<PAGE> 1
[ARROW GRAPHIC]
Armada
Funds
Money
Market
Series
PROSPECTUS
December 23, 1997
ARMADA MONEY MARKET FUND
ARMADA GOVERNMENT MONEY MARKET FUND
ARMADA TREASURY MONEY MARKET FUND
ARMADA TAX EXEMPT MONEY MARKET FUND
ARMADA PENNSYLVANIA TAX EXEMPT
MONEY MARKET FUND
[ARMADA FUNDS LOGO]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction.............................................................................. 2
Expense Table............................................................................. 3
Financial Highlights...................................................................... 5
Investment Objectives and Policies........................................................ 10
Investment Limitations.................................................................... 17
Yield and Performance Information......................................................... 18
Pricing of Shares......................................................................... 19
How to Purchase and Redeem Shares......................................................... 19
Distribution and Servicing Arrangements................................................... 26
Dividends and Distributions............................................................... 27
Taxes..................................................................................... 28
Management of The Trust................................................................... 29
Description of the Trust and Its Shares................................................... 30
Custodian and Transfer Agent.............................................................. 32
Expenses.................................................................................. 32
Miscellaneous............................................................................. 32
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY
BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and National Asset Management Corporation serve as investment
advisers to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
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> 3
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments, Inc.,
please call your Financial Consultant for information.
For current performance, fund information, account redemption
information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following five investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
MONEY MARKET FUND'S investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund invests in "money market" instruments such as bank certificates of deposit,
bankers' acceptances, and commercial paper (including variable and floating rate
notes) in addition to obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities and repurchase agreements relating to such
obligations.
GOVERNMENT MONEY MARKET FUND'S investment objective is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Fund invests in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements relating
to such obligations.
TREASURY MONEY MARKET FUND'S investment objective is to seek as high a level
of current income as is consistent with liquidity and stability of principal.
The Fund invests in U.S. Treasury bills and notes and other direct obligations
of the U.S. Treasury.
TAX EXEMPT MONEY MARKET FUND'S investment objective is to provide as high a
level of current interest income exempt from federal income tax as is consistent
with liquidity and stability of principal.
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND'S investment objective is to
provide current income exempt from regular federal income and Pennsylvania
personal income taxes, consistent with stability of principal. The Fund invests
primarily in high quality debt obligations issued by or on behalf of the
Commonwealth of Pennsylvania and its political subdivisions and financing
authorities.
All securities or instruments in which the Funds invest have remaining
maturities of 397 calendar days or less, except variable and floating rate
instruments and securities underlying certain repurchase agreements which may
bear longer maturities.
National City Bank ("National City") serves as investment adviser to the
Money Market, Government Money Market, Treasury Money Market, Tax Exempt Money
Market and Pennsylvania Tax Exempt Money Market Funds (the "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 BANK, ITS PARENT COMPANY OR
ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR
STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
December 23, 1997
<PAGE> 4
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 company under the 1940 Act.
Shares of each Fund have been classified into two separate
classes -- Retail shares and Institutional shares, with the exception of the
Money Market and Tax Exempt Money Market Funds, which have been classified into
three separate classes -- Retail shares, B shares and Institutional shares.
ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED FOR THE TAX EXEMPT MONEY
MARKET FUND, THEY MAY BE OFFERED IN THE FUTURE. Retail shares, B shares and
Institutional 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, Retail
shares are sold through selected broker-dealers and other financial
intermediaries to individual or institutional customers. Retail 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. B shares of the Money Market and Tax Exempt Money Market
Funds are available only to holders of another fund's B shares who wish to
exchange them for B shares of the Money Market and/or Tax Exempt Money Market
Fund.
2
<PAGE> 5
EXPENSE TABLE
<TABLE>
<CAPTION>
GOVERNMENT GOVERNMENT TREASURY TREASURY TAX EXEMPT
MONEY MONEY MONEY MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET MARKET MARKET MARKET
RETAIL B INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
SHARES(1) SHARES(1,2) SHARES SHARES(1) SHARES SHARES(1) SHARES SHARES(1)
------- -------- ------------- ---------- ------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Sales Charge Imposed on
Purchases................... None None None None None None None None
Sales Charge Imposed on
Reinvested Dividends........ None None None None None None None None
Deferred Sales Charge(3)...... None 5.00% None None None None None None
Exchange Fee.................. None None None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
daily net assets)
Management Fees (after fee
waivers)(4)................. .25% .25% .25% .25% .25% .25% .25% .15%
12b-1 Fees(4,5)............... .06% .75% .06% .06% .06% .06% .06% .06%
Other Expenses................ .22% .22% .07% .24% .09% .24% .09% .24%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)...... .53% 1.22% .38% .55% .40% .55% .40% .45%
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
PENNSYLVANIA PENNSYLVANIA
TAX EXEMPT TAX EXEMPT TAX EXEMPT TAX EXEMPT
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
B INSTITUTIONAL RETAIL INSTITUTIONAL
SHARES(1,2) SHARES SHARES(1) SHARES
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Sales Charge Imposed on
Purchases................... None None None None
Sales Charge Imposed on
Reinvested Dividends........ None None None None
Deferred Sales Charge(3)...... 5.00% None None None
Exchange Fee.................. None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
daily net assets)
Management Fees (after fee
waivers)(4)................. .15% .15% .15% .15%
12b-1 Fees(4,5)............... .75% .06% .06% .06%
Other Expenses................ .24% .09% .28% .13%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(4)...... 1.14% .30% .49% .34%
==== ==== ==== ====
</TABLE>
- ---------------
ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED FOR THE TAX EXEMPT MONEY
MARKET FUND, THEY MAY BE OFFERED IN THE FUTURE.
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to Retail shares in each of the Funds and B shares of the Money
Market and Tax Exempt Money Market Funds. 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 Retail shares or B shares
in consideration for the payment of up to .15% (on an annualized basis) of
the net asset value of such retail shares or B shares, respectively, of the
Money Market or Tax Exempt Money Market Funds. For further information
concerning these plans, see "Distribution and Servicing Arrangements."
(2) As of the date of this Prospectus, the Money Market and Tax Exempt Money
Market Funds' B share classes have not commenced operations, and therefore,
"Other Expenses" for such classes are estimates only.
(3) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 4.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. For more information, see "How to
Purchase and Redeem Shares Sales Charges Applicable to Purchase 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, the adviser will
voluntarily waive fees in the amount of .10% of the average daily net assets
of the Money Market and Government Money Market Funds, .05% of the average
daily net assets of the Treasury Money Market Fund, .20% of the average
daily net assets of the Tax Exempt Money Market Fund and .25% of the average
daily net assets of the Pennsylvania Tax Exempt Money Market Fund (the
adviser is entitled to receive an advisory fee, computed daily and payable
monthly, at the annual rate of .35% of the average daily net assets of each
of the Money Market, Government Money Market and Tax Exempt Money Market
Funds, .30% of the average daily net assets of the Treasury Money Market
Fund and .40% of the average daily net assets of the Pennsylvania Tax Exempt
Money Market Fund pursuant to its Advisory Agreement with the Trust).
Without such fee waivers, Total Fund Operating Expenses would be .63%, 1.32%
and .48% for the Retail, B and Institutional shares of the Money Market
Fund, respectively, .65% and .50% for the Retail and Institutional shares of
the Government Money Market Fund, respectively, .60% and .45% for the Retail
and Institutional Shares of the Treasury Money Market Fund, respectively,
.65%, 1.34% and .50% for the Retail, B and Institutional shares of the Tax
Exempt Money Market Fund, respectively, and .74% and .59% for the Retail and
Institutional shares of the Pennsylvania Tax Exempt Money Market Fund,
respectively. Additionally, if the maximum distribution fee permitted under
the 12b-1 Plan were imposed, Total Fund Operating Expenses would be .67%,
1.32% and .52%, .69% and .54%, .64% and .49%, .69%, 1.34% and .54%, and .78%
and .63% for the Retail, B and Institutional shares of the Money Market
Fund, Government Money Market Fund, Treasury Money Market Fund, Tax Exempt
Money Market Fund and Pennsylvania Tax Exempt Money Market Fund,
respectively.
(5) The Funds have in effect a 12b-1 Plan for the Retail and Institutional
classes of shares pursuant to which each Fund's Retail and Institutional
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 Money
Market and Tax Exempt Money Market Funds' B class of shares, pursuant to
which each class of B shares may bear fees in an amount of up to .75% of
average daily net assets. As a result of the payment of 12b-1 fees,
long-term shareholders may pay more than the economic equivalent of the
maximum sales charges permitted by the National Association of Securities
Dealers, Inc. ("NASD"). The NASD has adopted rules which generally limit the
aggregate payments under the Trust's 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> 6
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EXAMPLE
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Retail Shares............................. $ 5 $ 17 $ 30 $ 66
Money Market B Shares(1)............................... $ 62 $ 79 $ 87 $129(2)
Money Market Institutional Shares...................... $ 4 $ 12 $ 21 $ 48
Government Money Market Retail Shares.................. $ 6 $ 18 $ 31 $ 69
Government Money Market Institutional Shares........... $ 4 $ 13 $ 22 $ 51
Treasury Money Market Retail shares.................... $ 6 $ 18 $ 31 $ 69
Treasury Money Market Institutional Shares............. $ 4 $ 13 $ 22 $ 51
Tax Exempt Money Market Retail shares.................. $ 5 $ 14 $ 25 $ 57
Tax Exempt Money Market B Shares(1).................... $ 62 $ 76 $ 83 $119(2)
Tax Exempt Money Market Institutional Shares........... $ 3 $ 10 $ 17 $ 38
Pennsylvania Tax Exempt Money Market Retail Shares..... $ 5 $ 16 $ 27 $ 62
Pennsylvania Tax Exempt Money Market Institutional
Shares............................................... $ 3 $ 11 $ 19 $ 43
</TABLE>
- ---------------
(1 )Assumes deduction of maximum applicable contingent deferred sales charge.
(2 )Based on conversion of B shares to Retail shares after eight years.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Trust will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution and
Servicing Arrangements" in this Prospectus and the financial statements and
related notes incorporated by reference into the Statement of Additional
Information for the Money Market, Government Money Market, Treasury Money
Market, Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market 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.
4
<PAGE> 7
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
MONEY MARKET FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- ----------------------- -----------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- -------- ------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- ---------- -------- ---------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income.............. .05 .05 .05 .05 .05 .05 .03 .03
LESS DISTRIBUTIONS
Dividends from Net
Investment Income... (.05) (.05) (.05) (.05) (.05) (.05) (.03) (.03)
---------- -------- ---------- -------- ---------- -------- ---------- --------
Net Asset Value, End
of Period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ========== ======== ========== ========
TOTAL RETURN........... 5.19% 5.09% 5.45% 5.35% 5.11% 5.01% 2.91% 2.81%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (in 000s).... $ 1,943,021 $346,172 $ 1,344,414 $343,087 $ 1,083,243 $175,192 $ 743,377 $ 67,229
Ratio of Expenses to
Average Net Assets.. .37%(4) .47%(5) .37%(4) .47%(5) .37%(4) .47%(5) .43%(4) .53%(5)
Ratio of Net
Investment Income to
Average Net
Assets.............. 5.07%(4) 4.97%(5) 5.30%(4) 5.18%(5) 5.07%(4) 5.12%(5) 2.94%(4) 2.78%(3)
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------------------------------------------------------------------------------------
1993 1992 1991(1) 1990 1989 1988
----------------------- ----------------------- ----------------------- -------- -------- --------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL(1)
------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- ---------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income.............. .03 .03 .05 .04 .07 .01 .08 .08 .07
LESS DISTRIBUTIONS
Dividends from Net
Investment Income... (.03) (.03) (.05) (.04) (.07) (.01) (.08) (.08) (.07)
---------- -------- ---------- -------- ---------- -------- -------- -------- --------
Net Asset Value, End
of Period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ========== ======== ======== ======== ========
TOTAL RETURN........... 2.93% 2.82% 4.59% 4.50% 7.34% 5.64%(2) 8.69% 8.66% 6.87%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (in 000s).... $ 399,191 $ 57,710 $ 352,578 $ 28,497 $ 322,943 $ 22,658 $365,468 $387,631 $370,064
Ratio of Expenses to
Average Net Assets.. .43% .53% .43% .53% .42% .52%(2) .42% .44% .44%(3)
Ratio of Net
Investment Income to
Average Net
Assets.............. 2.89% 2.79% 4.51% 4.41% 7.52% 6.03%(2) 8.37% 8.35% 6.69%(3)
</TABLE>
- ---------------
(1) Retail class commenced operations on April 1, 1991.
(2) Annualized.
(3) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the year ended May 31, 1988 were .45% and 6.68%,
respectively.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .47% and 4.97%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
custodian for the Institutional class for the years ended May 31, 1996 and
1995 would have been .48% and 5.19% and .48% and 4.96%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Institutional class for the year ended May 31, 1994
would have been .45% and 2.92%, respectively.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .57% and 4.87%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .58% and 5.07% and .58% and 5.01%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Retail class for the year ended May 31, 1994 would
have been .55% and 2.76%, respectively.
5
<PAGE> 8
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
GOVERNMENT MONEY MARKET FUND
(Formerly, the Government Fund)
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- ----------------------- -----------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- -------- ------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- ---------- -------- ---------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income............ .05 .05 .05 .05 .05 .05 .03 .03
LESS DISTRIBUTIONS
Dividends from Net
Investment
Income............ (.05) (.05) (.05) (.05) (.05) (.05) (.03) (.03)
---------- -------- ---------- -------- ---------- -------- ---------- --------
Net Asset Value, End
of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ========== ======== ========== ========
TOTAL RETURN......... 5.15% 5.04% 5.41% 5.31% 4.97% 4.87% 2.91% 2.80%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (in 000s).. $ 811,662 $159,129 $ 741,894 $131,194 $ 618,058 $ 19,174 $ 768,337 $ 6,945
Ratio of Expenses to
Average Net
Assets............ .36%(3) .47%(4) .36%(3) .46%(4) .39%(3) .51%(4) .42%(3) .52%(4)
Ratio of Net
Investment Income
to Average Net
Assets............ 5.03%(3) 4.93%(4) 5.27%(3) 5.13%(4) 4.83%(3) 5.01%(4) 2.92%(3) 2.75%(4)
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------------------- ----------------------- ----------------------- -------- -------- --------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL(1)
------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- ---------- -------- ---------- -------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income............ .03 .03 .05 .04 .07 .01 .08 .08 .06
LESS DISTRIBUTIONS
Dividends from Net
Investment
Income............ (.03) (.03) (.05) (.04) (.07) (.01) (.08) (.08) (.06)
---------- -------- ---------- -------- ---------- -------- -------- -------- --------
Net Asset Value, End
of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ========== ======== ========== ======== ======== ======== ========
TOTAL RETURN......... 2.91% 2.81% 4.65% 4.55% 7.17% 5.63%(2) 8.53% 8.38% 6.59%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (in 000s).. $ 272,809 $ 11,050 $ 148,389 $ 2,234 $ 136,376 $ 3,671 $110,67 $ 74,684 $ 62,963
Ratio of Expenses to
Average Net
Assets............ .45%(3) .55%(4) .45%(3) .55%(4) .45%(3) .55%(2,4) .45%(3) .45%(3) .41%(3)
Ratio of Net
Investment Income
to Average Net
Assets............ 2.84%(3) 2.74%(4) 4.49%(3) 4.39%(4) 6.81%(3) 5.47%(2,4) 8.16%(3) 8.20%(3) 6.42%(3)
</TABLE>
- ---------------
(1) Retail class commenced operations on April 1, 1991.
(2) Annualized.
(3) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .46% and 4.93%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
custodian for the Institutional class for the years ended May 31, 1996 and
1995 would have been .47% and 5.16% and .50% and 4.72%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Institutional class for the years ended May 31,
1994, 1993, 1992, 1991, 1990, 1989, and 1988 would have been .44% and 2.90%,
.46% and 2.82%, .46% and 4.48%, .47% and 6.79%, .46% and 8.15%, .48% and
8.17% and .55% and 6.28%, respectively.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .57% and 4.83%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .57% and 5.02% and .63% and 4.90%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Retail class for the years ended May 31, 1994, 1993
and 1992 would have been .54% and 2.73%, .56% and 2.72%, .56% and 4.38%, and
.56% and 5.46%, respectively.
6
<PAGE> 9
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
TREASURY MONEY MARKET FUND
(Formerly, the Treasury Fund)
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE PERIOD ENDED
MAY 31, 1997 MAY 31, 1996 MAY 31, 1995
------------------------ ------------------------ -----------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(3) RETAIL(4)
------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................... .05 .05 .05 .05 .05 .02
LESS DISTRIBUTIONS
Dividends from Net Investment Income.... (.05) (.05) (.05) (.05) (.05) (.02)
-------- ------ -------- ------ -------- ------
Net Asset Value, End of Period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ====== ======== ====== ======== ======
TOTAL RETURN.............................. 4.89% 4.79% 5.07% 4.97% 4.86%(5) 5.41%(5)
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's).... $ 276,327 $5,680 $ 312,255 $4,355 $ 142,877 $ 366
Ratio of Expenses to Average Net
Assets................................ .37%(1) .47%(2) .41%(1) .52%(2) .43%(1,5) .056%(2,5)
Ratio of Net Investment Income to
Average Net Assets.................... 4.79%(1) 4.68%(2) 4.88%(1) 4.77%(2) 4.78%(1,5) 5.35%(2,5)
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .42% and 4.74%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
custodian for the Institutional class for the year ended May 31, 1996 and
for the period ended May 31, 1995 would have been .47% and 4.82%, and .49%
and 4.72%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .52% and 4.63%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
custodian for the Retail class for the year ended May 31, 1996 and for the
period ended May 31, 1995 would have been .58% and 4.71%, and .63% and
5.28%, respectively.
(3) Institutional class commenced operations on June 16, 1994.
(4) Retail class commenced operations on December 22, 1994.
(5) Annualized.
