ohio 44135-1389,
and if to the Distributor, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456.
ARTICLE 11. LIMITATION OF LIABILITY. A copy of the Declaration of Trust
of the Trust is on file with the Secretary of State of the Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed on
behalf of the Trustees of the Trust as Trustees and not individually and that
the obligations of this instrument are not binding upon any of the Trustees,
officers or shareholders of the Trust individually but binding only upon the
assets and property of the Trust.
ARTICLE 12. GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Massachusetts and the applicable
provisions of the 1940 Act. To the extent that the applicable laws of the
Commonwealth of Massachusetts, or any of the provisions herein, conflict with
the applicable provisions of the 1940 Act, the latter shall control.
ARTICLE 13. MULTIPLE ORIGINALS. This Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
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<PAGE> 6
IN WITNESS, the Trust and Distributor have each duly executed this
Agreement, as of the day and year above written.
ARMADA FUNDS
By:_____________________________
Attest:_________________________
SEI INVESTMENTS DISTRIBUTION CO.
By:_____________________________
Attest:_________________________
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<PAGE> 1
Exhibit (9)(a)
INTERIM ADMINISTRATION AGREEMENT
THIS INTERIM ADMINISTRATION AGREEMENT is made as of this 1st day of
April, 1998, by and between Armada Funds, a Massachusetts business trust, (the
"Trust"), and SEI Fund Resources (the "Administrator"), a Delaware business
trust.
WHEREAS, the Trust is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), consisting of several series of shares of Common Stock; and
WHEREAS, the Trust desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such portfolios of the Trust as the Trust and the Administrator may agree on
("Portfolios") and as listed on the schedule attached hereto ("Schedule") and
made a part of this Agreement, on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Administrator hereby agree as follows:
ARTICLE 1. RETENTION OF THE ADMINISTRATOR. The Trust hereby retains the
Administrator to act as the administrator of the Portfolios and to furnish the
Portfolios with the management and administrative services as set forth in
Article 2 below. The Administrator hereby accepts such employment to perform the
duties set forth below.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Trust in any way and shall
not be deemed an agent of the Trust.
ARTICLE 2. ADMINISTRATIVE AND ACCOUNTING SERVICES. The Administrator
shall perform or supervise the performance by others of other administrative
services in connection with the operations of the Portfolios, and, on behalf of
the Trust, will investigate, assist in the selection of and conduct relations
with custodians, depositories, accountants, legal counsel, underwriters, brokers
and dealers, corporate fiduciaries, insurers, banks and persons in any other
capacity deemed to be necessary or desirable for the Portfolios' operations. All
services provided hereunder shall be in conformity with the Declaration of
trust, Bylaws, resolutions and other instructions of the Board of trustees and
the current prospectuses and statements of additional information of the
Portfolios. The Administrator agrees to furnish the services set forth herein in
return for the compensation provided in Article 4 of this Agreement. The
Administrator shall provide the Trustees of the Trust with such reports
regarding investment performance and compliance with investment policies and
applicable laws, rules and regulations as they may reasonably request but shall
have no responsibility for supervising the performance by any investment adviser
or sub-adviser of its responsibilities, except with respect to the Portfolios'
compliance with investment objective and policies. The Administrator may appoint
a sub-administrator to perform certain of the services to be performed by the
Administrator
<PAGE> 2
hereunder. The Administrator acknowledges that as of the date stated above, it
shall enter into a sub-administration agreement with National City Bank, the
form of which is attached to this Agreement.
The Administrator shall provide the Trust with administrative services,
regulatory reporting, fund accounting and related portfolio accounting services
as set forth on Schedule II of this Agreement, all necessary office space,
equipment, personnel, compensation and facilities (including facilities for
Shareholders' and Trustees' meetings) for handling the affairs of the Portfolios
and such other services as the Trustees may, from time to time, reasonably
request and the Administrator shall, from time to time, reasonably determine to
be necessary to perform its obligations under this Agreement. In addition, at
the request of the Trust's Board of Trustees (the "Trustees"), the Administrator
shall make reports to the Trustees concerning the performance of its obligations
hereunder.
Without limiting the generality of the foregoing, the Administrator shall:
(A) calculate contractual Trust expenses and control all
disbursements for the Trust, and as appropriate compute the
Trust's yields, total return, expense ratios, portfolio
turnover rate and, if required, portfolio average
dollar-weighed maturity;
(B) assist Trust counsel with the preparation of prospectuses,
statements of additional information, registration statements,
and proxy materials;
(C) prepare such reports, applications and documents (including
reports regarding the sale and redemption of Shares as may be
required in order to comply with Federal and state securities
law) as may be necessary or desirable to register the Trust's
shares with state securities authorities, monitor sale of
Trust shares for compliance with state securities laws, and
file with the appropriate state securities authorities the
registration statements and reports for the Trust and the
Trust's shares and all amendments thereto, as may be necessary
or convenient to register and keep effective the Trust and the
Trust's shares with state securities authorities to enable the
Trust to make a continuous offering of its shares;
(D) develop and prepare communications to shareholders, including
the annual report to shareholders, coordinate mailing
prospectuses, notices, proxy statements, proxies and other
reports to Trust shareholders, and supervise and facilitate
the solicitation of proxies solicited by the Trust for all
shareholder meetings, including tabulation process for
shareholder meetings;
(E) coordinate with Trust counsel the preparation of, and
administer contracts on behalf of the Trust with, among
others, the Trust's investment adviser, distributor,
custodian, and transfer agent;
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<PAGE> 3
(F) maintain the Trust's general ledger and prepare the Trust's
financial statements, including expense accruals and payments,
determine the net asset value of the Trust's assets and of the
Trust's shares, and supervise the Trust's transfer agent with
respect to the payment of dividends and other distributions to
shareholders;
(G) calculate performance data of the Trust and its portfolios for
dissemination to information services covering the investment
company industry;
(H) coordinate and supervise the preparation and filing of the
Trust's tax returns;
(I) At the request of the Trustees, examine and review the
operations and performance of the various organizations
providing services to the Trust or any Portfolio of the Trust,
and report to the Trustees;
(J) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and
printing of the Trust's semi-annual and annual reports to
shareholders;
(K) provide internal legal and administrative services as
requested by the Trust from time to time;
(L) assist with the design, development, and operation of the
Trust, including new portfolio and class investment
objectives, policies and structure;
(M) provide individuals acceptable to the Trustees for nomination,
appointment, or election as officers of the Trust, who will be
responsible for the management of certain of the Trust's
affairs as determined by the Trustees;
(N) advise the Trust and its Trustees on matters concerning the
Trust and its affairs;
(O) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Trust
in accordance with the requirements of Rules 17g-1 and
17d-1(7) under the 1940 Act as such bonds and policies are
approved by the Trust's Board of Trustees;
(P) monitor and advise the Trust and its Portfolios on their
registered investment company status under the Internal
Revenue Code of 1986, as amended;
(Q) perform all administrative services and functions of the Trust
and each Portfolio to the extent administrative services and
functions are not provided to the Trust or such Portfolio
pursuant to the Trust's or such Portfolio's investment
advisory agreement, distribution agreement, custodian
agreement and transfer agent agreement;
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<PAGE> 4
(R) furnish advice and recommendations with respect to other
aspects of the business and affairs of the Portfolios as the
Trust and the Administrator shall determine desirable; and
(S) prepare and file with the SEC the semi-annual report for the
Trust on Form N-SAR and all required notices pursuant to Rule
24f-2.