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
TAX EXEMPT MONEY MARKET FUND
(Formerly, the Tax Exempt Fund)
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .03 .03 .03 .03 .03 .03
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.03) (.03) (.03) (.03) (.03) (.03)
-------- ------- -------- ------- -------- -------
Net Asset Value, End of Period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======== ======= ======== =======
TOTAL RETURN................................. 3.23% 3.12% 3.40% 3.29% 3.14% 3.04%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $370,679 $71,917 $261,808 $85,928 $172,643 $51,916
Ratio of Expenses to Average Net Assets..... .29%(4) .39%(5) .30%(4) .40%(5) .35%(4) .46%(5)
Ratio of Net Investment Income to Average Net
Assets...................................... 3.18%(4) 3.08%(5) 3.33%(4) 3.23%(5) 3.15%(4) 3.17%(5)
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1994 1994 1993 1993 1992 1992
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .02 .02 .02 .02 .04 .03
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.02) (.02) (.02) (.02) (.04) (.03)
-------- ------- -------- ------- -------- -------
Net Asset Value, End of Period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======== ======= ======== =======
TOTAL RETURN................................. 2.06% 1.96% 2.18% 2.07% 3.57% 3.47%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $139,015 $17,819 $ 58,928 $17,791 $ 60,079 $10,745
Ratio of Expenses to Average Net Assets..... .33%(4) .43%(5) .36%(4) .46%(5) .28%(4) .38 %(5)
Ratio of Net Investment Income to Average Net
Assets...................................... 2.05%(4) 1.94%(5) 2.16%(4) 2.06%(5) 3.45%(4) 3.35 %(5)
<CAPTION>
YEAR
YEAR ENDED ENDED YEAR YEAR
MAY 31, MAY,31 ENDED ENDED
1991 1991 MAY 31, MAY 31,
INSTITUTIONAL RETAIL(2) 1990 1989(1)
------------- ------ ------- -------
Net Asset Value, Beginning of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .05 .01 .06 .05
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.05) (.01) (.06) (.05)
------- ------ ------- -------
Net Asset Value, End of Period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ======= =======
TOTAL RETURN................................. 5.29% 4.24%(3) 5.96% 6.03%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $63,559 $4,922 $73,265 $87,770
Ratio of Expenses to Average Net Assets..... .20%(4) .28%(3,5) .21%(4) .31%(3,4)
Ratio of Net Investment Income to Average Net
Assets...................................... 5.14%(4) 4.15%(3,5) 5.82%(4) 5.93%(3,4)
</TABLE>
- ------------------
(1) The Tax Exempt Money Market Fund commenced operations on July 20, 1988.
(2) Retail class commenced operations on April 1, 1991.
(3) Annualized.
(4) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .49% and 2.98%, respectively. The operating expense
ratio and net investment income ratio before fee waivers by the advisers and
Custodian for the Institutional class for the years ended May 31, 1996 and
1995 would have been .51% and 3.12%, and .56% and 2.94%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Institutional class for the years ended May 31,
1994, 1993, 1992, 1991, 1990, and the period ended May 31, 1989 would have
been .53% and 1.85%, .56% and 1.96%, .54% and 3.20%, .55% and 4.79%, .27%
and 5.76%, and .51% and 5.73%, respectively.
(5) The operating expense ratio and net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been .59% and 2.88%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the advisers and
Custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .61% and 3.02%, and .67% and 2.96%, respectively. The
operating expense ratio and net investment income ratio before fee waivers
by the advisers for the Retail class for the years ended May 31, 1994, 1993,
1992, and for the period ended May 31, 1991 would have been .63% and 1.74%,
.66% and 1.86%, .64% and 3.10%, and .63% and 3.80%, respectively.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND
(Formerly, the Pennsylvania Tax Exempt Fund)
The Fund commenced operations on August 8, 1994 as a separate investment
portfolio (the "Predecessor Fund") of Inventor Funds, Inc., which was organized
as a Maryland corporation. On September 9, 1996, the Fund was reorganized as a
new portfolio of the Trust. Prior to the reorganization, the Predecessor Fund
offered and sold Retail shares that were similar to the Fund's Retail shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Fund's Retail shares (the
series that is similar to the Retail shares of the Pennsylvania Tax Exempt Money
Market 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 Fund was changed to
coincide with the Trust's May 31 fiscal year. A one-month financial report
representing the Predecessor Fund's operations from May 1, 1996 through May 31,
1996 is being presented. The information was derived from financial statements
audited by Coopers & Lybrand L.L.P., independent accountants for the Predecessor
Fund, whose reports thereon are contained in Inventor Funds' Annual Reports to
Shareholders for the fiscal year ended April 30, 1996 and the period ended May
31, 1996. Such financial highlights should be read in conjunction with the
financial statements and notes thereto contained in Inventor Funds' Annual
Reports to Shareholders and incorporated by reference into the Statement of
Additional Information relating to the Pennsylvania Tax Exempt Money Market
Fund.
The information presented below relating to the fiscal year ended May 31,
1997 has been derived from financial statements audited by Ernst & Young, LLP,
independent auditors for the Pennsylvania Tax Exempt Money Market Fund, whose
report is incorporated by reference in the Statement of Additional Information.
It should be read in conjunction with the financial statements and related notes
which are incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, MAY 31, PERIOD ENDED YEAR ENDED PERIOD ENDED
1997(5) 1997(5) MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(6) 1996(5) 1996(5) 1995(5)
------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1,00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .03 .02 .00 .03 .02
LESS DISTRIBUTIONS
Distributions from Net Investment Income.... (.03) (.02) .00 (.03) (.02)
------- ------- ------- ------- -------
Net Asset Value, End of Period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN.................................. 3.26% 3.18% .28%(4) 3.36% 2.32%(4)
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)........ $60,876 $ 20,830 $ 68,472 $ 70,422 $ 56,668
Ratio of Expenses to Average Net Assets..... .41%(1) .46%(2,3) .55%(1,3) .55%(1) .55%(1,3)
Ratio of Net Investment Income to Average
Net Assets................................ 3.20%(1) 3.27%(2,3) 3.24%(1,3) 3.29%(1) 3.21%(1,3)
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and other affiliates for the Institutional class for
the periods ending May 31, 1997, May 31, 1996, April 30, 1996, and April 30,
1995 would have been .74% and 2.87%, .97% and 2.82%, .96% and 2.88%, and
1.04% and 2.72%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and other affiliates for the Retail class for the
period ended May 31, 1997 would have been .71% and 3.02%, respectively.
(3) Annualized.
(4) Not annualized.
(5) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(6) Retail class commenced operations on September 11, 1996.
9
<PAGE> 12
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.
Each Fund will only purchase "eligible securities" that present minimal
credit risks as determined by the adviser pursuant to guidelines established by
the Trust's Board of Trustees. Eligible securities generally include (i) U.S.
government obligations, (ii) securities that are rated (at the time of purchase)
by nationally recognized statistical rating organizations ("Rating Agencies") in
the two highest rating categories for such securities, and (iii) certain
securities that are not so rated but are of comparable quality to rated eligible
securities as determined by the adviser. See "Investment Objectives and
Policies" in the Statement of Additional Information for a more complete
description of eligible securities. A description of ratings is also contained
in the Statement of Additional Information.
Each Fund's assets have remaining maturities of 397 calendar days or less
(except for certain variable and floating rate instruments and securities
underlying certain repurchase agreements) as defined by the SEC and each Fund's
dollar-weighted average portfolio maturity may not exceed 90 days.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Fund seeks to achieve its objective by investing in "money
market" instruments such as certificates of deposit and other obligations issued
by domestic and foreign banks, and commercial paper (including variable and
floating rate instruments) rated high quality by an unaffiliated Rating Agency,
or determined to be of comparable quality by the adviser. The Money Market Fund
may also invest in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and repurchase agreements issued by financial
institutions such as banks and broker-dealers. See "Common Investment Policies
of the Funds -- Money Market Instruments."
GOVERNMENT MONEY MARKET FUND
The investment objective of the Government Money Market Fund is to seek as
high a level of current income as is consistent with liquidity and stability of
principal. The Fund seeks to achieve its objective by investing in obligations
issued or guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities, and repurchase agreements issued
by financial institutions such as banks and broker-dealers. See "Common
Investment Policies of the Funds -- Government Obligations." The Fund is
currently rated by Standard & Poor's Ratings Services ("Standard & Poor's").
TREASURY MONEY MARKET FUND
The investment objective of the Treasury Money Market Fund is to seek as
high a level of current income as is consistent with liquidity and stability of
principal. The Fund seeks to achieve its objective by investing exclusively in
direct obligations of the U.S. Treasury, such as Treasury bills and notes. See
"Common Investment Policies of the Funds." The Fund is currently rated by
Standard & Poor's.
TAX EXEMPT MONEY MARKET FUND
The investment objective of the Tax Exempt Money Market Fund is to provide
as high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. The Fund seeks to achieve
its objective by investing substantially all of its assets in a diversified fund
of obligations issued by or on behalf of states, territories and possessions of
the United States, the District of Columbia and their political subdivisions,
agencies, instrumentalities and authorities, the interest on which, in the
opinion of counsel issued on
10
<PAGE> 13
the date of the issuance thereof, is exempt from regular federal income tax
("Municipal Securities").
Under normal market conditions, at least 80% of the value of the Tax Exempt
Money Market Fund's total assets will be invested in Municipal Securities. This
policy is fundamental and may not be changed without the affirmative vote of the
holders of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous"). The Fund may hold uninvested cash reserves pending investment,
during temporary defensive periods or if, in the opinion of the adviser,
desirable tax-exempt obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods; however, uninvested cash reserves will not earn income. See
"Common Investment Policies of the Funds."
Although the Tax Exempt Money Market Fund may invest 25% or more of its net
assets in (i) Municipal Securities whose issuers are in the same state, (ii)
Municipal Securities the interest on which is paid solely from revenues of
similar projects, and (iii) private activity bonds (described below), it does
not presently intend to do so unless in the opinion of its adviser the
investment is warranted. To the extent that the Fund's assets are invested in
Municipal Securities that are payable from the revenues of similar projects or
are issued by issuers located in the same state or are invested in private
activity bonds, the Fund will be subject to the peculiar risks presented by the
laws and economic conditions relating to such states, projects and bonds to a
greater extent than it would be if its assets were not so invested.
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND
The investment objective of the Pennsylvania Tax Exempt Money Market Fund
is to provide current income exempt from regular federal income tax and
Pennsylvania personal income taxes, consistent with stability of principal. 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, and
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 ("Pennsylvania Municipal Securities"). As a matter of
fundamental policy, the Fund invests its assets so that at least 80% of its
annual interest income is not only exempt from regular federal income tax and
Pennsylvania personal income taxes, but is not considered a preference item for
purposes of the federal alternative minimum tax.
The Pennsylvania Tax Exempt Money Market Fund is concentrated in securities
issued by the Commonwealth of Pennsylvania or entities within the Commonwealth
of Pennsylvania, and therefore investment in the Fund may be riskier than an
investment in other types of money market funds.
The Fund may invest in variable and floating rate obligations, may purchase
securities on a "when-issued" basis and reserves the right to engage in
transactions involving stand-by commitments and repurchase agreements. The Fund
may invest up to 100% of its assets in other Municipal Securities and in taxable
securities, during temporary defensive periods when, in the opinion of the
adviser, Pennsylvania Municipal Securities of sufficient quality are
unavailable. There is no percentage limitation on the amount of assets which may
be held uninvested during temporary defensive periods; however, uninvested cash
reserves will not earn income. See "Other Investment Policies."
SPECIAL RISK CONSIDERATIONS -- PENNSYLVANIA TAX EXEMPT MONEY MARKET 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 in-
11
<PAGE> 14
dustries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the ability of the respective obligors to make payments of interest and
principal due on the obligations held by the Fund, and the market values of
these obligations. Rising unemployment, a relatively high proportion of persons
65 and older in the Commonwealth of Pennsylvania and court ordered increases in
healthcare reimbursement rates place increased pressures on the tax resources of
the Commonwealth and its municipalities. The Commonwealth has sold a substantial
amount of bonds over the past several years, but the debt burden remains
moderate. The recession in the early 1990s affected Pennsylvania's economic
base, with income and job growth at levels below national averages. Employment
growth has shifted to the trade and service sectors, with losses in more
high-paid manufacturing positions. A new governor took office in January 1995,
but the Commonwealth has continued to show fiscal restraint.
COMMON INVESTMENT POLICIES OF THE FUNDS
Illiquid Securities
The Funds will not knowingly invest more than 10% of the value of their
respective net assets in securities that are illiquid. Each Fund may purchase
securities which are not registered under the Securities Act of 1933, as amended
(the "1933 Act") but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
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. The ability to sell to qualified institutional
buyers under Rule 144A is a recent development, and it is not possible to
predict how this market will develop.
Risk Factors Associated with Derivative Instruments
The Funds are managed with emphasis on safety and high credit quality. This
requires that liquidity risk and market risk or interest rate risk, as well as
credit risk, be held to minimal levels. The 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 on behalf of the Funds.
The following types of derivative instruments ARE NOT permitted investments
for the Funds:
- - leveraged or deleveraged floaters (whose interest rate reset provisions are
based on a formula that magnifies the effect of changes in interest rates);
- - range floaters (which do not pay interest if market interest rates move
outside of a specified range);
- - dual index floaters (whose interest rate reset provisions are tied to more
than one index so that a change in the relationship between these indices may
result in the value of the instrument falling below face value);
- - inverse floaters (which reset in the opposite direction of their index); and
- - any other structured instruments having cash flow characteristics that can
create potential market volatility similar to the instruments listed above.
Additionally, the Funds may not invest in instruments indexed to longer
than one-year rates, or in instruments whose interest rate reset provisions are
tied to an index that materially lags short-term interest rates, such as "COFI
floaters."
At the present time, the only derivative investments that have been
determined to be suitable for investment by the Funds are:
12
<PAGE> 15
- securities based on short-term, fixed-rate contracts; and
- floating-rate or variable-rate securities whose interest rates reset
based on changes in standard money market rate indices such as U.S.
government Treasury bills, London Interbank Offered Rate, published
commercial paper rates, or federal funds rates.
The risk to the Funds due to the use of derivatives will be limited to the
principal invested in such instruments. The 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.
Repurchase and Reverse Repurchase Agreements
The Money Market, Government Money Market and Pennsylvania Tax Exempt Money
Market Funds may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). These Funds may enter into repurchase agreements only
with financial institutions such as banks and broker-dealers which are deemed to
be creditworthy by the adviser, pursuant to guidelines approved by the Trust's
Board of Trustees. None of the Funds may enter into repurchase agreements with
the adviser, Distributor, or any of their affiliates. Although the securities
subject to repurchase agreements may bear maturities exceeding 397 days, the
Funds presently intend to enter only into repurchase agreements which terminate
within seven days after notice by the Funds. If a Fund were to enter into
repurchase agreements which provide for a notice period greater than seven days
in the future, the Fund would do so only if such investment, together with other
illiquid securities, did not exceed 10% of the Fund's net assets.
The seller under a repurchase agreement will be required to maintain the
value of the securities which a Fund holds subject to the agreement at not less
than the repurchase price, marked to market daily, by providing additional
securities or other collateral to the Fund if necessary. If the seller defaulted
on its repurchase obligation, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. Further, it is uncertain
whether the Trust would be entitled, as against a claim by such seller or its
receiver or trustee in bankruptcy, to retain the underlying securities.
The Money Market and Government Money Market Funds may also borrow funds
for temporary purposes by entering into reverse repurchase agreements. Pursuant
to such agreements the Funds will sell portfolio securities to financial
institutions such as banks and broker-dealers and agree to repurchase them at a
particular date and price. Reverse repurchase agreements involve the risk that
the market value of the securities sold by a Fund may decline below the price of
the securities it is obligated to repurchase.
Lending Portfolio Securities
In order to generate additional income, the Money Market, Government Money
Market and Treasury Money Market Funds may, from time to time, lend their
portfolio securities to broker-dealers, banks or other institutional borrowers.
A Fund must receive 100% collateral in the form of cash or U.S. government
securities. This collateral must be valued daily by the 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 the ad-
13
<PAGE> 16
viser has determined are creditworthy under guidelines established by the
Trust's Board of Trustees.
Variable and Floating Rate Obligations
The Money Market, Government Money Market, Tax Exempt Money Market and
Pennsylvania Tax Exempt Money Market Funds may purchase variable and floating
rate demand obligations (including variable amount master demand notes) which
are unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. A Fund, however, may
invest in such obligations which have a stated maturity in excess of 397 days
only if the Fund may demand repayment at intervals in accordance with guidelines
established by the Board of Trustees. Because variable and floating rate
obligations are direct lending arrangements between the purchasing Fund and the
issuer, they are not normally traded. Although there may be no active secondary
market in such instruments, a Fund may demand payment of principal and accrued
interest at a time specified in the instrument or may resell them to a third
party. Such obligations may be backed by bank letters of credit or guarantees
issued by banks, other financial institutions or the U.S. government, its
agencies or instrumentalities. The quality of any letter of credit or guarantee
will be rated high quality or, if unrated, will be determined to be of
comparable quality by the adviser. Variable and floating rate obligations
entered into by the Government Money Market Fund, such as Student Loan Marketing
Association variable rate obligations, may have a more active secondary market
because they are issued or guaranteed by the U.S. government or its agencies or
instrumentalities. In the event an issuer of a variable or floating rate
obligation defaulted on its payment obligation, a Fund might be unable to
dispose of the instrument because of the absence of a secondary market and
could, for this or other reasons, suffer a loss to the extent of the default.
Money Market Instruments
The Money Market Fund may invest in "money market" instruments, including
bank obligations and commercial paper. The Pennsylvania Tax Exempt Money Market
Fund may also invest, from time to time, a portion of its assets for temporary
defensive or other purposes in such taxable money market instruments.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit, and non-negotiable time deposits issued for a definite period of time
and earning a specified return by a U.S. bank which is a member of the Federal
Reserve System. Bank obligations also include U.S. dollar denominated bankers'
acceptances, certificates of deposit and time deposits issued by foreign
branches of U.S. banks or foreign banks. Investment in bank obligations is
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase. The Money Market Fund may also make
interest bearing savings deposits in commercial and savings banks not in excess
of 5% of its total assets. Investment in non-negotiable time deposits is limited
to no more than 5% of the Fund's total assets at the time of purchase.
Investments in commercial paper and other short-term promissory notes
issued by corporations (including variable and floating rate instruments) must
be rated at the time of purchase "A-2" or better by Standard & Poor's Ratings
Group ("S&P"), "Prime-2" or better by Moody's Investors Service, Inc.
("Moody's"), "F-2" or better by Fitch Investors Service, L.P. ("Fitch"), "Duff
2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or "A2" or better by
IBCA, Inc. or, if not rated, determined by the 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 Money Market Fund
may invest in Canadian Commercial Paper ("CCP"), which is U.S. dollar
denominated commercial paper issued by a Canadian corporation or a Canadian
counterpart of a U.S. corporation, and in Europaper, which is U.S. dollar
denominated commercial paper of a foreign issuer. The Money Market Fund may
acquire zero coupon obligations, which have greater price volatility than coupon
obligations and which will not result in the payment of interest until maturity.
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<PAGE> 17
Investments in the obligations of foreign branches of U.S. banks, foreign
banks and other foreign issuers may subject the Money Market Fund to additional
investment risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and foreign banks may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting, and recordkeeping standards than those applicable to domestic
branches of U.S. banks. The Money Market Fund will invest in the obligations of
foreign banks or foreign branches of U.S. banks only when the adviser believes
that the credit risk with respect to the instrument is minimal.
The Money Market Fund may also make limited investments in guaranteed
investment contracts ("GICs") issued by U.S. insurance companies. The Fund will
purchase a GIC only when the 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 certain nationally recognized statistical rating organizations.
Government Obligations
The Treasury Money Market Fund may only invest in direct obligations of the
U.S. Treasury. The other Funds may invest in these obligations and other
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the
U.S. government, such as the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. Some of these
investments may be variable or floating rate instruments. See "Variable and
Floating Rate Obligations."
Types of Municipal Securities
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue or "special obligation" securities
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a specific excise tax or
other specific revenue source such as the user of the facility being financed.
"Private activity" bonds are revenue securities normally issued by industrial
development authorities to finance privately-owned facilities and are backed by
private entities. Any private activity bonds (including industrial development
bonds) held by a Fund are not payable from revenues of the issuer. Consequently,
the credit quality of private activity bonds is usually directly related to the
credit standing of the corporate or other user of the facility involved. Private
activity bonds are included in the term "Municipal Securities" only if the
interest paid thereon is exempt from regular federal income tax and not treated
as a specific tax preference item under the federal alternative minimum tax. See
"Taxes."
The Tax Exempt Money Market Fund and Pennsylvania Tax Exempt Money Market
Fund may also invest in "moral obligation" bonds, which are ordinarily issued by
special purpose public authorities. If the issuer of moral obligation bonds is
unable to meet its debt service obligations from current revenues, it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
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<PAGE> 18
In addition, the Tax Exempt Money Market Fund and Pennsylvania Tax Exempt
Money Market Fund may purchase short-term Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, and other forms of short-term
loans. Such notes are issued with a short-term maturity in anticipation of the
receipt of tax or other funds, the proceeds of bonds or other revenues.
Municipal Securities purchased by the Tax Exempt Money Market and Pennsylvania
Tax Exempt Money Market Funds may include variable and floating rate instruments
(described above). The Tax Exempt Money Market and Pennsylvania Tax Exempt Money
Market Funds may also acquire zero coupon obligations, which have greater price
volatility than coupon obligations and which will not result in the payment of
interest until maturity.
Certain municipal obligations may be accompanied by a guaranty, letter of
credit or insurance. The Tax Exempt Money Market and Pennsylvania Tax Exempt
Money Market Funds typically evaluate the credit quality and ratings of such
"credit enhanced" securities based upon the financial condition and ratings of
the party providing the credit enhancement (the "credit enhancer"), in addition
to the issuer. The bankruptcy, receivership or default of the credit enhancer
will adversely affect the quality and marketability of the underlying security.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation certificate
in any of the above. Municipal lease obligations typically are not backed by the
municipality's credit, and their interest may become taxable if the lease is
assigned. Under guidelines established by the Board of Trustees, the credit
quality of municipal leases will be determined on an ongoing basis, including an
assessment of the likelihood that a lease will be canceled.
Participation interests are interests in Municipal Securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participations, beneficial interests in a trust, partnership interests or any
other form of indirect ownership that allows the Pennsylvania Tax Exempt Money
Market Fund to treat the income from the investment as exempt from federal
income tax. This Fund invests in these participation interests in order to
obtain credit enhancement or demand features that would not be available through
direct ownership of the underlying Municipal Securities.
A participation interest may be in the form of "certificates of
participation" which represents undivided proportional interests in lease
payments by a governmental or nonprofit entity. The municipal leases underlying
the certificates of participation in which the Tax Exempt Money Market and
Pennsylvania Tax Exempt Money Market Funds invest will be subject to the same
quality rating standards applicable to Municipal Securities.
Stand-by Commitments
The Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds
may acquire stand-by commitments with respect to Municipal Securities. Under a
stand-by commitment, a dealer agrees to purchase at the Fund's option specified
Municipal Securities at a specified price. Stand-by commitments must be of high
quality as determined by any Rating Agency, or, if not rated, must be deemed to
be of comparable quality. The Funds acquire stand-by commitments solely to
facilitate fund liquidity and do not intend to exercise their rights thereunder
for trading purposes.
Tax-Exempt Derivatives and Other Municipal Securities
The Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds
may invest in tax-exempt derivative securities relating to Municipal Securities,
including tender option bonds, participations, beneficial interests in trusts
and partnership interests. (See generally "Risk Factors Associated with
Derivative Instruments" above.)
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
16
<PAGE> 19
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the Tax
Exempt Money Market Fund and Pennsylvania Tax Exempt Money Market Fund from
tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Funds and their investment adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Securities, the creation of any tax-exempt
derivative securities, or the bases for such opinions.
When-Issued Securities
The Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds
may purchase securities on a "when-issued" or delayed delivery basis. These
transactions are arrangements in which a Fund purchases securities with payment
and delivery scheduled for a future time. These transactions involve the risk
that the price or yield obtained may be less favorable than the price or yield
available when delivery takes place. The Funds expect that commitments to
purchase when-issued securities will not exceed 25% of the value of their
respective total assets under normal market conditions. The Funds do not intend
to purchase when-issued securities for speculative purposes but only for the
purpose of acquiring portfolio securities. In when-issued and delayed delivery
transactions, each Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
attractive. For further information, see "Risk Factors, Investment Objectives,
and Policies" in the Statement of Additional Information.
Securities of Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high-quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Funds may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne indirectly by its shareholders.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the holders of
a majority of the Fund's outstanding shares (as defined under "Miscellaneous").
(Other fundamental investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objectives and Policies.")
No Fund may:
1. 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, or domestic bank obligations and repurchase agreements
secured by such obligations;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if
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<PAGE> 20
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. 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.
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.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of 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 "effective yield" and the Tax Exempt Money
Market and Pennsylvania Tax Exempt Money Market Funds' "tax-equivalent yield"
for each class of shares. The "yield" quoted in advertisements refers to the
income generated by an investment in a class of shares of a Fund over a
seven-day period identified in the advertisement. This income is then
"annualized." The amount of income so generated by the investment during that
week is assumed to be generated each week over a 52-week period and is shown as
a percentage of the investment. The "effective yield" for a class of shares is
calculated similarly but, when annualized, the income earned by an investment in
the class is assumed to be reinvested. An effective yield for a class of shares
will be slightly higher than its yield because of the compounding effect of the
assumed reinvestment. The Tax Exempt Money Market and Pennsylvania Tax Exempt
Money Market Funds' "tax-equivalent yield" for a class of shares, which shows
the level of taxable yield necessary to produce an after-tax equivalent to the
tax-free yield for that class, may also be quoted from time to time. It is
calculated by increasing the yield (calculated as above) for a class of shares
by the amount necessary to reflect the payment of federal income tax and state
income tax at stated tax rates. The tax-equivalent yield for a class of shares
will always be higher than its yield.
Investors may compare the performance of each class of shares of a Fund to
the performance of other mutual funds with comparable investment objectives, to
various mutual fund or market indices, and to data or rankings prepared by
independent services such as Lipper Analytical Services, Inc. or other financial
or industry publications that monitor the performance of mutual funds.
Comparisons may also be made to indices or data published in IBC's Money Fund
Report, a nationally recognized money market fund reporting service, Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, U.S.A. Today, CDA/Weisenberger, The American Banker, Morningstar,
Incorporated and other publications of a local, regional or financial industry
nature.
The performance of each class of shares of the Funds is based on historical
earnings and will fluctuate and is not intended to indicate future performance.
Performance data may not provide a basis for comparison with bank deposits and
other investments which provide a fixed yield for a stated period of time. Yield
will be affected by fund quality, composition, maturity, market conditions and
the
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<PAGE> 21
level of operating expenses for the class of shares. From time to time, the
adviser may voluntarily waive its investment advisory fees in order to reduce
such operating expenses, which will have the effect of enhancing the yield. Any
fees charged by financial institutions (as described in "How to Purchase and
Redeem Shares") are not included in the computation of performance data but will
reduce a shareholder's net return on an investment in a Fund.
Shareholders should note that the yields, effective yields and
tax-equivalent yields of Retail shares and B shares will be lower than those of
the Institutional shares of a Fund because of the different distribution and/or
servicing fees. The yields, effective yields and tax-equivalent yields of the B
shares will be lower than those of the Retail 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 copies
from the Trust free of charge by calling 1-800-622-FUND(3863).
PRICING OF SHARES
For processing purchase and redemption orders, the net asset values per
share of the Money Market and Government Money Market Funds are calculated on
each business day first at 3:00 p.m. Eastern time, then as of the close of
trading of the New York Stock Exchange (the "Exchange"). The net asset values
per share of the Treasury Money Market, Tax Exempt Money Market and Pennsylvania
Tax Exempt Money Market Funds are calculated on each business day first at 1:00
p.m. Eastern time then as of the close of trading of the Exchange, generally
4:00 p.m. Eastern time. Net asset value per share is determined on each business
day, except those holidays which the Exchange, or banks and trust companies
which are affiliated with National City Corporation (the "Banks"), observe
(currently New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans'
Day, Thanksgiving Day And Christmas Day) ("Business Day").
Net asset value per share is calculated by dividing the value of all
securities and other assets allocable to a particular class, less liabilities
charged to that class, by the number of outstanding shares of the respective
class.
The assets in all of the Funds are valued based upon the amortized cost
method, which has been determined by the Trust's Board of Trustees to represent
the fair value of the Funds' investments. Amortized cost valuation involves
valuing an instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium. Although the Trust seeks to
maintain the net asset value per share of the Funds at $1.00, there can be no
assurance that the net asset value will not vary.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at Oaks, Pennsylvania 19456.
The distributor, adviser and/or their affiliates, at their own expense, may
provide compensation to dealers in connection with 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 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
19
<PAGE> 22
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 RETAIL SHARES AND B SHARES
Retail shares of the Funds are sold without 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." B shares of the Money Market Fund and Tax Exempt Money Market Fund are
not available to investors for initial purchases, but only for exchange from B
shares of other investment funds offered by the Trust.
Retail shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts. B shares of the Money Market
and Tax Exempt Money Market Funds are available only to the holders of B shares
of another fund who wish to exchange those B shares for B shares of the Money
Market and/or Tax Exempt Money Market Fund. Financial institutions may charge
certain account fees depending on the type of account the Investor has
established with the institution. (For information on such fees, the Investor
should review his agreement with the institution or contact it directly.) In
addition, certain financial institutions may enter into shareholder servicing
agreements with the Trust whereby a financial institution would perform various
administrative support services for its customers who are the beneficial owners
of Retail shares and would receive fees from the Funds for such services of up
to .15% (on an annualized basis). See "Distribution and Servicing Arrangements."
For direct purchases of shares, Investors should call 1-800-622-FUND(3863) or to
speak with a NatCity Investments professional, call 1-888-4NATCTY (462-8289).
With respect to the Money Market, Government Money Market and Treasury
Money Market Funds, shares may be purchased in conjunction with an individual
retirement account ("IRA") and rollover IRAs where a designated custodian acts
as custodian. Investors should contact NatCity Investments, Inc., the
Distributor, or their financial institutions for information as to applications
and annual fees. Investors should also consult their tax advisers to determine
whether the benefits of an IRA are available or appropriate.
The minimum investment for the initial purchase of Retail shares in a Fund
is $500. All subsequent investments for Retail shares and IRAs are subject to a
minimum investment of $250. 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 Retail
shares by a sweep program described below or through the Planned Investment
Program ("PIP"), a monthly savings program described below, are not subject to
the minimum initial and subsequent investment requirements or any minimum
account balance requirements described in "Other Redemption Information" below.
Purchases for an IRA through the PIP will be considered as contributions for the
year in which the purchases are made.
Customers of Banks may purchase Retail shares through procedures
established by the Banks
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<PAGE> 23
or their financial institutions in connection with the requirements of their
customer accounts. These procedures may include instructions under which a Bank
or financial institution may automatically "sweep" a customer account and invest
amounts agreed to by the Bank or financial institution and the customer in
additional Retail shares of a Fund. Customers may obtain information relating to
the requirements of such accounts from their Banks or financial institutions.
Under a PIP, Investors may add to their investment in the Retail shares of
a Fund, in a consistent manner each month, with a minimum amount of $50. Funds
may be automatically withdrawn from a shareholder's checking or savings account
available through an investor's financial institution and invested in additional
shares at the net asset value per share next determined after an order is
received by the Trust. An Investor may apply for participation in a monthly
program by completing an application obtained through a financial institution,
such as banks, brokers, or dealers selling Retail shares of the Funds, or by
calling 1-800-622-FUND(3863). The program may be modified or terminated by an
Investor on 30 days written notice or by the Trust at any time.
All shareholders of record will receive confirmations of share purchases
and redemptions. Financial institutions will be responsible for transmitting
purchase and redemption orders to the Trust's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"), on a timely basis.
The Trust reserves the right to reject any purchase order.
SALES CHARGES APPLICABLE TO PURCHASES OF B SHARES
B shares of the Money Market and Tax Exempt Money Market Funds are sold at
their net asset value next determined after an order to exchange B shares of
another Fund is received in good form by the Trust's Distributor. Although
Investors pay no front-end sales charge on exchanges into 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 six years of purchase of the B shares of the
original Fund.
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 from the
original Fund 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 of
the B shares of the original Fund 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....................... 4.0%
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%
More than five, but less
than six.................. 1.0%
After six years........... None
</TABLE>
When an Investor redeems his 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.
Exemptions From Contingent Deferred Sales Charge
The following types of redemptions qualify for an exemption from the
contingent deferred sales charge:
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<PAGE> 24
(a) exchanges described under "Exchange Privilege Applicable to Retail
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 RETAIL SHARES AND B 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
Retail 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 Retail shares takes place at net asset value, as a result of which
an Investor receives dollar-for-dollar the same value of Retail shares as he 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 Retail 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 Retail shares of the Fund on the
same date.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to Banks, National Asset Management
Corporation ("NAM") customers that are large institutions, and investment
advisers and financial planners affiliated with National City ("RIAs") who
charge an advisory, consulting or other fee for their services and buy shares
for their own accounts or the accounts of their clients ("Customers"). Depending
on the terms governing the particular account, the Banks, NAM or RIAs may impose
account charges such as account maintenance fees, compensating balance
requirements or other charges based upon account transactions, assets or income
which will have the effect of reducing the net return on a shareholder's
investment in a Fund. There is no minimum investment.
Customers may purchase Institutional shares through procedures established
by the Banks, NAM or RIAs in connection with the requirements of their Customer
accounts. These procedures may include instructions under which a Bank, NAM or
RIAs may automatically "sweep" a Customer's account not less frequently than
weekly and invest amounts in excess of a minimum balance agreed to by the Bank,
NAM or RIA and the Customer in additional Institutional shares of a Fund.
Customers should obtain information relating to the requirements of such
accounts from their Banks, NAM or RIAs.
It is the responsibility of the Banks, NAM and RIAs to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
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on a timely basis, in accordance with the procedures stated above. Institutional
shares will be held of record by the Banks, NAM or RIAs. Confirmations of share
purchases and redemptions will be sent to the Banks, NAM and RIAs. Beneficial
ownership of Institutional shares will be recorded by the Banks, NAM or RIAs or
the Transfer Agent and reflected in the account statements provided by them to
their Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Money Market and Government Money Market
Funds received by the Transfer Agent by 3:00 pm Eastern time are processed that
day. Similarly, purchase orders for shares of the Treasury Money Market, Tax
Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds received by
the Transfer Agent by 1:00 pm Eastern time are also processed that day. Purchase
orders received after the above listed times are processed the following
business day.
Purchase orders are processed at the net asset value per share next
determined after an order is received by the Transfer Agent.
Purchases will be effected only when Federal funds or other funds are
immediately available to the Trust's custodian to make the purchase on the day
the Transfer Agent receives the purchase order. Orders for which funds have not
been received by the Transfer Agent by the prescribed deadline on a given day
will not be accepted and notice thereof will be given promptly to the Bank or
financial institution. In accordance with this policy, purchase orders which are
accompanied by a check will be executed on the second Business Day following
receipt of the order at the previous day's net asset value per share.
REDEMPTION OF RETAIL SHARES 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 financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks, NAM and RIAs. It is the responsibility of the Banks, NAM and RIAs to
transmit redemption orders to the Transfer Agent and credit their Customers'
accounts with the redemption proceeds on a timely basis. Redemption orders are
effected at the net asset value per share next determined after receipt of the
order by the Transfer Agent. No charge for wiring redemption payments is imposed
by the Trust, although Banks, NAM and RIAs may charge their Customers' accounts
for services. Information relating to such services and charges, if any, is
available from the Banks, NAM and RIAs.
If a Customer has agreed with a particular Bank, NAM or RIAs to maintain a
minimum balance in his account at the Bank, NAM or RIAs and the balance in such
account falls below that minimum, the Customer may be obliged to redeem all or
part of his Institutional shares to the extent necessary to maintain the
required minimum balance. Customers who have instructed that automatic purchases
and redemptions be made for their accounts receive monthly confirmations of
share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to the Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421.
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Redemption requests must be signed by each shareholder, including each joint
owner on redemption requests for joint accounts, in the exact manner as the Fund
account is registered, and must state the number of shares or the amount to be
redeemed and identify the shareholder account number and tax identification
number. For a redemption amount of $10,000 or more, each signature on the
written request must be guaranteed by a commercial bank or trust company which
is a member of the Federal Reserve System or FDIC, a member firm of a national
securities exchange or a savings and loan association. A signature guaranteed by
a savings bank or notarized by a notary public is not acceptable. For a
redemption amount less than $10,000, no signature guarantee is needed. The Trust
may require additional supporting documents for redemptions made by
corporations, fiduciaries, executors, administrators, trustees, guardians and
institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares 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. Additional information regarding this service
may be obtained from an investor's financial institution or the Transfer Agent
at 1-800-622-FUND(3863). 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.
CHECKWRITING APPLICABLE TO RETAIL SHARES
Checkwriting is available from certain institutions with respect to Retail
shares of the Funds. No charge for the use of the checkwriting privilege is
currently imposed by the Trust, although a charge may be imposed in the future.