Also, the Administrator will perform other services for the Trust as agreed from
time to time, including, but not limited to performing internal audit
examinations; mailing the annual reports of the Portfolios; preparing an annual
list of shareholders; and mailing notices of shareholders' meetings, proxies and
proxy statements, for all of which the Trust will pay the Administrator's or
Sub-Administrators out-of-pocket expenses.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Administrator agrees that all records which it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
any of such records upon the Trust's request.
In the event that the Administrator cannot perform the services
required by this Agreement, SEI, the parent of the Administrator shall succeed
to the rights, duties, obligations and liabilities of the Administrator
hereunder, and may without limitation and whenever it deems necessary or
appropriate, subcontract, delegate or assign its rights, duties, obligations and
liabilities hereunder to subsidiaries or affiliates of the Administrator
following notice to the Trust. Such actions shall discharge the Administrator or
SEI from its obligations hereunder.
ARTICLE 3. ALLOCATION OF CHARGES AND EXPENSES.
(A) THE ADMINISTRATOR. The Administrator shall furnish at its own
expense the executive, supervisory and clerical personnel necessary to perform
its obligations under this Agreement. The Administrator shall also provide the
items which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Trust as well as all Trustees of the
Trust who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Trust retained by the Trustees of the Trust
to perform services on behalf of the Trust.
(B) THE TRUST. The Trust assumes and shall pay or cause to be paid all
other expenses of the Trust not otherwise allocated herein, including, without
limitation, organizational costs, taxes, expenses for legal and auditing
services, the expenses of preparing (including typesetting), printing and
mailing reports, prospectuses, statements of additional information, proxy
solicitation material and notices to existing Shareholders, all expenses
incurred in connection with issuing and redeeming Shares, the costs of pricing
services, the costs of custodial services, the cost of initial and ongoing
registration of the Shares under Federal and state securities laws, fees and
out-of-pocket expenses of Trustees who are not affiliated persons of the
Administrator or the investment adviser to the Trust or any affiliated
corporation of the Administrator or the investment Adviser, the costs of
Trustees' meetings, insurance, interest, brokerage costs,
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<PAGE> 5
litigation and other extraordinary or nonrecurring expenses, and all fees and
charges of investment advisers to the Trust.
ARTICLE 4. COMPENSATION OF THE ADMINISTRATOR.
(A) ADMINISTRATION FEE. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Trust shall pay to the Administrator compensation at an annual
rate specified in the Schedule. Such compensation shall be calculated and
accrued daily, and paid to the Administrator monthly. The Trust shall also
reimburse the Administrator for its reasonable out-of-pocket expenses.
If this Agreement becomes effective subsequent to the first day of a
month or terminates before the last day of a month, the Administrator's
compensation for that part of the month in which this Agreement is in effect
shall be prorated in a manner consistent with the calculation of the fees as set
forth above. Payment of the Administrator's compensation for the preceding month
shall be made promptly.
(B) COMPENSATION FROM TRANSACTIONS. The Trust hereby authorizes any
entity or person associated with the Administrator which is a member of a
national securities exchange to effect any transaction on the exchange for the
account of the Trust which is permitted by Section 11 (a) of the Securities
Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and the Trust hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T) (a) (2) (iv).
(C) SURVIVAL OF COMPENSATION RATES. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADMINISTRATOR. The duties of
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in carrying out its duties hereunder, except a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties,
or by reason of reckless disregard of its obligations and duties hereunder,
except as may otherwise be provided under provisions of applicable law which
cannot be waived or modified hereby. (As used in this Article 5, the term
"Administrator" shall include directors, officers, employees and other agents of
the Administrator as well as that corporation itself.)
So long as the Administrator, or its agents, acts in good faith and
with due diligence the Trust assumes full responsibility and shall indemnify the
Administrator and hold it harmless from and against any and all actions, suits
and claims, whether groundless or otherwise, and from and against any and all
losses, damages, costs, charges, reasonable counsel fees and disbursements,
payments, expenses and liabilities (including reasonable investigation expenses)
arising directly or indirectly from any action which the Administrator takes or
does not take (i) at the request, on the direction of or in reliance on the
advice of the Trust pursuant to this
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<PAGE> 6
agreement or (ii) upon oral or written instructions. The indemnity provision set
forth herein shall survive the termination of this Agreement.
The Administrator may apply to the Trust at any time for instructions
and may consult counsel for the Trust or its own counsel and with accountants
and other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with the
written opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. Nor shall the Administrator be held to have
notice of any change of authority of any officers, employee or agent of the
Trust until receipt of written notice thereof from the Trust.
ARTICLE 6. ACTIVITIES OF THE ADMINISTRATOR. The services of the
Administrator rendered to the Trust are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that Trustees, officers, employees
and Shareholders of the Trust are or may be or become interested in the
Administrator, as directors, officers, employees and shareholders or otherwise
and that directors, officers, employees and shareholders of the Administrator
and its counsel are or may be or become similarly interested in the Trust, and
that the Administrator may be or become interested in the Trust as a Shareholder
or otherwise.
ARTICLE 7. CONFIDENTIALITY. The Administrator agrees on behalf of
itself and its employees to treat confidentially all records and other
information relative to the Trust and its prior, present or potential
Shareholders and relative to the Adviser and its prior, present or potential
customers, except, after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where the Administrator may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
ARTICLE 8. EQUIPMENT FAILURES. In the event of equipment failures
beyond the Administrator's control, the Administrator shall, at no additional
expense to the Trust, take reasonable steps to minimize service interruptions
but shall have no liability with respect thereto. The Administrator shall
develop and maintain a plan for recovery from equipment failures which may
include contractual arrangements with appropriate parties making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available.
ARTICLE 9. YEAR 2000 COMPLIANT. The Administrator warrants that all
software code owned by or under the Administrator's control, used in the
performance of the Administrator's obligations under this contract, will be Year
2000 compliant. For purposes of this paragraph, "Year 2000 Compliant" means that
the software will continue to operate beyond December 31, 1999 without creating
any logical or mathematical inconsistencies
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<PAGE> 7
concerning any date after December 31, 1999 and without decreasing the
functionality of the system applicable to dates prior to January 1, 2000
including, but not limited to, making changes to [a] date and data century
recognition; [b] calculations which accommodate same- and multi- century
formulas and date values; and [c] input/output of date values which reflect
century dates. All changes described in this paragraph will be made at no
additional cost to the Trust.
ARTICLE 10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. The
Administrator undertakes to comply with all applicable requirements of the 1933
Act, the 1934 Act, the 1940 Act and any laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by the Administrator hereunder.
ARTICLE 11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective on the date first set forth above and shall remain in
effect until the effective date of an administration agreement between The
Administrator and the Trust for the provision of administration services for all
of the Portfolios of the Trust.
This Agreement shall not be assignable by the Administrator, without
the prior written consent of the Trust, except to an entity that is controlled
by, or under common control, with, the Administrator.