With this service, a shareholder may write a check in an amount of $250 or more.
To obtain checks, a shareholder must complete the signature card that
accompanies the account application. To establish this checkwriting service
after opening an account in one or more of the Funds, the shareholder must
contact the Trust by calling 1-800-622-FUND(3863) or by sending a written
request to the Armada Funds, P.O. Box 8421, Boston, Massachusetts 02266-8421 to
obtain an application. A signature guarantee may be required. A shareholder will
receive daily dividends declared on the shares to be redeemed up to the day that
a check is presented to the Custodian for payment. Upon 30 days written notice
to shareholders, the checkwriting privilege may be modified or
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terminated. An investor cannot close an account in a Fund by writing a check.
OTHER REDEMPTION INFORMATION
Payment for redemption orders received by the Transfer Agent before 3:00 pm
Eastern time for the Money Market and Government Money Market Funds and received
before 1:00 pm Eastern time for the Treasury Money Market, Tax Exempt Money
Market and Pennsylvania Tax Exempt Money Market Funds will be wired the same day
to the Bank or financial institution placing the order. Payment for redemption
orders received after such times will normally be wired the next business day.
The Trust reserves the right to wire redemption proceeds within seven days after
receiving the redemption orders if, in the judgement of the adviser, an earlier
payment could adversely affect the Trust.
Redemption orders are processed at the net asset value per share next
determined after receipt of the order by the Transfer Agent.
WHEN REDEEMING SHARES IN A FUND, SHAREHOLDERS SHOULD INDICATE WHETHER THEY
ARE REDEEMING RETAIL SHARES OR B SHARES. In the event a redeeming shareholder
owns both Retail shares and B shares in a Fund, the Retail 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 investment should purchase shares by Federal funds, bank wire, or by
certified or cashier's check. Financial institutions normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and Federal funds.
The Trust may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of the
Trust's responsibilities under the 1940 Act. See "Net Asset Value" in the
Statement of Additional Information.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES AND B SHARES
The Trust offers an exchange program whereby Investors who own Retail
shares of the Funds (each a "no load Fund") may exchange those Retail shares for
Retail shares of an investment fund offered by the Trust which is sold with a
sales charge (each a "load Fund") subject to payment of the applicable sales
charge. (However, shareholders exchanging Retail shares of a no load Fund which
were received in a previous exchange transaction involving Retail shares of a
load Fund will not be required to pay an additional sales charge upon the
reinvestment of the equivalent amount into the Retail shares of a load Fund.)
Shareholders who have exchanged their B shares of another Fund for B shares
of the Money Market Fund or Tax Exempt Money Market Fund (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.
Shareholders may also exchange Retail shares of a no load Fund for Retail
shares of another no load Fund at the net asset value per share without payment
of a sales charge.
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No exchange fee is imposed by the Trust. Shareholders contemplating an
exchange should carefully review the prospectus of the Fund into which the
exchange is being considered. An Armada Funds prospectus may be obtained from
NatCity Investments, Inc., an Investor's financial institution or by calling
1-800-622-FUND(3863).
Any Retail 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 Retail 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 before 3:00 pm Eastern time for the Money Market and Government
Money Market Funds and before 1:00 pm Eastern time for the Treasury Money
Market, Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds
will be processed as of the close of business on the day of receipt. Requests
received by the Transfer Agent after the above listed times will be processed on
the next business day. The Trust reserves the right to reject any exchange
request. During periods of unusual economic or market changes, telephone
exchanges may be difficult to implement. In such event, an Investor should mail
the exchange request to his financial institution, and an Investor who directly
purchased shares from the Trust should mail the exchange request to the Transfer
Agent. The exchange privilege may be modified or terminated at any time upon 60
days' notice to shareholders.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified Funds over a specified period of time, and
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this prospectus. Because purchases of
Retail shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent indicating an intent to purchase
Retail shares in connection with the systematic exchange program. An Investor
may also arrange to purchase B shares through the systematic exchange program.
Upon exchange into another Fund, such shares will convert to B shares of that
Fund, and, while the Investor will not pay a front-end sales load for such
purchase, the shares will bear the regular expenses borne by B shares of such
Fund. A shareholder may apply for participation in this program through his
financial institution or by calling 1-800-622-FUND(3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement, as amended and Rule 12b-1
under the 1940 Act, the Trust adopted a Service and Distribution Plan relating
to the Institutional and Retail classes of shares ("Institutional and Retail
Plan") and a separate B Shares Distribution and Servicing Plan relating to the B
classes of shares ("B Shares Plan"). Under the Institutional and Retail Plan,
the Trust pays the following compensation to the Distributor for services
provided and expenses assumed in providing the Trust advertising, marketing,
prospectus printing and other distribution services:
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(i) an annual base fee of $1,250,000, plus (ii) incentive fees related to asset
growth. Such compensation is payable monthly and accrued daily among the
Institutional and Retail classes of the Trust's investment funds with respect to
which the Distributor is distributing shares. In the case of each such fund,
such compensation shall not exceed .10% per annum of the average aggregate net
assets of its Institutional and Retail classes. 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 Institutional and Retail Plan. Such compensation is payable
monthly and accrued daily by each fund's B shares only.
Under the Shareholder Services Plan relating to each Fund's Retail 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 Retail or B shares in consideration
for the payment of up to .15% (on an annualized basis) of the average daily net
asset value of such shares. Persons entitled to receive compensation for
servicing Retail or B shares may receive different compensation with respect to
those shares than with respect to Institutional shares in the same Fund.
Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Funds on
behalf of customers, providing information periodically to customers showing
their position in Retail or B shares, and providing sub-transfer agent services
or the information necessary for sub-transfer agent services with respect to
Retail 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 Retail or B shares should read
this Prospectus in light of the terms and fees governing their accounts with
financial institutions.
DIVIDENDS AND DISTRIBUTIONS
On each day that the net asset values per share of the Funds are
determined, each Fund declares a dividend from net investment income as of the
close of business on the day of declaration. Net investment income for the Money
Market, Government Money Market and Treasury Money Market Funds consists of (a)
interest accrued and discount earned (including both original issue and market
discount) on the Fund's assets, (b) less amortization of market premium on such
assets, and the accrued expenses of the Fund. Net investment income of the Tax
Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds consists of
interest accrued, original issue discount earned, less amortization of any
market premium and accrued expenses. Fund shares begin earning dividends on the
day the purchase order is executed and continue earning dividends through and
including the day before the redemption order for the shares is executed.
Dividends are paid monthly by check, or by wire transfer if requested in
writing by the shareholder to his Bank or financial institution, within five
Business Days after the end of each calendar month or within five Business Days
after a shareholder's complete redemption of his shares in a Fund.
Shareholders of the Funds may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class of any Armada Funds
at the net asset value of such shares on the payment date. Shareholders must
make such election, or any revocation thereof, in writing to their Banks or
financial institutions. The election will become effective with respect to
dividends paid after its receipt.
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TAXES
IN GENERAL
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves each Fund of liability for federal income tax to the
extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Since all of each Fund's net investment income is expected to be
derived from earned interest, it is anticipated that no part of any distribution
will be eligible for the dividends received deduction for corporations.
The Money Market, Government Money Market and Treasury Money Market Funds
intend to distribute substantially all of their respective investment company
taxable income and net tax-exempt interest income each year. Such dividends will
be taxable as ordinary income to each Fund's shareholders who are not currently
exempt from federal income taxes, whether such income is received in cash or
reinvested in additional shares. (Federal income taxes for distributions to an
IRA or to a qualified retirement plan are deferred under the Code.)
The Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market Funds
intend to distribute substantially all of their respective net tax-exempt income
(such distributions are known as "exempt-interest dividends") and investment
company taxable income (if any) each taxable year. Exempt-interest dividends may
be treated by shareholders as items of interest excludable from their gross
income under Section 103(a) of the Code unless under the circumstances
applicable to the particular shareholder the exclusion would be disallowed. See
the Statement of Additional Information under "Additional Information Concerning
Taxes." To the extent, if any, dividends paid to each Fund's shareholders are
derived from taxable income or from net long-term capital gains, such dividends
will not be exempt from federal income tax and may also be subject to state and
local taxes. The Funds do not intend to earn any investment company taxable
income or net long-term capital gains.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
If the Tax Exempt Money Market and Pennsylvania Tax Exempt Money Market
Funds should hold certain private activity bonds issued after August 7, 1986,
shareholders must include, as an item of tax preference, the portion of
dividends paid by the Tax Exempt Money Market Fund that is attributable to
interest on such bonds in their federal alternative minimum taxable income for
purposes of determining liability (if any) for the alternative minimum tax
applicable to individuals and corporations. Corporate shareholders must also
take all exempt- interest dividends into account in determining certain
adjustments for federal alternative minimum tax purposes. Shareholders receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
PENNSYLVANIA TAXES
Under current Pennsylvania law, shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Pennsylvania Tax
Exempt Money Market Fund attributable to interest income from obligations of the
Commonwealth of Pennsylvania or its political subdivisions, the
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United States, its territories or certain of its agencies and instrumentalities
("Exempt Securities"). However, Pennsylvania Personal Income Tax will apply to
distributions from the Pennsylvania Tax Exempt Money Market Fund attributable to
gain realized on the disposition of any investment, including Exempt Securities,
or to interest income from investments other than Exempt Securities.
Shareholders also will be subject to the Pennsylvania Personal Income Tax in the
unlikely event that they realize any gain on the disposition of shares in the
Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of shares in the Fund
that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended to
the extent that the Fund is comprised of Exempt Securities.
MISCELLANEOUS
Shareholders of the Funds will be advised at least annually as to the
federal income tax and, in the case of the Pennsylvania Tax Exempt Money Market
Fund, Pennsylvania income tax consequences, of distributions made to them each
year. Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes, other than Pennsylvania taxes, which may
differ from the tax consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Funds should consult their tax advisers with specific reference to their own
tax situation.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISER
National City serves as investment adviser to the Funds. The adviser is a
wholly owned subsidiary of National City Corporation. The adviser provides trust
and banking services to individuals, corporations, and institutions both
nationally and internationally, including investment management, estate and
trust administration, financial planning, corporate trust and agency, and
personal and corporate banking. The adviser is a member bank of the Federal
Reserve System and the Federal Deposit Insurance Corporation.
On September 30, 1997, the Trust Department of National City had
approximately $11.1 billion in assets under management, and had approximately
$23.0 billion in total trust assets. National City 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 each Fund's investment policies, the adviser has agreed to
manage the Funds, make decisions with respect to and place orders for all
purchases and sales of the Funds' securities, and maintain the
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<PAGE> 32
Trust's records relating to such purchases and sales. For the services provided
and expenses assumed pursuant to the Advisory Agreement, the adviser is entitled
to receive an advisory fee, computed daily and payable monthly, at the annual
rate of .35% of the average net assets of the Money Market Fund, .35% of the
average net assets of the Government Money Market Fund, .30% of the average net
assets of the Treasury Money Market Fund, .35% of the average net assets of the
Tax Exempt Money Market Fund, and .40% of the average net assets of the
Pennsylvania Tax Exempt Money Market Fund. The adviser may from time to time
waive all or a portion of the advisory fee payable by one or more of the Funds.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
the Funds' net asset values per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive an administration fee,
accrued daily and paid monthly, computed on a combined basis for the Tax Exempt
Money Market and Pennsylvania Tax Exempt Money Market Funds and on a combined
basis for all taxable money market funds at an annual rate of .05% of the first
$300,000,000 of aggregate net assets of the Funds, .0325% of the next
$300,000,000, .03% of the next $400,000,000, .025% of the next $500,000,000,
.02% of the next $1 billion, and .015% of aggregate net assets in excess of $2.5
billion. PFPC is also entitled to be reimbursed for its out-of-pocket expenses
incurred on behalf of the Trust.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 57 separate classes or
series of shares of beneficial interest ("shares"). Twelve of these classes or
series, which represent interests in the Money Market Fund (Class A, Class
A-Special Series 1 and Class A-Special Series 2), Government 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) and Pennsylvania Tax Exempt
Money Market Fund (Class Q and Class Q-Special Series 1), are described in this
Prospectus. Class A, Class B, Class C, Class D and Class Q shares constitute the
Institutional class or series of shares; and Class A-Special Series 1, Class
B-Special Series 1, Class C-Special Series 1, Class D-Special Series 1 and Class
Q-Special Series 1 shares constitute the Retail class or series of shares, and
Class A-Special Series 2 and Class D-Special Series 2 constitute the B class or
series of shares. The other Funds of the Trust are:
Equity Growth Fund
(Class H, Class H-Special Series 1 and Class H-Special Series 2)
Intermediate Bond Fund
(Class I, Class I-Special Series 1 and Class I-Special Series 2)
Ohio Tax Exempt Fund
(Class K, Class K-Special Series 1 and Class K-Special Series 2)
National Tax Exempt Fund
(Class L and Class L-Special Series 1)
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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)
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 )
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such class or series as are declared in the discretion
of the Trust's Board of Trustees. The Trust's Declaration of Trust authorizes
the Board of Trustees to classify or reclassify any unissued shares into any
number of additional classes of shares and to classify or reclassify any class
of shares into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests of
the holders of a particular class or series of shares. Under the Institutional
and Retail Plan and B Shares Plan, only the holders of Retail/Institutional or B
shares in an investment fund are 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 being or having been a shareholder and not because of his acts or
omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the
31
<PAGE> 34
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 December 9, 1997, nine bank subsidiaries of National City Corporation
held beneficially or of record approximately 93.81%, 99.24%, 99.59% and 99.99%
of the outstanding Institutional shares of the Money Market, Government Money
Market, Treasury Money Market and Tax Exempt Money Market Funds, respectively,
and two bank subsidiaries of National City Corporation held of record
approximately 100.0% of the outstanding Institutional shares of the Pennsylvania
Tax Exempt Money Market Fund. National City does not have any economic interest
in such shares which are held solely for the benefit of its customers, but may
be deemed to be a controlling person of the Funds within the meaning of the 1940
Act by reason of its record ownership of such shares. The names of beneficial
owners and record owners who are controlling shareholders under the 1940 Act may
be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to
P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust
for these services are described in the Statement of Additional Information.
EXPENSES
Except as noted below, the Funds' 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 relating 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 (if any) 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, as National City Bank serves the Trust as both the
custodian and 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.
32
<PAGE> 35
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).
33
<PAGE> 36
LOGO NOTES
<PAGE> 37
LOGO NOTES
<PAGE> 38
LOGO NOTES
<PAGE> 39
LOGO ARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, 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:
Acromed Corporation
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishing's 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:
Meridia Health System
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 40
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
[ARMADA FUNDS LOGO]
Oaks, Pennsylvania, 19456
ARMADA FUNDS
INVESTMENT ADVISER
AFFILIATE OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44144
<PAGE> 41
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 23, 1997
MONEY MARKET FUND
GOVERNMENT MONEY MARKET FUND
TREASURY MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated December 23, 1997 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at 1-800-622-FUND
(3863), Oaks, Pennsylvania 19456.
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION...................................... 1
INVESTMENT OBJECTIVES AND POLICIES....................................... 1
NET ASSET VALUE.......................................................... 14
DIVIDENDS................................................................ 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 15
DESCRIPTION OF SHARES.................................................... 16
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 18
TRUSTEES AND OFFICERS.................................................... 22
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS......................... 27
SHAREHOLDER SERVICES PLANS............................................... 34
PORTFOLIO TRANSACTIONS................................................... 34
AUDITORS................................................................. 36
COUNSEL.................................................................. 37
STANDARDIZED YIELD QUOTATIONS............................................ 37
MISCELLANEOUS............................................................ 39
FINANCIAL STATEMENTS..................................................... 44
APPENDIX A............................................................... A-1
</TABLE>
-i-
<PAGE> 43
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Money Market Fund, Government Money Market Fund (the "Government Fund"),
Treasury Money Market Fund (the "Treasury Fund"), Tax Exempt Money Market Fund
(the "Tax Exempt Fund") and Pennsylvania Tax Exempt Money Market Fund (the
"Pennsylvania Tax Exempt Fund"). The information contained in this Statement of
Additional Information expands upon matters discussed in the Prospectus. No
investment in shares of a Fund should be made without first reading the
Prospectus.
The Pennsylvania Tax Exempt Fund commenced operations on
August 8, 1994 as a separate investment portfolio (the "Predecessor Fund") of
Inventor Funds, Inc, which was organized as a Maryland corporation. On September
9, 1996, the Predecessor Fund was reorganized as a new portfolio of the Trust.
Prior to the reorganization, the Predecessor Fund offered and sold shares of
stock that were similar to the Trust's Retail Shares of beneficial interest.
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the adviser's investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Standardized Yield Quotations" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for municipal bonds, short term notes and other
securities which may be held by the Funds.
ELIGIBLE SECURITIES
- -------------------
The Funds may purchase "eligible securities" that present
minimal credit risks as determined by the adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities generally
include: (1) securities that are rated by two or more Rating Agencies (or the
only Rating Agency which has issued a rating) in one of the two highest rating
categories for short term debt securities; (2) securities that have no short
term rating, if the issuer has other outstanding short term obligations that are
comparable in priority and security as determined by the adviser ("Comparable
Obligations") and that have been rated in accordance with (1) above; (3)
securities that have no short term
-1-
<PAGE> 44
rating, but are determined to be of comparable quality to a security satisfying
(1) or (2) above, and the issuer does not have Comparable Obligations rated by
a Rating Agency; and (4) securities with credit supports that meet specified
rating criteria similar to the foregoing and other criteria in accordance with
applicable Securities and Exchange Commission ("SEC") regulations. Securities
issued by a money market fund and securities issued by the U.S. Government may
constitute eligible securities if permitted under applicable SEC regulations
and Trust procedures. The Board of Trustees will approve or ratify any
purchases by the Money Market, Government, Treasury, Tax Exempt and
Pennsylvania Tax Exempt Funds of securities that are rated by only one Rating
Agency or that qualify under (3) above as long as required by applicable
regulations or Trust procedures.
VARIABLE AND FLOATING RATE INSTRUMENTS
- --------------------------------------
The Funds may purchase variable rate and floating rate
obligations as described in the Prospectus. The adviser will consider the
earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such notes and will continuously monitor their financial status to
meet payment on demand. In determining average weighted portfolio maturity, a
variable or floating rate instrument issued or guaranteed by the U.S. government
or an agency or instrumentality thereof will be deemed to have a maturity equal
to the period remaining until the obligation's next interest rate adjustment.