ARTICLE 12. AMENDMENTS. This Agreement or any part hereof may be
changed or waived only by an instrument in writing signed by the party against
which enforcement of such change or waiver is sought.
ARTICLE 13. CERTAIN RECORDS. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Trust shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Trust and will be made available
to or surrendered promptly to the Trust on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Trust and follow the Trust's
instructions as to permitting or refusing such inspection; provided that the
Administrator may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so, unless
(in cases involving potential exposure only to civil liability) the Trust has
agreed to indemnify the Administrator against such liability.
ARTICLE 14. DEFINITIONS OF CERTAIN TERMS. The terms "interested person"
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
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<PAGE> 8
ARTICLE 15. NOTICE. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the last address furnished by the other party to the party giving
notice: if to the Trust, at National City Bank, 4100 West 150th Street,
Cleveland Ohio 44135-1389; and if to the Administrator at 1 Freedom Valley
Drive, Oaks, Pennsylvania, 19456.
ARTICLE 16. GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Massachusetts and the applicable
provisions of the 1940 Act. To the extent that the applicable laws of the
Commonwealth of Massachusetts, or any of the provisions herein, conflict with
the applicable provisions of the 1940 Act, the latter shall control.
ARTICLE 17. MULTIPLE ORIGINALS. This Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
ARTICLE 18. LIMITATION OF LIABILITY. The Administrator is hereby
expressly put on notice of the limitation of liability as set forth in Article
XI of the Trust's Declaration of Trust and agrees that the obligations pursuant
to this Agreement of a particular Portfolio and of the Trust with respect to
that Portfolio shall be limited solely to the assets of that Portfolio, and the
Administrator shall not seek satisfaction of any such obligation from any other
Portfolio, the shareholders of any Portfolio, the Trustees, officers, employees
or agents of the Trust, or any of them.
ARTICLE 19. BINDING AGREEMENT. This Agreement, and the rights and
obligations of the parties and the Portfolios hereunder, shall be binding on,
and inure to the benefit of, the parties and the Portfolios and the respective
successors and assigns of each of them.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ARMADA FUNDS
By:__________________________
Attest: _____________________
SEI FUND RESOURCES
By:__________________________
Attest: _____________________
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<PAGE> 9
SCHEDULE
TO THE INTERIM ADMINISTRATION AGREEMENT
DATED AS OF ______________, 1998
BETWEEN
ARMADA FUNDS
AND
SEI FUND RESOURCES
Portfolios: This Agreement shall apply to the following Portfolios of the
Trust: National Tax Exempt Fund and Tax Managed Equity Fund.
Fees: Pursuant to Article 4, Section A, the Trust shall pay the
Administrator compensation for services rendered to the
Portfolios at an annual rate, which is calculated daily and
paid monthly, equal to .07% fee, of average daily net assets
of each Portfolio.
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<PAGE> 10
SCHEDULE II
ACCOUNTING SERVICES
The Administrator will perform the following accounting functions:
(i) Journalize each Portfolio's investment, capital share and income and
expense activities;
(ii) Receive duplicate investment buy/sell trade tickets and receivable
trades with the Fund's custodian;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of each Portfolio with the
custodian, and prepare the beginning cash balance available for
investment purposes;
(vi) Update the cash availability throughout the day as required;
(vii) Post to and prepare each Portfolio's statement of Assets and
Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory and custody
fees);
(ix) Monitor the expense accruals and notify Fund management of any
proposed adjustments;
(x) Control all disbursements from each Portfolio and authorize such
disbursements upon Written Instruction;
(xi) Calculate capital gains and losses;
(xii) Determine each Portfolio's net income;
(xiii) Obtain security market quotes from independent pricing services
approved by the Fund, or if such quotes are unavailable, then obtain
such prices from the management of the Fund, and in either case
calculate the market value of each Portfolio's investment's;
(xiv) Transit or mail a copy of the daily portfolio valuation to each
Portfolio's investment advisor;
(xv) Compute the net asset value of each Portfolio;
(xvi) As appropriate, compute the yields, total return, expense ratios,
portfolio turnover rate, and, if required, portfolio average
dollar-weighted maturity; and
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<PAGE> 11
(xvii) Prepare a monthly financial statement, which will include the following
items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Change in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
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<PAGE> 1
Exhibit 9(b)
ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT is made as of this 1st day of May, 1998,
by and between Armada Funds, a Massachusetts business trust, (the "Trust"), and
SEI Fund Resources (the "Administrator"), a Delaware business trust.
WHEREAS, the Trust is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), consisting of several series of shares of Common Stock; and
WHEREAS, the Trust desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such portfolios of the Trust as the Trust and the Administrator may agree on
("Portfolios") and as listed on the schedules attached hereto ("Schedules") and
made a part of this Agreement, on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Administrator hereby agree as follows:
ARTICLE 1. RETENTION OF THE ADMINISTRATOR. The Trust hereby retains the
Administrator to act as the administrator of the Portfolios and to furnish the
Portfolios with the management and administrative services as set forth in
Article 2 below. The Administrator hereby accepts such employment to perform the
duties set forth below.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Trust in any way and shall
not be deemed an agent of the Trust.
ARTICLE 2. ADMINISTRATIVE AND ACCOUNTING SERVICES. The Administrator
shall perform or supervise the performance by others of other administrative
services in connection with the operations of the Portfolios, and, on behalf of
the Trust, will investigate, assist in the selection of and conduct relations
with custodians, depositories, accountants, legal counsel, underwriters, brokers
and dealers, corporate fiduciaries, insurers, banks and persons in any other
capacity deemed to be necessary or desirable for the Portfolios' operations. All
services provided hereunder shall be in conformity with the Declaration of
trust, Bylaws, resolutions and other instructions of the Board of trustees and
the current prospectuses and statements of additional information of the
Portfolios. The Administrator agrees to furnish the services set forth herein in
return for the compensation provided in Article 4 of this Agreement. The
Administrator shall be subject to written service level standards embodied in
that certain agreement (the "Service Standards Agreement") between the
Administrator and the Sub-Administrator. The determination of compliance with
the requisite service level standards shall be the responsibility of the Board
of Trustees of the Trust. The Administrator shall provide the Trustees of the
Trust with such reports regarding investment performance and compliance with
investment policies
<PAGE> 2
and applicable laws, rules and regulations as they may reasonably request but
shall have no responsibility for supervising the performance by any investment
adviser or sub-adviser of its responsibilities, except with respect to the
Portfolios' compliance with investment objective and policies. The Administrator
may appoint a sub-administrator to perform certain of the services to be
performed by the Administrator hereunder. The Administrator acknowledges that as
of the date stated above, it shall enter into a sub-administration agreement
with National City Bank, the form of which is attached to this Agreement.
The Administrator shall provide the Trust with administrative services,
regulatory reporting, fund accounting and related portfolio accounting services
as set forth on Schedule II of this Agreement, all necessary office space,
equipment, personnel, compensation and facilities (including facilities for
Shareholders' and Trustees' meetings) for handling the affairs of the Portfolios
and such other services as the Trustees may, from time to time, reasonably
request and the Administrator shall, from time to time, reasonably determine to
be necessary to perform its obligations under this Agreement. In addition, at
the request of the Trust's Board of Trustees (the "Trustees"), the Administrator
shall make reports to the Trustees concerning the performance of its obligations
hereunder.
Without limiting the generality of the foregoing, the Administrator shall:
(A) calculate contractual Trust expenses and control all
disbursements for the Trust, and as appropriate compute the
Trust's yields, total return, expense ratios, portfolio
turnover rate and, if required, portfolio average
dollar-weighed maturity;
(B) assist Trust counsel with the preparation of prospectuses,
statements of additional information, registration statements,
and proxy materials;
(C) prepare such reports, applications and documents (including
reports regarding the sale and redemption of Shares as may be
required in order to comply with Federal and state securities
law) as may be necessary or desirable to register the Trust's
shares with state securities authorities, monitor sale of
Trust shares for compliance with state securities laws, and
file with the appropriate state securities authorities the
registration statements and reports for the Trust and the
Trust's shares and all amendments thereto, as may be necessary
or convenient to register and keep effective the Trust and the
Trust's shares with state securities authorities to enable the
Trust to make a continuous offering of its shares;
(D) develop and prepare communications to shareholders, including
the annual report to shareholders, coordinate mailing
prospectuses, notices, proxy statements, proxies and other
reports to Trust shareholders, and supervise and facilitate
the solicitation of proxies solicited by the Trust for all
shareholder meetings, including tabulation process for
shareholder meetings;
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<PAGE> 3
(E) coordinate with Trust counsel the preparation of, and
administer contracts on behalf of the Trust with, among
others, the Trust's investment adviser, distributor,
custodian, and transfer agent;
(F) maintain the Trust's general ledger and prepare the Trust's
financial statements, including expense accruals and payments,
determine the net asset value of the Trust's assets and of the
Trust's shares, and supervise the Trust's transfer agent with
respect to the payment of dividends and other distributions to
shareholders;
(G) calculate performance data of the Trust and its portfolios for
dissemination to information services covering the investment
company industry;
(H) coordinate and supervise the preparation and filing of the
Trust's tax returns;
(I) At the request of the Trustees, examine and review the
operations and performance of the various organizations
providing services to the Trust or any Portfolio of the Trust,
, and report to the Trustees;
(J) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and
printing of the Trust's semi-annual and annual reports to
shareholders;
(K) provide internal legal and administrative services as
requested by the Trust from time to time;
(L) assist with the design, development, and operation of the
Trust, including new portfolio and class investment
objectives, policies and structure;
(M) provide individuals acceptable to the Trustees for nomination,
appointment, or election as officers of the Trust, who will be
responsible for the management of certain of the Trust's
affairs as determined by the Trustees;
(N) advise the Trust and its Trustees on matters concerning the
Trust and its affairs;
(O) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Trust
in accordance with the requirements of Rules 17g-1 and
17d-1(7) under the 1940 Act as such bonds and policies are
approved by the Trust's Board of Trustees;
(P) monitor and advise the Trust and its Portfolios on their
registered investment company status under the Internal
Revenue Code of 1986, as amended;
(Q) perform all administrative services and functions of the Trust
and each Portfolio to the extent administrative services and
functions are not provided to the Trust or such Portfolio
pursuant to the Trust's or such Portfolio's investment
advisory
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<PAGE> 4
agreement, distribution agreement, custodian agreement and
transfer agent agreement;
(R) furnish advice and recommendations with respect to other
aspects of the business and affairs of the Portfolios as the
Trust and the Administrator shall determine desirable; and
(S) prepare and file with the SEC the semi-annual report for the
Trust on Form N-SAR and all required notices pursuant to Rule
24f-2.
Also, the Administrator will perform other services for the Trust as agreed from
time to time, including, but not limited to performing internal audit
examinations; mailing the annual reports of the Portfolios; preparing an annual
list of shareholders; and mailing notices of shareholders' meetings, proxies and
proxy statements, for all of which the Trust will pay the Administrator's or
Sub-Administrators out-of-pocket expenses.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Administrator agrees that all records which it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
any of such records upon the Trust's request.
In the event that the Administrator cannot perform the services
required by this Agreement, SEI, the parent of the Administrator shall succeed
to the rights, duties, obligations and liabilities of the Administrator
hereunder, and may without limitation and whenever it deems necessary or
appropriate, subcontract, delegate or assign its rights, duties, obligations and
liabilities hereunder to subsidiaries or affiliates of the Administrator
following notice to the Trust. Such actions shall discharge the Administrator or
SEI from its obligations hereunder.
ARTICLE 3. ALLOCATION OF CHARGES AND EXPENSES.
(A) THE ADMINISTRATOR. The Administrator shall furnish at its own
expense the executive, supervisory and clerical personnel necessary to perform
its obligations under this Agreement. The Administrator shall also provide the
items which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Trust as well as all Trustees of the
Trust who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Trust retained by the Trustees of the Trust
to perform services on behalf of the Trust.
(B) THE TRUST. The Trust assumes and shall pay or cause to be paid all
other expenses of the Trust not otherwise allocated herein, including, without
limitation, organizational costs, taxes, expenses for legal and auditing
services, the expenses of preparing (including typesetting), printing and
mailing reports, prospectuses, statements of additional information, proxy
solicitation material and notices to existing Shareholders, all expenses
incurred in connection with issuing and redeeming Shares, the costs of pricing
services, the costs of custodial services, the cost of initial and ongoing
registration of the Shares under Federal and state securities laws,
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<PAGE> 5
fees and out-of-pocket expenses of Trustees who are not affiliated persons of
the Administrator or the investment adviser to the Trust or any affiliated
corporation of the Administrator or the investment Adviser, the costs of
Trustees' meetings, insurance, interest, brokerage costs, litigation and other
extraordinary or nonrecurring expenses, and all fees and charges of investment
advisers to the Trust.
ARTICLE 4. COMPENSATION OF THE ADMINISTRATOR.
(A) ADMINISTRATION FEE. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Trust shall pay to the Administrator compensation at an annual
rate specified in the Schedule. Such compensation shall be calculated and
accrued daily, and paid to the Administrator monthly. The Trust shall also
reimburse the Administrator for its reasonable out-of-pocket expenses.
If this Agreement becomes effective subsequent to the first day of a
month or terminates before the last day of a month, the Administrator's
compensation for that part of the month in which this Agreement is in effect
shall be prorated in a manner consistent with the calculation of the fees as set
forth above. Payment of the Administrator's compensation for the preceding month
shall be made promptly.
(B) COMPENSATION FROM TRANSACTIONS. The Trust hereby authorizes any
entity or person associated with the Administrator which is a member of a
national securities exchange to effect any transaction on the exchange for the
account of the Trust which is permitted by Section 11 (a) of the Securities
Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and the Trust hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T) (a) (2) (iv).
(C) SURVIVAL OF COMPENSATION RATES. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADMINISTRATOR. The duties of
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in carrying out its duties hereunder, except a loss resulting from
willful misfeasance, bad faith or negligence in the performance of its duties,
or by reason of reckless disregard of its obligations and duties hereunder,
except as may otherwise be provided under provisions of applicable law which
cannot be waived or modified hereby. (As used in this Article 5, the term
"Administrator" shall include directors, officers, employees and other agents of
the Administrator as well as that corporation itself.)