Other variable and floating rate obligations will be deemed to have a maturity
equal to the longer or shorter of the periods remaining to the next interest
rate adjustment or the demand notice period in accordance with applicable
regulations or Trust procedures.
Variable and floating rate obligations held by a Fund may have
maturities of more than 397 days, provided: (a) (i) the Fund is entitled to
payment of principal and accrued interest upon not more than 30 days' notice or
at specified intervals not exceeding one year (upon not more than 30 days'
notice) and (ii) the rate of interest on such instrument is adjusted
automatically at periodic intervals which normally will not exceed 31 days, but
may extend up to one year, or (b) if the obligation is an asset-backed security,
and if permitted under Trust procedures and applicable regulations, the security
has a feature permitting the holder unconditionally to receive principal and
interest within 13 months of making demand.
GUARANTEED INVESTMENT CONTRACTS
- -------------------------------
As stated in the Prospectus, the Money Market Fund may invest
in GICs issued by insurance companies. Pursuant to such contracts, the Fund
makes cash contributions to a deposit fund of
-2-
<PAGE> 45
the insurance company's general account. The insurance company then credits to
the Fund on a monthly basis guaranteed interest which is based on an index. The
GICs provide that this guaranteed interest will not be less than a certain
minimum rate. The insurance company may assess periodic charges against a GIC
for expense and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. The Fund will only purchase a GIC when the
adviser has determined, under guidelines established by the Board of Trustees,
that the GIC presents minimal credit risks to the Fund and is of comparable
quality to instruments that are rated high quality by Rating Agencies. The
Fund's investments in GICs will not exceed 10% of the Fund's net assets. In
addition, because the Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, the GIC is considered an
illiquid investment, and, together with other instruments in the Fund which are
not readily marketable, will not exceed 10% of the Fund's net assets. The term
of a GIC will be one year or less. In determining average weighted portfolio
maturity, a GIC will be deemed to have a maturity equal to the period of time
remaining until the next readjustment of the guaranteed interest rate.
BANK OBLIGATIONS AND COMMERCIAL PAPER
- -------------------------------------
The Pennsylvania Tax Exempt and Money Market Funds may invest
in bank obligations. Bank obligations include bankers' acceptances generally
having a maturity of six months or less and negotiable certificates of deposit.
Bank obligations also include U.S. dollar denominated bankers' acceptances and
certificates of deposit. Investment in bank obligations is limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase. For purposes of the Money Market Fund's
investment policy with respect to bank obligations, the assets of a bank or
savings institution will be deemed to include the assets of its domestic and
foreign branches.
Investments by the Pennsylvania Tax Exempt Fund include
commercial paper and other short term promissory notes issued by corporations,
municipalities and other entities (including variable and floating rate
instruments).
REPURCHASE AGREEMENTS; REVERSE REPURCHASE AGREEMENTS;
- -----------------------------------------------------
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Funds purchase
securities from financial institutions such as banks and broker-dealers which
the 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
-3-
<PAGE> 46
the price paid by the Fund plus interest negotiated on the basis of current
short term rates, which may be more or less than the rate on the underlying
portfolio securities. The seller under a repurchase agreement will be required
to maintain the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, the Fund holding such
obligation would suffer a loss to the extent that the proceeds from a sale of
the underlying portfolio securities were less than the repurchase price under
the agreement, or to the extent that the disposition of such securities by the
Fund were delayed pending court action. Although there is no controlling legal
precedent confirming that a Fund would be entitled, as against a claim by such
seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody of a Fund's securities subject to
repurchase agreements and under federal laws, a court of competent jurisdiction
would rule in favor of the Trust if presented with the question. Securities
subject to repurchase agreements will be held by the Trust's custodian or
another qualified custodian or in the Federal Reserve/Treasury book-entry
system. Repurchase agreements are considered to be loans by a Fund under the
1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Funds under the 1940 Act. Whenever a Fund enters into a reverse
repurchase agreement as described in the Prospectus, it will place in a
segregated custodial account liquid assets at least equal to the repurchase
price marked to market daily (including accrued interest) and will subsequently
monitor the account to ensure such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Portfolio may decline below the price of the securities it is
obligated to repurchase.
With respect to loans by the Government or Treasury Fund of
its portfolio securities as described in the Prospectus, the Fund would continue
to accrue interest on loaned securities and would also earn income on loans. Any
cash collateral received by the Funds in connection with such loans would be
invested in short-term U.S. Government obligations.
GOVERNMENT SECURITIES
- ---------------------
Examples of the types of U.S. government obligations that may
be held by the Money Market, Government and Pennsylvania Tax Exempt Funds
include, in addition to U.S. Treasury Bills, the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
-4-
<PAGE> 47
General Services Administration, Student Loan Marketing Association, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks and Maritime Administration. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Money Market, Government and Tax Exempt Funds
will invest in the obligations of such agencies or instrumentalities only when
the adviser believes that their credit risk with respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser) which
invest in high quality, short term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. Each
Fund currently intends to limit such investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund; and (d) not more than 10% of the outstanding
voting stock of any one investment company will be owned in the aggregate by the
Fund and other investment companies advised by the adviser. As a shareholder of
another investment company, a Fund would bear, along with other shareholders,
its pro rata portion of 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.
-5-
<PAGE> 48
MUNICIPAL SECURITIES
- --------------------
As described in the Prospectus, the Tax Exempt and
Pennsylvania Tax Exempt Funds may purchase Municipal Securities. The two
principal classifications of Municipal Securities consist of "general
obligation" and "revenue" issues. The Funds also may invest in "moral
obligation" issues, which are normally issued by special purpose authorities.
Municipal Securities include debt obligations issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds may be purchased if the
interest paid is excludable from federal income tax. Private activity bonds are
issued by or on behalf of states or political subdivisions thereof to finance
privately owned or operated facilities for business and manufacturing, housing,
sports, and pollution control and to finance activities of and facilities for
charitable institutions. Private activity bonds are also used to finance public
facilities such as airports, mass transit systems, ports, parking and low income
housing. The payment of the principal and interest on private activity bonds is
dependent solely on the ability of the facility's user to meet its financial
obligations and may be secured by a pledge of real and personal property so
financed.
Pennsylvania Municipal Securities which are payable only from
the revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest and principal,
including, among others, laws and regulations which limit the amount of fees,
rates or other charges which may be imposed for use of the facility or which
increase competition among facilities of that type or which limit or otherwise
have the effect of reducing the use of such facilities generally, thereby
reducing the revenues generated by the particular facility. Pennsylvania
Municipal Securities, the payment of interest and principal on which is insured
in whole or in part by a Pennsylvania governmentally created fund, may be
adversely affected by Pennsylvania laws or regulations which restrict the
aggregate proceeds available for payment of principal and interest in the event
of a default on such municipal securities. Similarly, Pennsylvania Municipal
Securities, the payment of interest and principal on which is secured, in whole
or in part, by an interest in real property may be adversely affected by
Pennsylvania laws which limit the availability of remedies or the scope of
remedies available in the event of a default on such municipal securities.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific Pennsylvania Municipal Securities the
Pennsylvania Tax Exempt Fund will invest from time to time or predicting the
nature
-6-
<PAGE> 49
or extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the securities
in which the Pennsylvania Tax Exempt Fund may invest and, therefore, on the
shares of that Fund.
There are, of course, variations in the quality of Municipal
Securities both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Rating Agencies represent
their opinions as to the quality of Municipal Securities. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality, and Municipal Securities with the same maturity, interest rate and
rating may have different yields while Municipal Securities of the same maturity
and interest rate with different ratings may have the same yield. Subsequent to
its purchase by either the Tax Exempt or Pennsylvania Tax Exempt Fund, an issue
of Municipal Securities may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Tax Exempt or Pennsylvania Tax
Exempt Funds. The Tax Exempt and Pennsylvania Tax Exempt Funds' adviser will
consider such an event in determining whether it should continue to hold the
obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Tax Exempt and Pennsylvania Tax Exempt Funds will
depend upon the ability of the issuers to meet their obligations. An issuer's
obligations under its Municipal Securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. The
power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Securities may be materially
adversely affected by litigation or other conditions.
Certain Municipal Securities held by the Tax Exempt or
Pennsylvania Tax Exempt Fund may be insured at the time of issuance as to the
timely payment of principal and interest. The insurance policies will usually be
obtained by the issuer of the Municipal Bond at the time of its original
issuance. In the event that the issuer defaults on interest or principal
payments, the insurer of the bond is required to make payment to the bondholders
upon proper notification. There is, however, no guarantee that the insurer will
meet its obligations. In addition, such insurance will not
-7-
<PAGE> 50
protect against market fluctuations caused by changes in interest rates and
other factors.
Municipal notes in which the Tax Exempt and Pennsylvania Tax
Exempt Funds may invest include, but are not limited to, general obligation
notes, tax anticipation notes (notes sold to finance working capital needs of
the issuer in anticipation of receiving taxes on a future date), revenue
anticipation notes (notes sold to provide needed cash prior to receipt of
expected non-tax revenues from a specific source), bond anticipation notes,
certificates of indebtedness, demand notes and construction loan notes.
OTHER TAX-EXEMPT INSTRUMENTS
- ----------------------------
Tax-exempt commercial paper will be limited to investments in
obligations which are rated at least A-2 or SP-2 by S&P, F-2 by Fitch or
Prime-2, MIG-2 or VMIG-2 by Moody's at the time of investment or which are of
equivalent quality as determined by the adviser. Investments in floating rate
instruments will normally involve industrial development or revenue bonds which
provide that the investing Fund can demand payment of the obligation at all
times or at stipulated dates on short notice (not to exceed 30 days) at par plus
accrued interest. A Fund must use the shorter of the period required before it
is entitled to prepayment under such obligations or the period remaining until
the next interest rate adjustment date for purposes of determining the maturity.
Such obligations are frequently secured by letters of credit or other credit
support arrangements provided by banks. The quality of the underlying credit or
of the bank, as the case may be, must, in the opinion of the Fund's adviser be
equivalent to the commercial paper ratings stated above. The adviser will
monitor the earning power, cash flow and liquidity ratios of the issuers of such
instruments and the ability of an issuer of a demand instrument to pay principal
and interest on demand. Other types of tax-exempt instruments may also be
purchased as long as they are of a quality equivalent to the bond or commercial
paper ratings stated above.
STAND-BY COMMITMENTS
- --------------------
The Tax Exempt and Pennsylvania Tax Exempt Funds may acquire
stand-by commitments (also known as put options) with respect to Municipal
Securities held in their portfolios. The Tax Exempt and Pennsylvania Tax Exempt
Funds expect that stand-by commitments will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Tax Exempt and Pennsylvania Tax Exempt Funds may pay for a
stand-by commitment either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus reducing
the yield to maturity otherwise
-8-
<PAGE> 51
available for the same securities). The Tax Exempt and Pennsylvania Tax Exempt
Funds will not acquire stand-by commitments unless immediately after the
acquisition, not more than 5% of their respective total assets will be invested
in instruments subject to a demand feature, or in stand-by commitments, with the
same institution.
The Tax Exempt and Pennsylvania Tax Exempt Funds' right to
exercise stand-by commitments will be unconditional and unqualified. A stand-by
commitment will be transferable only with the underlying Municipal Securities
which may be sold to a third party at any time. Until a Fund exercises its
stand-by commitment, it owns the securities in its portfolio which are subject
to the commitment.
The amount payable to the Tax Exempt or Pennsylvania Tax
Exempt Fund upon its exercise of a stand-by commitment will normally be (i) the
Fund's acquisition cost of the Municipal Securities (excluding any accrued
interest which the Fund paid on its acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Under normal
market conditions, in determining net asset value the Tax Exempt and
Pennsylvania Tax Exempt Funds value the underlying Municipal Securities on an
amortized cost basis. Accordingly, the amount payable by a dealer upon exercise
of a stand-by commitment will normally be substantially the same as the
portfolio value of the underlying Municipal Securities.
The Tax Exempt and Pennsylvania Tax Exempt Funds intend to
enter into stand-by commitments only with dealers, banks and broker-dealers
which, in the adviser's opinion, present minimal credit risks. The Funds'
reliance upon the credit of these dealers, banks and broker-dealers will be
secured by the value of the underlying Municipal Securities subject to the
commitment. Thus, the risk of loss to the Tax Exempt and Pennsylvania Tax Exempt
Funds in connection with a stand-by commitment will not be qualitatively
different from the risk of loss faced by a person that is holding securities
pending settlement after having agreed to sell the securities in the ordinary
course of business.
WHEN-ISSUED SECURITIES
- ----------------------
The Tax Exempt and Pennsylvania Tax Exempt Funds may purchase
Municipal Securities on a "when-issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When a Fund agrees to
purchase when-issued securities, the custodian sets aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase
-9-
<PAGE> 52
commitment, and in such a case the Fund may be required subsequently to place
additional assets in the separate account in order to ensure that the value of
the account remains equal to the amount of the Fund's commitment, marked to
market daily. It is likely that a Fund's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Funds will set aside cash
or liquid assets to satisfy the Funds' purchase commitments in the manner
described, their liquidity and ability to manage their portfolios might be
affected in the event the Funds' commitments to purchase when-issued securities
ever exceeded 25% of the value of their respective total assets.
When the Funds engage in when-issued transactions, they rely
on the seller to consummate the trade. Failure of the seller to do so may result
in a Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
No Fund may:
1. Purchase or sell real estate, except that the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with its
investment objective and policies a Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices; (b) purchase and sell options on futures contracts or
indices; and (c) purchase publicly traded securities of companies engaging in
whole or in part in such activities.
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> 53
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 by the 1940 Act.
2. Write or sell put options, call options, straddles,
spreads, or any combination thereof, except, as consistent with the Fund's
investment objective and policies for transactions in options on securities or
indices of securities, futures contracts and options on futures contracts and in
similar investments.
3. Purchase securities on margin, make short sales of
securities or maintain a short position, except that, as consistent with a
Fund's investment objective and policies, (a) this investment limitation shall
not apply to the Fund's transactions in futures contracts and related options,
options on securities or indices of securities and similar instruments, and (b)
it may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 10% of its net assets in illiquid
securities.
The Funds do not intend to purchase securities while their
outstanding borrowings (including reverse repurchase agreements) are in excess
of 5% of their respective total assets. Securities held in escrow or separate
accounts in connection with a Fund's investment practices are not deemed to be
pledged for purposes of this limitation.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA
- ----------------------------------------------------------------
BONDS
- -----
Potential shareholders should consider the fact that the
Pennsylvania Tax Exempt Fund's portfolio consists primarily of securities issued
by the Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize that such Fund's performance is closely tied to
general economic conditions within the Commonwealth as a whole and to economic
conditions within particular industries and geographic areas located within the
Commonwealth.
-11-
<PAGE> 54
Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending deceases have resulted in surpluses the last
four years; as of June 30, 1996, the General Fund had a surplus of $635.2
million.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU and the parties are proceeding with discovery; (ii) in 1987, the Supreme
Court of Pennsylvania held the statutory scheme for country funding of the
judicial system to be in conflict with the constitution of the Commonwealth, but
it stayed judgment pending enactment by the legislature of funding consistent
with the opinion, and the legislature has yet to consider legislation
implementing the judgment. In 1992, a new action in mandamus was filed seeking
to compel the Commonwealth to comply with the original decision. The Court
issued a writ in mandamus and appointed a special master in 1996 to submit a
plan for implementation, which it intended to require by January 1, 1998. In
January 1997, the Court established a committee, consisting of the special
master and representatives of the Executive and Legislative branches, to develop
an implementation plan; (iii) litigation was filed in both state and federal
court by an association of rural and small schools and several individual school
districts and parents challenging the constitutionality of the Commonwealth's
system for funding local school districts -- the federal case has been stayed
pending the resolution of the state
-12-
<PAGE> 55
case; a trial in the state case commenced in January 1997 and has recessed; no
briefing schedule or date for oral argument has yet been set; (iv)
Envirotest/Synterra Partners ("Envirotest") filed suit against the Commonwealth
asserting that it sustained damages in excess of $350 million, as a result of
investments it made in reliance on a contract to conduct emissions testing
before the emission testing program was suspended. Envirotest entered into a
Standstill Agreement with the Commonwealth pursuant to which the parties will
attempt to resolve Envirotest will receive $145 million, with interest at 6
percent per annum; and (v) in 1995, the Commonwealth, the Governor of
Pennsylvania, the City of Philadelphia and the Mayor of Philadelphia were joined
as additional respondents in an enforcement action commenced in Commonwealth
Court in 1973 by the Pennsylvania Human Relations Commission against the School
District of Philadelphia pursuant to the Pennsylvania Human Relations Act. The
Commonwealth and the City were joined to determine their liability, if any, to
pay additional costs necessary to remedy segregation-related conditions found to
exist in Philadelphia public schools. In January 1997, the Pennsylvania Supreme
Court ordered the parties to brief certain issues, but no decision by the
Supreme Court has been issued.
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
-13-
<PAGE> 56
under a five year plan approved by PICA in 1995. PICA's power to issue further
bonds to finance capital projects expired on December 31, 1994. PICA's authority
to issue bonds to finance cash flow deficits expired on December 31, 1996, but
its authority to refund existing debt will not expire.
NET ASSET VALUE
---------------
The Trust uses the amortized cost method to value shares in
the Funds. Pursuant to this method, a security is valued at its cost initially
and thereafter a constant amortization to maturity of any discount or premium is
assumed, regardless of the impact of fluctuating interest rates on the market
value of the security. Where it is not appropriate to value a security by the
amortized cost method, the security will be valued either by market quotations,
or by fair value as determined by the Board of Trustees. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price each respective
Fund would receive if it sold the security. The value of the portfolio
securities held by each respective Fund will vary inversely to changes in
prevailing interest rates. Thus, if interest rates have increased from the time
a security was purchased, such security, if sold, might be sold at a price less
than its cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its purchase cost. In either instance, if the security is held to maturity,
no gain or loss will be realized.