So long as the Administrator, or its agents, acts in good faith and
with due diligence the Trust assumes full responsibility and shall indemnify the
Administrator and hold it harmless from and against any and all actions, suits
and claims, whether groundless or otherwise, and from and against any and all
losses, damages, costs, charges, reasonable counsel fees and
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<PAGE> 6
disbursements, payments, expenses and liabilities (including reasonable
investigation expenses) arising directly or indirectly from any action which the
Administrator takes or does not take (i) at the request, on the direction of or
in reliance on the advice of the Trust pursuant to this agreement or (ii) upon
oral or written instructions.. The indemnity provision set forth herein shall
survive the termination of this Agreement.
The Administrator may apply to the Trust at any time for instructions
and may consult counsel for the Trust or its own counsel and with accountants
and other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with the
written opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. Nor shall the Administrator be held to have
notice of any change of authority of any officers, employee or agent of the
Trust until receipt of written notice thereof from the Trust.
ARTICLE 6. ACTIVITIES OF THE ADMINISTRATOR. The services of the
Administrator rendered to the Trust are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that Trustees, officers, employees
and Shareholders of the Trust are or may be or become interested in the
Administrator, as directors, officers, employees and shareholders or otherwise
and that directors, officers, employees and shareholders of the Administrator
and its counsel are or may be or become similarly interested in the Trust, and
that the Administrator may be or become interested in the Trust as a Shareholder
or otherwise.
ARTICLE 7. CONFIDENTIALITY. The Administrator agrees on behalf of
itself and its employees to treat confidentially all records and other
information relative to the Trust and its prior, present or potential
Shareholders and relative to the Adviser and its prior, present or potential
customers, except, after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where the Administrator may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
ARTICLE 8. EQUIPMENT FAILURES. In the event of equipment failures
beyond the Administrator's control, the Administrator shall, at no additional
expense to the Trust, take reasonable steps to minimize service interruptions
but shall have no liability with respect thereto. The Administrator shall
develop and maintain a plan for recovery from equipment failures which may
include contractual arrangements with appropriate parties making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available.
ARTICLE 9. YEAR 2000 COMPLIANT. The Administrator warrants that all
software code owned by or under the Administrator's control, used in the
performance of the
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<PAGE> 7
Administrator's obligations under this contract, will be Year 2000 compliant.
For purposes of this paragraph, "Year 2000 Compliant" means that the software
will continue to operate beyond December 31, 1999 without creating any logical
or mathematical inconsistencies concerning any date after December 31, 1999 and
without decreasing the functionality of the system applicable to dates prior to
January 1, 2000 including, but not limited to, making changes to [a] date and
data century recognition; [b] calculations which accommodate same- and multi-
century formulas and date values; and [c] input/output of date values which
reflect century dates. All changes described in this paragraph will be made at
no additional cost to the Trust.
ARTICLE 10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. The
Administrator undertakes to comply with all applicable requirements of the 1933
Act, the 1934 Act, the 1940 Act and any laws, rules and regulations of
governmental authorities having jurisdiction with respect to the duties to be
performed by the Administrator hereunder.
ARTICLE 11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective on the date set forth above in the Schedules and shall
remain in effect for an initial term of two (2) years (the "Initial Term"). This
Agreement may be renewed for subsequent terms upon the agreement of the parties.
(each, a "Renewal Term"), unless terminated in accordance with the provisions of
this Article 11. This Agreement may be terminated only: (a) by the mutual
written agreement of the parties; (b) by either party hereto on 90 days' written
notice, as of the end of the Initial Term or the end of any Renewal Term; (c) by
either party hereto on such date as is specified in written notice given by the
terminating party, in the event of a material breach of this Agreement by the
other party, provided the terminating party has notified the other party of such
breach at least 45 days prior to the specified date of termination and the
breaching party has not remedied such breach by the specified date; (d) if in
any consecutive six-month period the average cumulative service standards
performance (measured as set forth in the Service Standards Agreement) is less
than 50%; (e) effective upon the liquidation of the Administrator; or (f) as to
any Portfolio or the Trust, effective upon the liquidation of such Portfolio or
the Trust, as the case may be. For purposes of this Article 11, the term
"liquidation" shall mean a transaction in which the assets of the Administrator,
the Trust or a Portfolio are sold or otherwise disposed of and proceeds
therefrom are distributed in cash to the shareholders in complete liquidation of
the interests of such shareholders in the entity.
This Agreement shall not be assignable by the Administrator, without
the prior written consent of the Trust, except to an entity that is controlled
by, or under common control, with, the Administrator.
Upon termination of this Agreement, the Administrator shall use its
best efforts to assist in the transfer of its responsibilities hereunder to any
successor administrator without additional compensation (it being understood
that they would be reimbursed for their reasonable out-of-pocket expenses).
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<PAGE> 8
ARTICLE 12. AMENDMENTS. This Agreement or any part hereof may be
changed or waived only by an instrument in writing signed by the party against
which enforcement of such change or waiver is sought.
ARTICLE 13. CERTAIN RECORDS. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Trust shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Trust and will be made available
to or surrendered promptly to the Trust on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Trust and follow the Trust's
instructions as to permitting or refusing such inspection; provided that the
Administrator may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so, unless
(in cases involving potential exposure only to civil liability) the Trust has
agreed to indemnify the Administrator against such liability.
ARTICLE 14. DEFINITIONS OF CERTAIN TERMS. The terms "interested person"
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 15. NOTICE. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the last address furnished by the other party to the party giving
notice: if to the Trust, at National City Bank, 1900 East Ninth Street,
Cleveland Ohio 44114, with a copy to:
W. Bruce McConnel, III, Esquire
Drinker Biddle & Reath, LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107;
and if to the Administrator at 1 Freedom Valley Drive, Oaks,
Pennsylvania, 19456.
ARTICLE 16. GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Massachusetts and the applicable
provisions of the 1940 Act. To the extent that the applicable laws of the
Commonwealth of Massachusetts, or any of the provisions herein, conflict with
the applicable provisions of the 1940 Act, the latter shall control.
ARTICLE 17. MULTIPLE ORIGINALS. This Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
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<PAGE> 9
ARTICLE 18. LIMITATION OF LIABILITY. The Administrator is hereby
expressly put on notice of the limitation of liability as set forth in Article
XI of the Trust's Declaration of Trust and agrees that the obligations pursuant
to this Agreement of a particular Portfolio and of the Trust with respect to
that Portfolio shall be limited solely to the assets of that Portfolio, and the
Administrator shall not seek satisfaction of any such obligation from any other
Portfolio, the shareholders of any Portfolio, the Trustees, officers, employees
or agents of the Trust, or any of them.
ARTICLE 19. BINDING AGREEMENT. This Agreement, and the rights and
obligations of the parties and the Portfolios hereunder, shall be binding on,
and inure to the benefit of, the parties and the Portfolios and the respective
successors and assigns of each of them.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
ARMADA FUNDS
By:_____________________________
Attest:_________________________
SEI FUND RESOURCES
By:_____________________________
Attest:_________________________
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<PAGE> 10
SCHEDULE
TO THE ADMINISTRATION AGREEMENT
DATED AS OF MAY 1, 1998
BETWEEN
ARMADA FUNDS
AND
SEI FUND RESOURCES
Portfolios: This Agreement shall apply to all Portfolios of the Trust,
either now or in the future created. The following is a
listing of the current portfolios of the Trust (collectively,
the "Portfolios"): Small Cap Value Fund, Equity Growth Fund,
Equity Income Fund, Equity Index Fund, Small Cap Growth Fund,
International Equity Fund, Core Equity Fund, Ohio Tax Exempt
Fund, Pennsylvania Municipal Fund, Pennsylvania Tax Exempt
Money Market Fund, Money Market Fund, Government Money Market
Fund, Treasury Money Market Fund, Total Return Advantage Fund,
Intermediate Bond Fund, Enhanced Income Fund, GNMA Fund, Bond
Fund, Tax-Exempt Money Market Fund, Tax-Managed Equity Fund,
National Tax-Exempt Fund, Ohio Municipal Money Market Fund,
Real Return Advantage Fund and Balanced Allocation Fund.
Fees: Pursuant to Article 4, Section A of the Administration
Agreement, the Trust shall pay the Administrator compensation
for services rendered to the Portfolios at an annual rate,
which is calculated daily and paid monthly, at a maximum
administrative fee, in accordance with the following: .070% of
the aggregate average daily net assets of the Portfolios up to
the first eighteen (18) billion dollars in assets, and .060%
of the aggregate average daily net assets of the Portfolios
over eighteen (18) billion dollars in assets; provided that
with respect to newly created portfolios only (except for
portfolios created in connection with a merger of funds in the
Parkstone family of Funds into the Armada Funds) the
administrative fee shall be the greater of the fee set forth
above, or $60,000.00 (up to three classes) plus $15,000.00 for
each additional class (e.g. a new portfolio with four open
classes would have a minimum fee of $75,000.00).
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<PAGE> 11
SCHEDULE II
ACCOUNTING SERVICES
The Administrator will perform the following accounting functions:
(i) Journalize each Portfolio's investment, capital share and income and
expense activities;
(ii) Receive duplicate investment buy/sell trade tickets and receivable
trades with the Fund's custodian;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of each Portfolio with the
custodian, and prepare the beginning cash balance available for
investment purposes;
(vi) Update the cash availability throughout the day as required;
(vii) Post to and prepare each Portfolio's statement of Assets and
Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory and custody
fees);
(ix) Monitor the expense accruals and notify Fund management of any proposed
adjustments;
(x) Control all disbursements from each Portfolio and authorize such
disbursements upon Written Instruction;
(xi) Calculate capital gains and losses;
(xii) Determine each Portfolio's net income;
(xiii) Obtain security market quotes from independent pricing services
approved by the Fund, or if such quotes are unavailable, then obtain
such prices from the management of the Fund, and in either case
calculate the market value of each Portfolio's investment's;
(xiv) Transit or mail a copy of the daily portfolio valuation to each
Portfolio's investment advisor;
(xv) Compute the net asset value of each Portfolio;
(xvi) As appropriate, compute the yields, total return, expense ratios,
portfolio turnover rate, and, if required, portfolio average
dollar-weighted maturity; and
-11-
<PAGE> 12
(xvii) Prepare a monthly financial statement, which will include the following
items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Change in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
-12-
<PAGE> 1
Exhibit (9)(c)
SUB-ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of May, 1998, between SEI Fund Resources
("SEI"), a Delaware business trust, and having its principal place of business
at Oaks, PA 19456, and National City Bank ("Sub-Administrator"), a national
banking association having its main office at 1900 East Ninth Street, Cleveland,
Ohio 44114.
WHEREAS, SEI has entered into an Administration Agreement, dated May 1,
1998 (the "Administration Agreement"), with The Armada Funds ("the Trust"), a
Massachusetts business trust having its principal place of business at Oaks, PA
19456, concerning the provision of management and administrative services for
the investment portfolios identified on Schedule A hereto, as such Schedule
shall be amended from time to time (individually referred to herein as the
"Portfolio" and collectively as the "Portfolios"); and
WHEREAS, SEI desires to retain the Sub-Administrator to assist it in
performing administrative services with respect to each Portfolio and the
Sub-Administrator is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS SUB-ADMINISTRATOR. The Sub-Administrator will assist SEI
in providing administrative services with respect to each Portfolio as may be
reasonably requested by SEI from time to time. Such services may include, but
are in no way limited to, such clerical, bookkeeping, accounting, stenographic,
and administrative services which will enable SEI to more efficiently perform
its obligations under the Administration Agreement. Specific assignments may
include:
(i) With regard to the investment adviser to the Trust, and at the
direction of SEI, to:
a. advise with regard to various compliance requirements
including but not limited to the performance of
credit analysis as required by Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940
Act");
b. assist in the preparation of Trustees' compliance
reports;
c. assist in the resolution of other technical issues of
a non-compliance nature; and
d. serve as on-site liaison;
(ii) Gathering of information deemed necessary by SEI to support (a)
required state
<PAGE> 2
regulatory filings (including filings required to be made with tax,
blue sky and bank agencies) and (b) required federal regulatory
filings;
(iii) Preparation of statistical and research data;
(iv) Assistance in the preparation of the Trust's Annual and
Semi-Annual Reports to Shareholders; and
(v) Assistance in the gathering of data from the investment advisor to
the Trust for inclusion in SEI's periodic reports to the Trustees.
The Sub-Administrator will keep and maintain all books and records relating to
its services in accordance with Rule 31a-1 under the 1940 Act.
2. COMPENSATION; REIMBURSEMENT OF EXPENSES. SEI shall pay the
Sub-Administrator for the services to be provided by the Sub-Administrator under
this Agreement in accordance with, and in the manner set forth in herein under
Schedule A.
3. EFFECTIVE DATE. This Agreement shall become effective with respect
to a Portfolio as of the date first written above (or, if a particular Portfolio
is not in existence on that date, on the date specified in the amendment to
Schedule A to this Agreement relating to such Portfolio or, if no date is
specified, the date on which such amendment is executed) (the "Effective Date").
4. TERM. This Agreement shall become effective with respect to a
Portfolio on May 1, 1998, and shall remain in effect for 2 years, and thereafter
shall be renewed automatically for successive periods of two years unless
terminated by either party on not less than 90 days prior written notice;
provided, however, that after such termination for so long as the
Sub-Administrator, with the written consent of SEI, in fact continues to perform
any one or more of the services contemplated by this Agreement or any schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect, and further provided however, that this agreement shall
terminate in any event upon the termination of the Administration Agreement.
Either party to this Agreement may terminate such Agreement, without penalty,
prior to the expiration of the initial term set forth above by providing the
other party with written notice of such termination at least 60 days prior to
the date upon which such termination shall become effective. Compensation due
the Sub-Administrator and unpaid by SEI upon such termination shall be
immediately due and payable upon and notwithstanding such termination. The
Sub-Administrator shall be entitled to collect from SEI, in addition to the
compensation described under paragraph 2 hereof, the amount of all the
Sub-Administrator's cash disbursements for services in connection with the
Sub-Administrator's activities in effecting such termination, including without
limitation, the delivery to SEI, and/or their respective designees of the
Trust's property, records, instruments and documents, or any copies thereof.