Each Fund invests only in high-quality instruments and
maintains a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that a
Fund will neither purchase any security deemed to have a remaining maturity of
more than 397 calendar days within the meaning of the 1940 Act nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Trust's
Board of Trustees has established procedures pursuant to rules promulgated by
the SEC, that are intended to help stabilize the net asset value per share of
each Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Board of Trustees, at such intervals as it deems
appropriate, to determine the extent, if any, to which the net asset value per
share of each Fund calculated by using available market quotations deviates from
$1.00 per share. In the event such deviation exceeds one-half of one percent,
the Board of Trustees will promptly consider what action, if any, should be
initiated. If the Board of Trustees believes that the extent of any deviation
from a Fund's $1.00 amortized cost price per share may result in material
dilution or other unfair results to investors or existing shareholders, it has
agreed to
-14-
<PAGE> 57
take such steps as it considers appropriate to eliminate or reduce, to the
extent reasonably practicable, any such dilution or unfair results. These steps
may include selling portfolio instruments prior to maturity; shortening the
average portfolio maturity; withholding or reducing dividends; redeeming shares
in kind; reducing the number of a Fund's outstanding shares without monetary
consideration; or utilizing a net asset value per share determined by using
available market quotations.
DIVIDENDS
---------
As stated, the Trust uses its best efforts to maintain the net
asset value per share of the Funds at $1.00. As a result of a significant
expense or realized or unrealized loss incurred by the Funds, it is possible
that a Fund's net asset value per share may fall below $1.00. Should the Trust
incur or anticipate any unusual or unexpected significant expense or loss which
would affect disproportionately the income of a Fund for a particular period,
the Board of Trustees would at that time consider whether to adhere to the
present dividend policy with respect to the Funds or to revise it in order to
ameliorate to the extent possible the disproportionate effect of such expense or
loss on the income of the Fund experiencing such effect. Such expense or loss
may result in a shareholder's receiving no dividends for the period in which he
holds shares of a Fund and/or in his receiving upon redemption a price per share
lower than the price he paid.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares in the Trust are sold on a continuous basis by SEI
Investments Distribution Co. (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 B Shares class for each of the Money Market and Tax Exempt
Funds is expected to commence operations on or about January 1, 1998.
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<PAGE> 58
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, Institutional shares of the
Funds are sold to certain qualified investors at their net asset value without a
sales charge. Retail shares of the Funds are sold to public investors at the
public offering price based on the Fund's net asset value, without a front-end
load or sales charge, as described in the Prospectus. B shares of the Money
Market and Tax Exempt Funds are available only to the holders of B shares of
another Fund who wish to exchange their B shares of such other Fund for B shares
of the Money Market and/or Tax Exempt Funds. B shares 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.
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail 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 financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail 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
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<PAGE> 59
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 57 classes of shares. Twelve of these classes, which
represent interests in the Money Market Fund (Class A, Class A Special Series 1
and Class A - Special Series 2), Government Fund (Class B and Class B - Special
Series 1), Treasury Fund (Class C and Class C - Special Series 1), Tax Exempt
Fund (Class D, Class D - Special Series 1 and Class D - Special Series 2) and
Pennsylvania Tax Exempt Fund (Class Q and Class Q - Special Series 1) are
described in this Statement of Additional Information and the related
Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting without regard to a
particular fund. In addition, shareholders of each class in a particular
investment fund have equal voting rights except that only Institutional and
Retail 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
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<PAGE> 60
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 original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
GENERAL
- -------
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax
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<PAGE> 61
treatment as a regulated investment company under the Code, each Fund must
satisfy, in addition to the distribution requirement described in the Prospectus
and above, certain requirements with respect to the source of its income during
a taxable year. At least 90% of the gross income of each Fund must be derived
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks, securities or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to the Fund's business of investing in
such stock, securities or currencies. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to a Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. Any income derived by a
Fund from a partnership or trust is treated as derived with respect to the
Fund's business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months (the
"short-short test"): (1) stock and securities (as defined in Section 2(a)(36) of
the 1940 Act); (2) options, futures and forward contracts other than those on
foreign currencies; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are not directly related to the Fund's
principal business of investing in stock and securities (and options and futures
with respect to stocks and securities). Interest (including original issue
discount and, with respect to taxable debt securities and non-taxable debt
securities acquired after April 30, 1993, accrued market discount) received by a
Fund upon maturity or disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of this requirement. However, any other
income which is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
Effective for taxable years beginning after August 4, 1997, the recently enacted
Taxpayer Relief Act of 1997 repeals the short-short test.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital
-19-
<PAGE> 62
gain net income each calendar year to avoid liability for this excise tax.
If for any taxable year a Fund does not qualify for federal
tax treatment as a regulated investment company, all of such Fund's taxable
income will be subject to federal income tax at regular corporate rates without
any deduction for distributions to its shareholders. In such event, dividend
distributions (including amounts derived from interest on Municipal Securities
with respect to the Tax Exempt and Pennsylvania Tax Exempt Funds) would be
taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits, and would be eligible for
the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
Depending upon the extent of a Fund's activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, such Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of a Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Under state or local law,
distributions of net investment income may be taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
TAX EXEMPT FUND AND PENNSYLVANIA TAX EXEMPT FUND
- ------------------------------------------------
As described above and in the Prospectus, the Tax Exempt and
Pennsylvania Tax Exempt Funds are designed to provide investors with tax-exempt
interest income. The Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Funds would not be suitable for tax-exempt institutions and may not be
suitable for retirement plans qualified under Section 401 of the Code, H.R. 10
plans and IRAs since such plans and accounts are
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<PAGE> 63
generally tax-exempt and, therefore, would not gain any additional benefit from
the Funds' dividends being tax-exempt.
The policy of the Tax Exempt and Pennsylvania Tax Exempt Funds
is to pay each year as federal exempt-interest dividends substantially all the
Funds' Municipal Securities interest income net of certain deductions. In order
for the Funds to pay federal exempt-interest dividends with respect to any
taxable year, at the close of each taxable quarter at least 50% of the aggregate
value of their respective portfolios must consist of tax-exempt obligations. An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by a Fund and designated as an exempt-interest dividend in a
written notice mailed to shareholders not later than 60 days after the close of
the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Funds cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by the Funds during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code. The percentage of total dividends paid by the Funds with
respect to any taxable year which qualifies as federal exempt-interest dividends
will be the same for all shareholders receiving dividends from the Funds with
respect to such year.
The Tax Exempt and Pennsylvania Tax Exempt Funds do not expect
to realize long-term capital gains and, therefore, do not expect to distribute
any capital gain dividends.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the Tax Exempt and Pennsylvania Tax Exempt
Funds. A "substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses a part of such facilities in his
trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. A "related
person" includes certain related natural persons, affiliated corporations,
partners and partnerships, and S corporations and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase
or carry Tax Exempt and Pennsylvania Tax Exempt Fund shares is not deductible
for federal income tax purposes if the Funds distribute exempt-interest
dividends during the shareholder's taxable year. In addition, if a shareholder
holds Fund shares for
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<PAGE> 64
six months or less, any loss on the sale or exchange of those shares will be
disallowed to the extent of the amount of exempt-interest dividends received
with respect to the shares. The Treasury Department, however, is authorized to
issue regulations reducing the six months holding requirement to a period of not
less than the greater of 31 days or the period between regular dividend
distributions where the investment company regularly distributes at least 90% of
its net tax-exempt interest. No such regulations had been issued as of the date
of this Statement of Additional Information.
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
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<PAGE> 65
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ---------------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994;
Director, Zurn Industries,
Inc. (building products
and construction
services), since June
1995.
Herbert R. Martens, Jr.* President and Trustee Executive Vice President,
c/o NatCity Investments National City Corporation
1965 E. Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman,
Age 45 President and Chief Executive
Officer, NatCity
Investments, Inc., since
July 1995 (investment
banking); President and
Chief Executive Officer,
Raffensperger, Hughes &
Co., from 1993 until 1995
(broker-dealer);
President, Reserve Capital
Group, from 1990 until
1993.
Leigh Carter* Trustee Retired President and
13901 Shaker Blvd., #6B Chief Operating Officer,
Cleveland, OH 44120 B.F. Goodrich Company,
Age 72 August 1986 to September
1990; Director, Adams
Express Company (closed-
end investment company),
April 1982 to December 1997;
Director, Acromed
Corporation (producer of
spinal implants), since
June 1992; Director,
Petroleum & Resources
Corp., April 1987 to December
1997; Director, Morrison
Products (manufacturer of
blower fans and air moving
equipment), since April
1983; Director, Kirtland
Capital Corp. (privately
funded investment group),
since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishing's
Age 53 Center, Inc., since
January 1982; partner,
Kittles Bloomington
Property Company, since
January 1981; partner,
KK&D (Affiliated Real
Estate Companies of
Kittle's Home Furnishings
Center), since January
1989.
Robert J. Farling Trustee Retired Chairman, President and
1608 Balmoral Way Chief Executive Officer,
Westlake, OH 44145 Centerior Energy (electric
Age 61 utility), March 1992 to
October 1997; Director, National
City Corporation (bank
holding company) until
October 1997; Director,
Republic Engineered Steels,
since October 1997.
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ---------------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed
Corporation (restaurant
group), since 1990;
Director, Foam Design,
Inc. (manufacturer of
industrial and commercial
foam products), since
1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health
System (four hospital
health system); Trustee,
WVIZ Educational
Television (public
television).
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
Executive Officer,
American Contractors
Rentals & Sales (rental
subsidiary of Whayne
Supply Co.), since 1988.
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ---------------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP, Philadelphia,
1345 Chestnut Street Pennsylvania
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP
</TABLE>
- --------------------
* 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., President of the Trust, is Executive
Vice President of National City Corporation, which is the parent company of the
adviser, and Chairman and Chief Executive Officer of NatCity Investments, Inc.,
a registered broker-dealer that is affiliated with the advisers.
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as Administrator to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
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<PAGE> 68
The following table summarizes the compensation for each of
the trustees of the Trust for the fiscal year ended May 31, 1997:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Approval Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Robert D. Neary, $18,750 $0 $0 $18,750
Chairman and Trustee
Thomas R. Benua, Jr., $17,500 $0 $0 $17,500
Trustee*
Leigh Carter, Trustee $17,500 $0 $0 $17,500
John F. Durkott, Trustee $17,500 $0 $0 $17,500
Robert J. Farling, Trustee ** ** ** **
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
Gerald L. Gherlein, Trustee ** ** ** **
Herbert R. Martens, Jr., ** ** ** **
President and Trustee
J. William Pullen, Trustee $17,500 $0 $0 $17,500
Richard B. Tullis, Trustee* $18,750 $0 $0 $18,750
</TABLE>
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.
- --------
* Messrs. Benua and Tullis resigned as Trustees effective July 17, 1997 and
November 19, 1997, respectively.
** Messrs. Farling, Gherlein and Martens were not Trustees of the Trust during
the fiscal year ended May 31, 1997.
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<PAGE> 69
The Declaration of Trust provides for indemnification out of the trust property
of any shareholder held personally liable solely by reason of his being or
having been a shareholder and not because of his acts or omissions or some other
reason. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust, and shall satisfy any judgment thereon. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
-------------------------------------------------
ADVISORY AGREEMENT
- ------------------
National City serves as investment adviser to the Funds. Prior
to November 19, 1997, National City, National City Bank of Columbus and National
City Bank of Kentucky served as investment adviser to the Funds (together, the
"three advisers"). The three advisers and NAM are affiliates of National City
Corporation, a bank holding company with $52 billion in assets, and headquarters
in Cleveland, Ohio with nearly 900 branch offices in four states. Through its
subsidiaries, National City Corporation has been managing investments for
individuals, pension and profit-sharing plans and other institutional investors
for over 75 years and currently manages over $41 billion in assets. From time to
time, the adviser may voluntarily waive fees or reimburse the Trust for
expenses.
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<PAGE> 70
Pursuant to the Trust's then current advisory agreement, the
Trust incurred advisory fees in the following amounts for the fiscal years ended
May 31, 1997, 1996 and 1995: (i) $5,067,456 (after waivers of $2,026,982),
$3,686,919 (after waivers of $1,473,398) and $2,827,383 (after waivers of
$1,128,026), respectively, for the Money Market Fund; (ii) $2,415,282 (after
waivers of $966,112), $1,654,730 (after waivers of $661,292) and $1,766,159
(after waivers of $706,463), respectively, for the Government Fund, and (iii)
$573,529 (after waivers of $764,704), $444,402 (after waivers of $592,531) and
$307,159 (after waivers of $410,198), respectively, for the Tax Exempt Fund.
Advisory fees in the amounts of $794,834 (after waivers of $158,966), $527,698
(after waivers of $105,510) and $313,967 (after waivers of $62,648) were
incurred for the fiscal year ended May 31, 1997, 1996 and for the period from
June 16, 1994 (commencement of operations) through May 31, 1995 with respect to
the Treasury Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, National City, the adviser of the
Pennsylvania Tax Exempt Fund, earned advisory fees of $224,379 and waived fees
in the amount of $140,237 with respect to that Fund. For the period from June 1,
1996 until September 9, 1996, for the one-month period ended May 31, 1996, for
the fiscal year ended April 30, 1996 and for the period from August 8, 1994
(commencement of operations) through April 30, 1995, Integra Trust Company
("Integra"), the investment adviser to the Predecessor Fund, earned advisory
fees of $85,768, $26,907, $310,912 and $76,582, respectively, and Integra waived
fees in the amount of $51,068, $9,868, $110,272 and $84,075, respectively.
The Advisory Agreement provides that the adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. In addition, the adviser has undertaken in its Advisory Agreement to
maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
The Advisory Agreement relating to the Money Market,
Government, Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds was approved
by the shareholders of each Fund on November 19, 1997. Unless sooner terminated,
the Advisory Agreement will continue in effect with respect to a particular Fund
until September 30, 1998, and from year to year thereafter, subject to annual
approval by the Trust's Board of Trustees, or by a vote of a majority of the
-28-
<PAGE> 71
outstanding shares of such Fund (as defined in the Funds' Prospectus) and a
majority of the trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any party by votes cast in person at a
meeting called for such purpose. The Advisory 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.
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 contemplated by its Advisory Agreement with the Trust
as described in such agreement and this Prospectus without violation of
applicable banking laws or regulations. However, there are no controlling
judicial precedents and future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present and future requirements, that could prevent the
adviser from continuing to perform services for the Trust. If the adviser was
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
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<PAGE> 72
Trust. Legislation modifying such restrictions has been proposed in past
Sessions of Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the adviser,
or such an affiliate, might offer to provide such services.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
- ------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC for
the fiscal years ended May 31, 1997, 1996 and 1995: (i) $502,464, $421,493,
$322,722, respectively, for the Money Market Fund; (ii) $239,708, $187,373 and
$210,983, respectively, for the Government Fund; and (iii) $170,489, $145,303
and $102,395, respectively, for the Tax Exempt Fund. Administration fees in the
amounts of $79,005, $37,703 and $59,255 were incurred for the fiscal years ended
May 31, 1997, 1996 and for the period from June 16, 1994 (commencement of
operations) through May 31, 1995 with respect to the Treasury Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, PFPC earned administration fees of
$24,530 with respect to the Pennsylvania Tax Exempt Fund. For the period from
June 1, 1996 until September 9, 1996, for the one-month period ended May 31,
1996, for the fiscal year ended April 30, 1996 and for the period from August 8,
1994 (commencement of operations) through April 30, 1995, SEI Financial
Management Corporation, a wholly-owned subsidiary of SEI Corporation, served as
administrator to the Predecessor Fund and earned the following fees: $28,589;
$8,969; $103,634; and $53,552, respectively.
DISTRIBUTION PLANS AND RELATED AGREEMENTS
- -----------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreement with the Trust as described in the
Prospectus. Shares are sold on a continuous basis.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted
a Service and Distribution Plan for Retail and Institutional shares (the "Retail
and Institutional 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
Institutional and Retail shares, or B shares, respectively. As required by Rule
12b-1, the Trust's Distribution Plans and the related Distribution Agreement
have been approved, and are
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<PAGE> 73
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 related to the Distribution Plans, by vote cast in person at a
meeting called for the purpose of voting on the Distribution Plans and related
agreement. In compliance with the Rule, the trustees requested and evaluated
information they thought necessary to an informed determination of whether the
Distribution Plans and related agreement should be implemented, and concluded,
in the exercise of reasonable business judgment and in light of their fiduciary
duties, that there is a reasonable likelihood that the Distribution Plans and
related agreement will benefit the Trust and its shareholders.
Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a fund (in the Trust's case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Any change in a Distribution Plan that would materially
increase the distribution expenses of the class or classes of shares to which it
relates 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 a 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 Retail and Institutional Shares Plan provides that each
fund will compensate the Distributor for distribution expenses related to the
distribution of Institutional and Retail shares in an amount not to exceed .10%
per annum of average aggregate net assets of such shares. The Retail and
Institutional Plan provides that the Trust will pay the Distributor an annual
base fee of $1,250,000 plus incentive fees based upon asset growth payable
monthly and accrued daily by all of the Trust's investment funds with respect
to the Institutional and Retail 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 such class's average net assets. Distribution
expenses payable 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
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<PAGE> 74
expenses of preparing, printing and distributing 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.
For the period from March 10, 1997 to May 31, 1997, the Trust paid the
Distributor $121,188 with respect to the Money Market Fund, $51,393 with respect
to the Government Fund, $14,929 with respect to the Treasury Fund, and $23,431
with respect to the Tax Exempt Fund under the Retail and Institutional Shares
Plan. Of the aggregate amounts paid to the Distributor by the Trust with respect
to the Money Market Fund, $36,356 was attributable to distribution services and
$84,832 was attributable to marketing/consultation. Of the aggregate amount paid
to the Distributor by the Trust with respect to the Government Fund, $15,418 was
attributable to distribution services and $35,975 was attributable to
marketing/consultation. Of the aggregate amounts paid to the Distributor by the
Trust with respect to the Treasury Fund, $4,479 was attributable to distribution
services and $10,450 was attributable to marketing/consultation. Of the
aggregate amounts paid to the Distributor by the Trust with respect to the
Tax-Exempt Fund, $7,030 was attributable to distribution services and $16,401
was attributable to marketing/consultation. Distribution services include
broker/dealer and investor support, voice response development, wholesaling
services, legal review and NASD filings and transfer agency management.
Marketing/Consultation includes planning and development, market and industry
research and analysis and marketing strategy and planning.
For the period from June 1, 1996 through March 7, 1997, the
Trust paid 440 Financial Distributors, Inc. ("440 Financial") $545,381 with
respect to the Money Market Fund, $265,479 with respect to the Government Fund,
$97,651 with respect to the Treasury Fund, and $103,376 with respect to the Tax
Exempt Fund under the Retail and Institutional Shares Plan.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $4,325 with respect to the Pennsylvania Tax Exempt Fund
under the Retail and Institutional Shares Plan. Of the aggregate amounts paid to
the Distributor by the Trust with respect to the Pennsylvania Tax Exempt Fund,
$1,297 was attributable to distribution services and $3,028 was attributable to
marketing/consultation. Distribution services include broker/dealer and investor
support voice response development, wholesaling services, legal review and NASD
filings and transfer
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<PAGE> 75
agency management. Marketing/Consultation includes planning and development,
market and industry research and analysis and marketing strategy and planning.