Subsequent to such termination for a reasonable fee to be paid by SEI, the
Sub-Administrator will provide SEI and/or the Trust with reasonable access to
any
-2-
<PAGE> 3
documents or records remaining in its possession.
5. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION. The Sub-Administrator shall use its best efforts to insure the
accuracy of all services performed under this Agreement, but shall not be liable
to SEI or the Trust for any action taken or omitted by the Sub-Administrator in
the absence of bad faith, willful misfeasance, gross negligence or from reckless
disregard by it of its obligations and duties. SEI agrees to indemnify and hold
harmless the Sub-Administrator, its employees, agents, directors, officers and
nominees from and against any and all claims, demands, actions and suits,
whether groundless or otherwise, and from and against any and all judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character arising out of or in any way relating to the
Sub-Administrator's actions taken or nonactions with respect to the performance
of services under this Agreement with respect to a Portfolio or based, if
applicable, upon reasonable reliance on information, records, instructions or
requests with respect to such Portfolio given or made to the Sub-Administrator
by a duly authorized representative of SEI; provided that this indemnification
shall not apply to actions or omissions of the Sub-Administrator in cases of its
own bad faith, willful misfeasance, gross negligence or from reckless disregard
by it of its obligations and duties, and further provided that prior to
confessing any claim against it which may be the subject of this
indemnification, the Sub-Administrator shall give SEI written notice of and
reasonable opportunity to defend against said claim in its own name or in the
name of the Sub-Administrator.
6. RECORD RETENTION AND CONFIDENTIALITY. The Sub-Administrator shall
keep and maintain on behalf of the Trust all books and records which the Trust
and the Sub-Administrator are, or may be, required to keep and maintain in
connection with the services to be provided hereunder pursuant to any applicable
statutes, rules and regulations, including without limitation Rules 31a-1 and
31a-2 under the 1940 Act. The Sub-Administrator further agrees that all such
books and records shall be the property of the Trust and to make such books and
records available for inspection by the Trust, by SEI, or by the Securities and
Exchange Commission at reasonable times and otherwise to keep confidential all
books and records and other information relative to the Trust and its
shareholders; except when requested to divulge such information by
duly-constituted authorities or court process.
7. UNCONTROLLABLE EVENTS. The Sub-Administrator assumes no
responsibility hereunder, and shall not be liable, for any damage, loss of data,
delay or any other loss whatsoever caused by events beyond its reasonable
control.
8. RIGHTS OF OWNERSHIP. All computer programs and procedures developed
to perform the services to be provided by the Sub-Administrator under this
Agreement are the property of the Sub-Administrator. All records and other data
except such computer programs and procedures are the exclusive property of the
Trust and all such other records and data will be furnished to SEI and/or the
Trust in appropriate form as soon as practicable after termination of this
Agreement for any reason.
9. RETURN OF RECORDS. The Sub-Administrator may at its option at any
time, and
-3-
<PAGE> 4
shall promptly upon the demand of SEI and/or the Trust, turn over to SEI and/or
the Trust and cease to retain the Sub-Administrator's files, records and
documents created and maintained by the Sub-Administrator pursuant to this
Agreement which are no longer needed by the Sub-Administrator in the performance
of its services or for its legal protection. If not so turned over to SEI and/or
the Trust, such documents and records will be retained by the Sub-Administrator
for six years from the year of creation. At the end of such six-year period,
such records and documents will be turned over to SEI and/or the Trust unless
the Trust authorizes in writing the destruction of such records and documents.
10. REPRESENTATIONS OF SEI. SEI certifies to the Sub-Administrator that
this Agreement has been duly authorized by SEI and, when executed and delivered
by SEI, will constitute a legal, valid and binding obligation of SEI,
enforceable against SEI in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
11. REPRESENTATIONS OF THE SUB-ADMINISTRATOR. The Sub-Administrator
represents and warrants that: (1) the various procedures and systems which the
Sub-Administrator has implemented with regard to safeguarding from loss or
damage attributable to fire, theft, or any other cause of the records and other
data of the Trust and the Sub-Administrator's records, data, equipment
facilities and other property used in the performance of its obligations
hereunder are adequate and that it will make such changes therein from time to
time as are required for the secure performance of it obligations hereunder, and
(2) this Agreement has been duly authorized by the Sub-Administrator and, when
executed and delivered by the Sub-Administrator, will constitute a legal, valid
and binding obligation of the Sub-Administrator, enforceable against the
Sub-Administrator in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
12. YEAR 2000 COMPLIANT. The Sub-Administrator warrants that all
software code owned by or under the Sub-Administrator's control, used in the
performance of the Sub-Administrator's obligations under this contract, will be
Year 2000 compliant. For purposes of this paragraph, "Year 2000 Compliant" means
that the software will continue to operate beyond December 31, 1999 without
creating any logical or mathematical inconsistencies concerning any date after
December 31, 1999 and without decreasing the functionality of the system
applicable to dates prior to January 1, 2000 including, but not limited to,
making changes to [a] date and data century recognition; [b] calculations which
accommodate same- and multi- century formulas and date values; and [c]
input/output of date values which reflect century dates. All changes described
in this paragraph will be made at no additional cost to the Trust.
13. INSURANCE. The Sub-Administrator shall notify SEI should any of its
insurance coverage be cancelled or reduced. Such notification shall include the
date of change and the reasons therefor. The Sub-Administrator shall notify SEI
of any material claims against it with respect to services performed under this
Agreement, whether or not they may be covered by insurance, and shall notify SEI
from time to time as may be appropriate of the
-4-
<PAGE> 5
total outstanding claims made by the Sub-Administrator under its insurance
coverage.
14. NOTICES. Any notice provided hereunder shall be sufficiently given
when sent by registered or certified mail to SEI at the following address: One
Freedom Valley Drive, Oaks, PA, and to the Sub-Administrator at the following
address: National City Bank, Armada Funds Dept., 1900 East Ninth Street,
Cleveland, Ohio 44114, or at such other address as either party may from time to
time specify in writing to the other party pursuant to this Section.
15. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
16. ASSIGNMENT. This Agreement and the rights and duties hereunder
shall not be assignable with respect to a Portfolio by either of the parties
hereto except by the specific written consent of the other party and with the
specific written consent of the Trust.
17. GOVERNING LAW. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of The Commonwealth of
Massachusetts.
18. LIMITATION OF LIABILITY. A copy of the Trust's Declaration of Trust
is on file with the Secretary of State of the Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the
trustees and not individually and that the obligations of this instrument are
not binding upon any of the trustee, officers or shareholders of the Trust
individually, but binding any upon the assets and property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
SEI FUND RESOURCES
By:______________________
Title:____________________
NATIONAL CITY BANK
By:______________________
Title:____________________
-5-
<PAGE> 6
NATIONAL CITY BANK
Portfolios: This Agreement shall apply to all Portfolios of the Trust,
either now or in the future created. The following is a
listing of the current portfolios of the Trust (collectively,
the "Portfolios"): Small Cap Value Fund, Equity Growth Fund,
Equity Income Fund, Small Cap Growth Fund, International
Equity Fund, Core Equity Fund, Ohio Tax Exempt Fund,
Pennsylvania Municipal Fund, Pennsylvania Tax Exempt Money
Market Fund, Money Market Fund, Government Money Market Fund,
Treasury Money Market Fund, Total Return Advantage Fund,
Intermediate Bond Fund, Enhanced Income Fund, GNMA Fund, Bond
Fund, Ohio Municipal Money Market Fund, National Tax Exempt
Fund, Real Return Advantage Fund, Tax Managed Equity Fund and
Balanced Allocation Fund.
Fees: SEI Fund Resources shall pay compensation to the
Sub-Administrator pursuant to Section 2 of the
Sub-Administrator Agreement in accordance with the following
annual percentage rate.
Up to a maximum of .05% per year based on the average
aggregate net assets. The fee is calculated and paid monthly.
-6-
<PAGE> 1
Exhibit (10)
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
September 18, 1998
Armada Funds
Oaks, Pennsylvania 19456
RE: POST-EFFECTIVE AMENDMENT NO. 44 TO THE REGISTRATION
STATEMENT ON FORM N-1A (FILE NOS. 33-488 AND 811-4416)
------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Armada Funds, a Massachusetts business
trust (the "Trust"), in connection with the preparation and filing with the
Securities and Exchange Commission of Post-Effective Amendment No. 44 (the
"Amendment") to the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended.
The Trust is authorized to issue an unlimited number of shares of
beneficial interest (the "Shares"), without par value. The Board of Trustees of
the Trust has the power to designate one or more series ("Series") of Shares and
to classify or reclassify any unissued Shares with respect to such Series. The
Board of Trustees of the Trust also has the power to designate separate classes
("Classes") of Shares within the same Series. Currently, the Trust is offering
Shares of twenty four Series: the 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, Equity Growth Fund,
Intermediate Bond Fund, Ohio Tax Exempt Fund, National Tax Exempt Fund, Equity
Income Fund, Small Cap Value Fund, Enhanced Income Fund, Total Return Advantage
Fund, Bond Fund, GNMA Fund, Pennsylvania Muncipal Fund, International Equity
Fund, Equity Index Fund, Core Equity Fund, Small Cap Growth Fund, Real Return
Advantage Fund, Tax Managed Equity Fund and Balanced Allocation Fund. Currently,
the shares of each Series of the Trust may be offered in up to three separate
Classes: A Shares (formerly, Retail shares), B Shares and I Shares (formerly,
Institutional shares). The Board of Trustees has previously authorized the
issuance of Shares to the public.
<PAGE> 2
Armada Funds
September 18, 1998
Page 2
We have reviewed the Trust's Declaration of Trust, Code of Regulations,
resolutions of its Board of Trustees and such other legal and factual matters as
we have deemed appropriate. We have also relied upon an opinion of Ropes & Gray,
local Massachusetts counsel to the Trust, as to matters to which the laws of the
Commonwealth of Massachusetts are applicable. We assume that the Shares have
been or will be issued against payment therefor as described in the Trust's
applicable Prospectuses.
This opinion is based exclusively on Massachusetts law and the federal
law of the United States of America.
Based upon the foregoing, it is our opinion that the Shares have been
and will be validly issued, fully paid and non-assessable by the Trust.
We note that under Massachusetts law, shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable for
the obligations of such trust. However, the Declaration of Trust disclaims
shareholder liability for claims against the Trust. The Declaration of Trust
further provides that every note, bond, contract, instrument, certificate or
other undertaking made or issued by the Trust's trustees or officers shall
recite to the effect that the same was executed or made by or on behalf of the
Trust or by them as trustees or officers and that the obligations of such
instrument are not binding upon the Trust's shareholders individually but are
binding only upon the assets and property of the Trust or a particular Series
thereof. The Declaration of Trust provides for indemnification out of the assets
of the Series of which a shareholder owns or owned Shares, for any and all loss
or expense for which the shareholder shall be charged or held personally liable
solely by reason of the shareholder's being or having been such a shareholder.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which the relevant Series
itself would be unable to meet its obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Amendment to the Trust's Registration Statement.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
-2-
<PAGE> 1
Exhibit (11)(a)
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference
to our Firm under the caption "Counsel" in the Statements of Additional
Information that are included in Post-Effective Amendment No. 44 to the
Registration Statement on Form N-1A under the Investment Company Act of 1940, as
amended, of Armada Funds. This consent does not constitute a consent under
Section 7 of the Securities Act of 1933, and in consenting to the use of our
name and the references to our Firm under such caption we have not certified any
part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under Section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
----------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
September 18, 1998
<PAGE> 1
Exhibit (11)(b)
[Squire, Sanders & Dempsey Letterhead]
Armada Funds
4400 Computer Drive
Westborough, MA 01581
Re: Armada Funds (Ohio Tax Exempt Fund)
Post-Effective Amendment No. 44 -- Consent of Counsel
-----------------------------------------------------
We hereby consent to use of our name and to the reference to our Firm under
caption "Counsel" in the Statement of Additional Information included in the
Post-Effective Amendment No. 44 to the Registration statement (No. 33-488) on
Form N-1A under the Securities Act of 1933, as amended, of Armada Funds.
/s/ Squire, Sanders & Dempsey, L.P.P.
<PAGE> 1
Exhibit (11)(c)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and "Auditors" in the Statements of Additional
Information and to the incorporation by reference in Post-Effective Amendment
Number 44 to the Registration Statement (Form N-1A No. 33-488/811-4416) of
Armada Funds of our reports dated July 20, 1998, included in the May 31, 1998
Annual Report to Shareholders of the Armada Funds Tax Exempt Series the Armada
Funds Income Series and the Armada Funds Equity Series.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 14, 1998
<PAGE> 1
Exhibit (11)(d)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 44
to the Registration Statement of Armada Funds on Form N-1A (File No. 33-488) of
our report dated July 26, 1996, on our audit of the financial statements and
financial highlights of the Inventor Funds, Inc. comprising respectively,
Pennsylvania Municipal Fund and GNMA Fund (collectively the "Predecessor
Funds"), which report is included in the Annual Report to Shareholders for the
year ended April 30, 1996 and the period ended May 31, 1996. We also consent
to the reference to our Firm under the caption "Financial Highlights" in the
Prospectuses and "Auditors" in the Statements of Additional Information.
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, PA 19103
September 18, 1998
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<TABLE> <S> <C>
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<DISTRIBUTIONS-OF-GAINS> (875)
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<NUMBER-OF-SHARES-REDEEMED> (60)
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<NET-CHANGE-IN-ASSETS> 102292
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (958)
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<GROSS-EXPENSE> 1688
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 18.67
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<PER-SHARE-GAIN-APPREC> 4.99
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<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
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<TABLE> <S> <C>
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<OVERDISTRIBUTION-NII> (61)
<ACCUMULATED-NET-GAINS> 55477
<OVERDISTRIBUTION-GAINS> 0
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