For the period from September 9, 1996 (date of reorganization of the Predecessor
Fund) through March 7, 1997, the Trust paid 440 Financial $11,576 with respect
to the Pennsylvania Tax Exempt Fund under the Retail and Institutional Shares
Plan.
Class A Shares of the Predecessor Fund were subject to a Plan
adopted pursuant to rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor, SEI
Investments Distribution Co., of the Predecessor Fund's distribution expenses,
including (1) the cost of prospectuses, reports to shareholders, sales
literature and other materials for potential investors; (2) advertising; (3)
expenses incurred in connection with the promotion and sale of Inventor's shares
including the distributor's expenses for travel, communication, compensation and
benefits for sales personnel; and (4) any other expenses reasonably incurred in
connection with the distribution and marketing of Class A shares subject to
approval by a majority of disinterested directors of Inventor. For the period
from June 1, 1996 until September 9, 1996, the distributor of the Predecessor
Fund received $0 from the fund (after waivers of $47,649).
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (v) respond to correspondence by security brokers
and others relating to its duties; and (vi) make periodic reports to the Board
of Trustees concerning the Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Funds harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Funds reimburse National City Bank for its
direct and indirect costs and expenses incurred in rendering custodial services,
except that the costs and expenses borne by each Fund in any year may not exceed
$.225 for each $1,000 of average gross assets of such Fund.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend
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<PAGE> 76
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 relating to each Fund's Retail shares and the B Shares
Plan for each Fund offering B shares. Pursuant to these plans, the Trust may
enter into agreements with financial institutions pertaining to the provision of
administrative services to their customers who are the beneficial owners of
Retail shares or B shares in consideration for the payment of up to .15% (on an
annualized basis) of the net asset value of such shares. Such services may
include: (i) aggregating and processing purchase and redemption requests from
customers; (ii) providing customers with a service that invests the assets of
their accounts in Retail or B shares; (iii) processing dividend payments from
the Fund; (iv) providing information periodically to customers showing their
position in Retail or B shares; (v) arranging for bank wires; (vi) responding to
customer inquiries relating to the services performed with respect to Retail 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 Funds. The
adviser purchases portfolio securities either directly from the issuer or from
an underwriter or dealer making a market in the securities involved. Purchases
from an underwriter of portfolio securities include a commission or
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<PAGE> 77
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 current 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 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 it by the Funds. Such information may be
useful to the adviser in serving both the Trust and other clients, and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the adviser in carrying out its obligations to
the Trust.
While serving as adviser to the Trust, 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.
Portfolio securities will not be purchased from or sold to the
Trust's adviser, the Distributor, or any "affiliated person" (as such term is
defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Trust will not give preference to
its adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements. Under
certain circumstances, the Trust may be at a disadvantage because of these
limitations compared with the portfolios of other investment companies with
similar objectives that are not subject to such limitations.
-35-
<PAGE> 78
The Trust is required to identify any securities of its
"regular brokers or dealers" that it has acquired during its most recent fiscal
year. At May 31, 1997, (a) the Money Market Fund had entered into repurchase
transactions with: First Boston in the amount of $90,000,000 to be repurchased
on June 2, 1997 at $90,042,150 and with Prudential-Bache Securities in the
amount of $45,000,000 to be repurchased on June 2, 1997 at $45,020,963; (b) the
Government Fund had entered into repurchase transactions with First Boston in
the amount of $159,000,000 to be repurchased on June 2, 1997 at $159,074,465.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the adviser. Such other Funds, investment companies and
accounts may also invest in the same securities as such Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, the transaction will be averaged
as to price, and available investments allocated as to amount, in a manner which
the adviser believes to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by such Fund. In connection therewith, and to the extent permitted by
law and by the current 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 period ended May 31, 1997, for the Money Market, Government,
Treasury, Tax Exempt and Pennsylvania Tax Exempt Funds, which are incorporated
by reference in this Statement of Additional Information, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report referred
to under "Financial Statements," and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements for periods or years prior to May 31,
1997 with respect to the Predecessor Fund, which are incorporated by reference
in this Statement of Additional Information, were audited by Coopers & Lybrand,
L.L.P., independent accountants for the Predecessor Fund, whose report dated
July 26, 1996, expressed an unqualified opinion on such financial statements,
and are included in reliance upon such report given
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<PAGE> 79
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.
STANDARDIZED YIELD QUOTATIONS
-----------------------------
"Yields," as described in the Prospectus, are calculated
according to formulas prescribed by the SEC. The standardized seven-day yield
for a class of Fund shares is computed by determining the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account in the
class having a balance of one share at the beginning of the period, subtracting
a hypothetical charge reflecting deductions from shareholder accounts, dividing
the difference by the value of the account at the beginning of the base period
to obtain the base period return, and then multiplying the base period return by
(365/7). The net change in the value of an account in a class includes the value
of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares,
net of all fees, other than nonrecurring account or sales charges, that are
charged to all shareholder accounts in proportion to the length of the base
period and the class' mean or median account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The "effective yield" for a class of Fund shares is computed by
compounding the unannualized base period return (calculated as above) by adding
1 to the base period return, raising the sum to a power equal to 365 divided by
7, and subtracting 1 from the result.
The Tax Exempt and Pennsylvania Tax Exempt Funds'
"tax-equivalent yields" are computed by dividing the portion of those Funds'
yields (calculated as above) that is exempt from federal income tax by one minus
a stated federal income tax rate (using 39.6% tax bracket) and adding that
figure to that portion, if any, of the respective Fund's yield that is not
exempt from federal income tax.
For the seven-day period ended May 31, 1997, the yields of the
Retail and Institutional shares of the Money Market Fund, Government Fund,
Treasury Fund, Tax Exempt Fund and Pennsylvania
-37-
<PAGE> 80
Tax Exempt Fund were 5.14% and 5.24%, 5.08% and 5.18%, 4.79% and 4.89%, 3.39%
and 3.49%, and 3.48% and 3.58%, respectively, and their respective effective
yields were 5.27% and 5.38%, 5.21% and 5.31%, 4.91% and 5.01%, 3.44% and 3.55%,
and 3.54% and 3.65%, respectively.
For the Tax Exempt and Pennsylvania Tax Exempt Funds, the
tax-equivalent effective yields (assuming a 39.6% federal tax rate in the case
of both Funds and a 2.8% Pennsylvania tax rate in the case of the Pennsylvania
Tax Exempt Fund) for their Retail and Institutional shares for the seven-day
period ended May 31, 1997 were 5.70% and 5.88%, and 6.03% and 6.22%,
respectively.
The current yield for each class of shares in a Fund may be
obtained by calling the Trust at the telephone number provided on the cover
page. Quoted yields are not indicative of future yields. Yields will depend upon
factors such as fund maturity, the Fund's expenses and the types of instruments
held by the Fund.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments, economic conditions,
the relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical performance
of various asset classes, including but not limited to, stocks, bonds and
Treasury securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the 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.
-38-
<PAGE> 81
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 a Fund" means
the consideration received by the Trust upon the issuance of shares in that
particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the liabilities in respect of that Fund.
The Trust bears all costs in connection with its organization,
including the fees and expenses of registering and qualifying its shares for
distribution under federal and state securities regulations. All organization
expenses are amortized on the straight-line method over a period of five years
from the date of commencement of operations.
As of December 9, 1997, the following bank subsidiaries of
National City Corporation held of record 5% or more of the outstanding
Institutional shares of the Money Market, Government, Treasury, Tax Exempt and
Pennsylvania Tax Exempt Funds acting as agent or custodian for their customers,
but did not own such shares beneficially:
-39-
<PAGE> 82
<TABLE>
Percentage of Outstanding
Institutional Shares
<CAPTION>
Pennsylvania
Money Tax Tax
Market Government Treasury Exempt Exempt
Fund Fund Fund Fund Fund
------ ---------- -------- ------ -----------
<S> <C> <C> <C> <C> <C>
National City Bank, 5.82% 1.60% 23.95% 4.94% 0.09%
Northeast
One Cascade Plaza
Akron, OH 44308
National City Bank of 4.19% 1.69% 7.86% 8.94% 0%
Dayton
Gem Plaza, 6 N. Main
Dayton, OH 45412
National City Bank 40.60% 28.27% 5.11% 29.66% 0%
1900 East Ninth Street
Cleveland, OH 44114-3484
National City Bank of 4.17% 6.68% 15.03% 23.18% 0%
Columbus
155 East Broad Street
Columbus, OH 43251
National City Bank of 12.82% 49.10% 3.38% 11.96% 0%
Kentucky
National City Tower
101 South Fifth Street
Louisville, KY 40202
National City Bank of 6.94% 3.53% 37.10% 12.48% 0%
Indiana
101 W. Washington Street
Indianapolis, IN 46255
National City Bank, 5.18% 0.04% 3.13% 2.33% 0%
Northwest
405 Madison Avenue
Toledo, OH 43603
National City Bank of 13.87% 7.73% 3.86% 2.44% 99.92%
Pennsylvania
400 Fourth Avenue
Pittsburgh, PA 15222
National City Trust Co. 0.23% 0.59% 0.19% 4.05% 0%
1401 Forum Way, Suite 503
West Palm Beach, FL 33401
</TABLE>
As of November 30, 1997, the following persons owned of record 5
percent or more of the shares of the Funds of the Trust:
-40-
<PAGE> 83
<TABLE>
TAX EXEMPT MONEY MARKET FUND (RETAIL)
- -------------------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
Samtec Inc. 7,523,576.410 9.74%
P. O. Box 1147
New Albany, IN 47151-
1147
Perry Construction 5,273,000.000 6.82%
Group, Inc.
1440 West 21 Street
Erie, PA 16512-2091
David H. Weis & Edris 3,970,251.830 5.14%
Weis
144 Thornberry
Pittsburgh, PA 15235-
2643
</TABLE>
-41-
<PAGE> 84
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND (RETAIL)
- --------------------------------------------------
<TABLE>
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
Howard L. Solot 1,996,000.000 7.32%
3305 McConnell Road
Hermitage, PA 16148-
3215
Donald M. Werner 1,995,100.000 7.32%
770 Woodlawn Drive
Hermitage, PA 16148-
1577
TREASURY MONEY MARKET FUND (RETAIL)
- -----------------------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
Warner Theatre 569,710.060 9.77%
Preservation
Trust Corp.
P. O. Box 1645
Erie, PA 16507-0645
Doctors Hospital 576,597.650 9.71%
Development Foundation
1100 Dennison Avenue
Columbus, OH 43201-
3262
Estate of Barbara Cass 383,879.810 6.47%
c/o Richard Crone
1500 PPG Place
Pittsburgh, PA 15222
Pittsburgh Pediatric 365,408.460 6.26%
Research
253 Kenforest Drive
Pittsburgh, PA 15216-
1133
MONEY MARKET FUND (INSTITUTIONAL)
- ---------------------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
National City 295,815,353.690 29.80%
Corporation-Custody
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
-42-
<PAGE> 85
<TABLE>
GOVERNMENT MONEY MARKET FUND (INSTITUTIONAL)
- --------------------------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
American Electric Power 46,438,181.430 11.82%
Service Corp.
Joseph H. Shepard, Jr.
One Riverside Plaza
Columbus, OH 43215
Indiana Department of 18,653,792.300 5.90%
Transportation
Toll Road Divisions
Attn: Bob Havens
52551 Ash Road
Granger, IN 46530-0001
TREASURY MONEY MARKET FUND (INSTITUTIONAL)
- ------------------------------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
Harry B. & Louise A. 8,328,692.730 11.44%
Stoltz
22 Babcock Road
Bradford, PA 16701
Jessie L. Peters 4,447,804.620 6.11%
R. D. #3, Box 26
Franklin, PA 16323
TAX EXEMPT MONEY MARKET FUND (INSTITUTIONAL)
- --------------------------------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
National City 3,093,963.820 21.71%
Corporation
Non-Contributory Pension
Plan
1900 East Ninth Street
Cleveland, OH 44114
Elizabeth S. Black TUA 323,219.780 8.98%
Louise Black Clark
Box 218
Ojai, CA 93023
</TABLE>
-43-
<PAGE> 86
<TABLE>
PENNSYLVANIA TAX EXEMPT MONEY MARKET FUND (INSTITUTIONAL)
- ---------------------------------------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
National City 3,122,233.480 31.86%
Corporation
Non-Contributory Pension
Plan
1900 East Ninth Street
Cleveland, OH 44114
National City 2,640,172.320 17.82%
Corporation
Non-Contributory Pension
Plan
1900 East Ninth Street
Cleveland, OH 44114
National City Savings & 1,347,495.350 9.10%
Investment Plan
1900 East Ninth Street
Cleveland, OH 44114
National City Savings & 863,237.690 8.81%
Investment Plan Equity
Income Fund
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1997 are hereby incorporated herein by
reference. Copies of the Funds' annual reports may be obtained by calling the
Trust at 1-800-622-FUND (3863) or by writing to the Trust, Oaks, Pennsylvania
19456.
-44-
<PAGE> 87
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
A-1
<PAGE> 88
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 "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
A-2
<PAGE> 89
the long-term risks appear somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" 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:
A-3
<PAGE> 90
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" 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
A-4
<PAGE> 91
adverse changes in economic conditions and circumstances than bonds with higher
ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the 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.
A-5
<PAGE> 92
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
A-6
<PAGE> 93
"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.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
A-7
<PAGE> 94
"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,
enjoying 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,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-8
<PAGE> 95
[ARROW GRAPHIC]
PROSPECTUS
December 23, 1997
ARMADA OHIO TAX EXEMPT FUND
ARMADA PENNSYLVANIA MUNICIPAL FUND
ARMADA
FUNDS
TAX
EXEMPT
SERIES
[ARMADA FUNDS LOGO]
<PAGE> 96
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction.............................................................................. 2
Expense Table............................................................................. 3
Financial Highlights...................................................................... 5
Investment Objectives and Policies........................................................ 7
Investment Limitations.................................................................... 12
Yield and Performance Information......................................................... 13
Pricing of Shares......................................................................... 14
How to Purchase and Redeem Shares......................................................... 15
Distribution and Servicing Arrangements................................................... 23
Dividends and Distributions............................................................... 24
Taxes..................................................................................... 24
Management of The Trust................................................................... 27
Description of the Trust and Its Shares................................................... 28
Custodian and Transfer Agent.............................................................. 30
Expenses.................................................................................. 30
Miscellaneous............................................................................. 30
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY
BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and National Asset Management Corporation serve as investment
advisers to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
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> 97
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments,
Inc., please call your Financial Consultant for
information.
For current performance, fund information, account
redemption information, and to purchase shares, please
call 1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following two investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
OHIO TAX EXEMPT FUND'S investment objective is to provide as high a level
of interest income exempt from federal income tax and, to the extent possible,
from Ohio personal income tax, as is consistent with conservation of capital.
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.
Both Funds normally invest in tax-exempt obligations having average
remaining maturities of two to ten years.
Each Fund's net asset value per share will fluctuate as the value of its
assets changes in response to changing market prices and other factors.
National City Bank ("National City" or the "adviser") serves as investment
adviser to the Ohio Tax Exempt and Pennsylvania Municipal 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 BANK, ITS PARENT COMPANY OR
ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR
STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
December 23, 1997
<PAGE> 98
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 non-diversified investment fund under the 1940 Act.
Shares of each Fund have been classified into three separate
classes -- Retail shares, B shares and Institutional shares. ALTHOUGH B SHARES
ARE NOT CURRENTLY BEING OFFERED IN THESE FUNDS, THEY MAY BE OFFERED IN THE
FUTURE. Retail shares, B shares and Institutional 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, Retail shares and B shares are sold
through selected broker-dealers and other financial intermediaries to individual
or institutional customers. Retail 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> 99
EXPENSE TABLE
<TABLE>
<CAPTION>
OHIO OHIO OHIO PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA
TAX EXEMPT TAX EXEMPT TAX EXEMPT MUNICIPAL MUNICIPAL MUNICIPAL
RETAIL B INSTITUTIONAL RETAIL B INSTITUTIONAL
SHARES(1) SHARES(1,2) SHARES SHARES(1) SHARES(1,2) SHARES
---------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge Imposed
on Purchases(3).......... 3.00% None None 3.00% None None
Sales Charge Imposed on
Reinvested Dividends..... None None None None None None
Deferred Sales Charge(4).... 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)(5).............. 0% 0% 0% .20% .20% .20%
12b-1 Fees(5,6)............. .06% .75% .06% .02% .75% .02%
Other Expenses.............. .30% .30% .20% .38% .38% .28%
---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES(after fee
waivers)(5).............. .36% 1.05% .26% .60% 1.33% .50%
==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
ALTHOUGH B SHARES ARE NOT CURRENTLY BEING OFFERED FOR THESE FUNDS, THEY MAY BE
OFFERED IN THE FUTURE.
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to Retail 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 Retail
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) As of the date of this Prospectus, the Funds' B share classes have not
commenced operations, and therefore, "Other Expenses" for these classes are
estimates only.
(3) A reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges Applicable to Purchases of Retail Shares."
(4) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 4.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. For more information see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of B
Shares."
(5) The expense information in the table relating to each Fund 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 the Ohio 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 Fund Operating Expenses
would be .91%, 1.60% and .81% and .95%, 1.68% and .85% for the Retail, B and
Institutional shares of the Ohio Tax Exempt Fund and Pennsylvania Municipal
Fund, respectively. Additionally, if the maximum distribution fee permitted
under the 12b-1 Plan were imposed, Total Fund Operating Expenses would be
.95% and .85% and 1.03% and .93% for the Retail and Institutional shares of
the Ohio Tax Exempt Fund and Pennsylvania Municipal Fund, respectively.
(6) The Funds have in effect a 12b-1 Plan for the Retail and Institutional
classes of shares pursuant to which each Fund's Retail and Institutional
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 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.
3
<PAGE> 100
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 Retail Shares(1)...................... $ 34 $41 $50 $ 74
Ohio Tax Exempt Fund B Shares(2)........................... $ 61 $73 $78 $109(3)
Ohio Tax Exempt Fund Institutional Shares.................. $ 3 $ 8 $15 $ 33
Pennsylvania Municipal Fund Retail Shares(1)............... $ 36 $49 $62 $103
Pennsylvania Municipal Fund B Shares(2).................... $ 64 $82 $93 $140(3)
Pennsylvania Municipal Fund Institutional Shares........... $ 5 $16 $28 $ 63
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front end sales
charge.
(2) Assumes deduction of maximum applicable contingent sales charge.
(3) Based on conversion of B Shares to Retail Shares after eight years.
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> 101
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
OHIO TAX EXEMPT FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose reports are
incorporated by reference in the Statement of Additional Information. It should
be read in conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Ohio Tax Exempt Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31
----------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------- --------------------- --------------------- -------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL
------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 10.70 $10.66 $ 10.74 $10.70 $ 10.57 $10.53 $ 10.84
------- ------ ------- ------ ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income......................... 0.51 0.51 0.50 0.50 0.50 0.50 0.52
Net Gains (Losses) on Securities (Realized and
Unrealized)................................. 0.16 0.16 (0.04) (0.04) 0.17 0.17 (0.26)
------- ------ ------- ------ ------- ------ -------
Total from Investment Operations.............. 0.67 0.67 0.46 0.46 0.67 0.67 0.26
------- ------ ------- ------ ------- ------ -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.......... (0.51) (0.51) (0.50) (0.50) (0.50) (0.50) (0.52)
Dividends in Excess of Net Investment
Income...................................... (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) (0.01)
------- ------ ------- ------ ------- ------ -------
Total Distributions........................... (0.51) (0.51) (0.50) (0.50) (0.50) (0.50) (0.53)
------- ------ ------- ------ ------- ------ -------
Net Asset Value, End of Period................. $ 10.86 $10.82 $ 10.70 $10.66 $ 10.74 $10.70 $ 10.57
======= ====== ======= ====== ======= ====== =======
TOTAL RETURN................................... 6.37% 6.38%(4) 4.36% 4.35%(4) 6.61% 6.64%(4) 2.28%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s).............. $91,366 $3,535 $82,886 $2,869 $71,996 $3,168 $63,133
Ratio of Expenses to Average Net Assets (after
fee waivers)................................ 0.24%(5) 0.24%(6) 0.26%(5) 0.26%(6) 0.24%(5) 0.24%(6) 0.33%(5)
Ratio of Net Investment Income to Average Net
Assets (after fee waivers).................. 4.71%(5) 4.71%(6) 4.68%(5) 4.68%(6) 4.82%(5) 4.82%(6) 4.54%(5)
Portfolio Turnover Rate....................... 23% 23% 10% 10% 3% 3% 2%
<CAPTION>
FOR THE YEAR ENDED MAY 31
---------------------------------------------------------------------------------
1994 1993 1992
------ ---------------------- ----------------------
RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL(2) 1991 1990(1)
------ ------------- ------- ------------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $10.80 $ 10.33 $ 10.30 $ 10.14 $10.14 $ 9.93 $10.00
------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income......................... 0.52 0.51 0.51 0.19 0.46 0.50 0.13
Net Gains (Losses) on Securities (Realized and
Unrealized)................................. (0.26) 0.56 0.54 0.15 0.16 0.22 (0.11)
------ ------- ------
Total from Investment Operations.............. 0.26 1.07 1.05 0.34 0.62 0.72 0.02
------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.......... (0.52) (0.51) (0.51) (0.15) (0.46) (0.50) (0.09)
Dividends in Excess of Net Investment
Income...................................... (0.00) (0.05) (0.04) (0.00) (0.00) (0.01) (0.00)
Dividends in Excess of Net Realized Capital
Gains....................................... (0.01) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
------ ------- ------
Total Distributions........................... (0.53) (0.56) (0.55) (0.15) (0.46) (0.51) (0.09)
------ ------- ------
Net Asset Value, End of Period................. $10.53 $ 10.84 $ 10.80 $ 10.33 $10.30 $10.14 $9.93
====== ======= ======
TOTAL RETURN................................... 2.29%(4) 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).............. $2,725 $40,080 $ 1,466 $10,453 $ 437 $ 246 $ 582
Ratio of Expenses to Average Net Assets (after
fee waivers)................................ 0.33% 0.09%(5) 0.09% 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).................. 4.54% 5.00%(5) 5.00% 4.56%(5) 4.49%(3,6) 4.89%(5) 3.82%(3,5)
Portfolio Turnover Rate....................... 2% 11% 11% 1% 1% 25% 0%
</TABLE>
- ---------------
(1) The Fund commenced operations on January 5, 1990.
(2) Retail class commenced operations on April 15, 1991.
(3) Annualized.
(4) Total Return excludes sales charge.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Institutional class for the year ended May
31, 1997 would have been .79% and 4.16%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the adviser
and custodian for the Institutional class for the years ended May 31, 1996
and 1995 would have been .83% and 4.11%, and .80% and 4.26%, respectively.
The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Institutional class for the years ended May
31, 1994, 1993, 1992, 1991 and for the period ended 1990 would have been
.88% and 3.99%, .64% and 4.45%, 1.28% and 4.01%, 1.80% and 4.34% and 1.75%
and 3.72%, respectively.
(6) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Retail class for the year ended May 31, 1997
would have been .79% and 4.16%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the adviser and
custodian for the Retail class for the years ended May 31, 1996 and 1995
would have been .83% and 4.11% and .78% and 4.27%, respectively. The
operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Retail class for the years ended May 31,
1994, 1993 and for the period ended May 31, 1992 would have been .88% and
3.99%, .64% and 4.45%, and 1.48% and 3.94%, respectively.
5
<PAGE> 102
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
PENNSYLVANIA MUNICIPAL FUND
The Fund commenced operations on August 10, 1994 as a separate investment
portfolio (the "Predecessor Pennsylvania Municipal Fund") of Inventor Funds,
Inc., which was organized as a Maryland corporation. On September 9, 1996, the
Fund was reorganized as a new portfolio of the Trust. Prior to the
reorganization, the Predecessor Pennsylvania Municipal Fund offered and sold
Retail Shares that were similar to the Fund's Retail Shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Fund's Retail Shares (the
series that is similar to the Retail Shares of the Pennsylvania Municipal Fund)
for the fiscal period from May 1, 1996 to May 31, 1996, the fiscal year ended
April 30, 1996 and the fiscal period ended April 30, 1995. As part of the
reorganization, the fiscal year of the Predecessor Pennsylvania Municipal Fund
was changed to coincide with the Trust's May 31 fiscal year. A one-month
financial report representing the Predecessor Pennsylvania Municipal Fund's
operations from May 1, 1996 through May 31, 1996 is being presented. The
information was audited by Coopers & Lybrand L.L.P., independent accountants for
the Predecessor Fund, whose reports thereon are contained in Inventor Funds'
Annual Report to Shareholders for the fiscal year ended April 30, 1996 and the
period ended May 31, 1996. Such financial highlights should be read in
conjunction with the financial statements and notes thereto contained in
Inventor Funds' Annual Reports to Shareholders and incorporated by reference
into the Statement of Additional Information relating to the Pennsylvania
Municipal Fund. Additional information about the performance of the Predecessor
Pennsylvania Municipal Fund is contained in Inventor Funds' Annual Reports to
Shareholders, which may be obtained without charge by contacting the Trust at
its telephone number or address provided on page 1.
The information presented below relating to the fiscal year ended May 31,
1997 has been derived from financial statements audited by Ernst & Young LLP,
independent auditors for the Pennsylvania Municipal Fund, whose report is
incorporated by reference in the Statement of Additional Information. It should
be read in conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FOR THE PERIOD ENDED YEAR ENDED PERIOD ENDED
YEAR ENDED MAY 31, APRIL 30, APRIL 30,
MAY 31, 1997(5) 1996(5) 1996(5) 1995(5)
------------------------ ------------ --------------- ---------------
INSTITUTIONAL RETAIL(6)
------------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 10.08 $ 10.13 $ 10.12 $ 10.04 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income......................... 0.44 0.31 0.04 0.43 0.29
Net gain/(loss) on Securities (realized and
unrealized)................................. 0.17 0.12 (0.04) 0.08 0.04
------- ------- ------- ------- -------
Total from Investment Operations........ 0.61 0.43 (0.00) 0.51 0.33
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.......... (0.44) (0.31) (0.04) (0.43) (0.29)
Dividends from Net Realized Capital Gains..... (0.02) (0.02) (0.00) (0.00) (0.00)
Dividends in Excess of Net Realized Capital
Gains....................................... (0.01) (0.01) (0.00) (0.00) (0.00)
------- ------- ------- ------- -------
Total Distributions..................... (0.47) (0.34) (0.04) (0.43) (0.29)
------- ------- ------- ------- -------
Net Asset Value, End of Period.................. $ 10.22 $ 10.22 $ 10.08 $ 10.12 $ 10.04
======= ======= ======= ======= =======
TOTAL RETURN.................................... 6.21% 6.13%(7) (0.03)%(4,7) 5.06%(7) 3.38%(4,7)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000)............... $36,769 $ 81 $38,733 $38,809 $34,638
Ratio of Expenses to Average Net Assets....... .87%(1) .99%(2,3) .85%(1,3) .85%(1) .85%(1,3)
Ratio of Net Investment Income to Average Net
Assets...................................... 4.35%(1) 4.26%(2,3) 4.32%(1,3) 4.16%(1) 4.05%(1,3)
Portfolio Turnover Rate....................... 42% 42% 0% 22% 4%
</TABLE>
- ---------------
(1) The operating expense ratio and net investment waivers by the adviser and
other service providers for the Institutional class for the year ended May
31, 1997, for the period ended May 31, 1996, for the year ended April 30,
1996, and for the period ended April 30, 1995 would have been 1.02% and
4.20%, 1.31% and 3.86%, 1.24% and 3.77%, and 1.36% and 3.54%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser for the Retail class for the period ended May 31,
1997 would have been 1.00% and 4.25%, respectively.
(3) Annualized.
(4) Not Annualized.
(5) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(6) Retail class commenced operations on September 11, 1996.
(7) Total Return excludes sales charge.
6
<PAGE> 103
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 of
the State of Ohio and its political subdivisions, as well as of certain other
governmental issuers in Ohio ("Ohio Bonds"). Dividends paid by the Fund which
are derived from interest properly attributable to Ohio Bonds will be exempt
from regular federal income tax and Ohio personal income tax. Dividends derived
from interest on Municipal Securities of other governmental issuers will be
exempt from regular federal income tax but may be subject to Ohio personal
income tax. See "Taxes." The Fund may hold uninvested cash reserves, pending
investment, during temporary defensive periods. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods; however, uninvested cash reserves will not earn income. The
Fund may invest in other investments as described below under "Other Investment
Policies" including stand-by commitments, variable and floating rate
obligations, certificates of participation, other investment companies, illiquid
securities, Taxable Money Market Instruments (as defined below) and zero coupon
obligations and engage in when-issued transactions.
PENNSYLVANIA MUNICIPAL FUND
The investment objective of the Pennsylvania Municipal Fund is to provide
current income exempt from both regular federal income and Pennsylvania personal
income tax while preserving capital. The Fund seeks to achieve its objective by
investing 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"). Dividends paid by the Fund which are derived from
interest properly attributable to Pennsylvania Municipal Securities will be
exempt from regular federal income tax and Pennsylvania personal income tax.
Dividends derived from interest on Municipal Securities of other governmental
issuers will be exempt from regular federal income tax but may be subject to
Pennsylvania personal income tax. See "Taxes."
Under normal market conditions, the Fund will be fully invested in
Pennsylvania Municipal Securities. This policy is fundamental and may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as
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defined under "Miscellaneous"). For temporary defensive or liquidity purposes
when, in the opinion of the Fund's adviser, Pennsylvania Municipal Securities of
sufficient quality are not readily available, the Fund may invest up to 100% of
its assets in other Municipal Securities and in taxable securities. The Fund
also may hold uninvested cash reserves, pending investment, during temporary
defensive periods. There is no percentage limitation on the amount of assets
which may be held uninvested during temporary defensive periods; however,
uninvested cash reserves will not earn income. The Fund may invest in other
investments as described below under "Other Investment Policies" including
municipal leases, stand-by commitments, variable and floating rate obligations,
certificates of participation, other investment companies, illiquid securities,
Taxable Money Market Instruments (as defined below) and zero coupon obligations
and engage in when-issued transactions.
BOTH 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 Fund anticipates that it will
maintain a dollar-weighted average portfolio maturity of two to ten years.
SPECIAL RISK CONSIDERATIONS
Investment return on a non-diversified portfolio typically is dependent
upon the performance of a smaller number of securities relative to the number
held in a diversified portfolio. Consequently, the change in value of any one
security may affect the overall value of a non-diversified portfolio more than
it would a diversified portfolio, and thereby subject the market-based net asset
value per share of the non-diversified portfolio to greater fluctuations. In
addition, a non-diversified portfolio may be more susceptible to economic,
political and regulatory developments than a diversified investment portfolio
with similar objectives may be.
Although 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, the Ohio Tax Exempt Fund may invest up to 20% of its total
assets in private activity bonds and taxable investments, and the Pennsylvania
Municipal Bond Fund may invest up to 100% of its total assets in Pennsylvania
private activity bonds, 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 area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
six years, the State rates were below the national rates (4.9% versus 5.4% in
1996).
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio Bonds
held in the Fund or the ability of particular obligors to make timely payments
of debt service on (or lease payments relating to) those Bonds. A more detailed
summary of the more significant conditions affecting the financial
8
<PAGE> 105
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 Fund only if the
interest paid thereon is exempt from regular federal income tax and not treated
as a specific tax preference item under the federal alternative minimum tax. See
"Taxes."
Each Fund may also invest in "moral obligation" bonds, which are ordinarily
issued by special purpose public authorities. If the issuer of moral obligation
bonds is unable to meet its debt service obligations from current revenues, it
may draw on a reserve fund, the restoration of which is a moral commitment but
not a legal obligation of the state or municipality which created the issuer.
The Funds may also purchase municipal leases. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to be illiquid.
They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate in any of the above.
Municipal lease obligations typically are not backed by the municipality's
credit, and their interest may become taxable if the lease is assigned. If funds
are not appropriated for the following year's lease payments, a lease may
terminate, with a possibility of default on the lease obligation and significant
loss to the Fund. Under guidelines estab-
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<PAGE> 106
lished by the Board of Trustees, the credit quality of municipal leases will be
determined on an ongoing basis, including an assessment of the likelihood that a
lease will be canceled.
The Funds may also invest in unsecured short-term promissory notes issued
by municipalities and other entities.
Ratings Criteria
The Funds invest in Municipal Securities which at the time of purchase are
rated the following or higher:
(a) for the Ohio Tax Exempt Fund -- "A" by Standard and Poor's Ratings
Group ("S&P"), Fitch Investors Service, L.P. ("Fitch"), Duff & Phelps
Credit Rating Co. ("Duff"), or Moody's Investors Service, Inc. ("Moody's")
in the case of bonds; "SP-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, or
"MIG-2" ("VMIG-2" for variable rate demand notes) by Moody's in the case of
notes; or "A-2" by S&P, "F-2" by Fitch, "Duff 2" by Duff, or "Prime-2" by
Moody's in the case of tax-exempt commercial paper;
(b) Pennsylvania Municipal Fund -- "BBB" by S&P or Fitch, "Baa" by
Moody's, or "A" by Duff in the case of bonds; "SP-2" by S&P, "F-2" by
Fitch, "Duff 2" by Duff, or "MIG-2" ("VMIG-2" for variable rate demand
notes) by Moody's in the case of notes; or "A-2" by S&P, "F-2" by Fitch,
"Duff 2" by Duff, Baa or "Prime-2" by Moody's in the case of tax-exempt
commercial paper.
Securities that are unrated at the time of purchase will be determined to
be of comparable quality by the Funds' adviser 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 Bonds
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.
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.
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<PAGE> 107
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 (including other investment companies advised by the adviser) which
invest in high-quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, the Funds would bear, along with
other shareholders, their pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in connection with its own operations.
Investment companies in which a Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by a Fund and, therefore, will be borne indirectly by its shareholders.
Illiquid Securities
The Ohio Tax Exempt Fund and the Pennsylvania Municipal Fund will not
knowingly invest more than 15% of the value of their respective net assets in
securities that are illiquid. Illiquid securities would generally include
repurchase agreements and guaranteed investment contracts with
notice/termination dates in excess of seven days, 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 level of illiquidity in the Funds during any period
that qualified institutional buyers become uninter-
11
<PAGE> 108
ested in purchasing these restricted securities. The ability to sell to
qualified institutional buyers under Rule 144A is a recent development, and it
is not possible to predict how this market will develop.
Taxable Money Market Instruments
Each Fund may invest, from time to time, a portion of its assets for
temporary defensive or liquidity purposes in short-term money market
instruments, the income from which is subject to federal income tax ("Taxable
Money Market Instruments"). Taxable Money Market Instruments may include:
obligations of the U.S. government and its agencies and instrumentalities; debt
securities (including commercial paper) of issuers having, at the time of
purchase, a quality rating within the highest rating category of S&P, Fitch,
Duff, or Moody's; certificates of deposit; bankers' acceptances; and repurchase
agreements with respect to such obligations.
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 Fund is not permitted to enter into repurchase agreements
with the adviser, Distributor, or any of their affiliates. Although the
securities subject to repurchase agreements may bear maturities exceeding 397
days.
The seller under a repurchase agreement will be required to maintain the
value of the securities which the Fund holds subject to the agreement at not
less than the repurchase price, marked to market daily, by providing additional
securities or other collateral to the Fund if necessary. If the seller defaulted
on its repurchase obligation, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying securities (including accrued
interest) were less than the repurchase price (including accrued interest) under
the agreement. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Further, it is uncertain whether the Trust would be
entitled, as against a claim by such seller or its receiver or trustee in
bankruptcy, to retain the underlying securities.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the holders of
a majority of the Fund's outstanding shares (as defined under "Miscellaneous").
(Other 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, instrumental-
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ities 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;
(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.
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.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of 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 Retail shares, B
shares and Institutional shares. The "yield" quoted in advertisements refers to
the income generated by an investment in a class of shares over a 30-day period
identified in the advertisement. This income is then "annualized." The amount of
income generated by an investment during a 30-day period is assumed to be earned
and reinvested at a constant rate and compounded semi-annually; the annualized
income is then shown as a percentage of the investment. Each Fund's "tax-
equivalent" yield for a class of shares, which shows the level of taxable yield
necessary to produce an after-tax equivalent to a Fund's tax-free yield for that
class, may also be quoted from time to time. It is calculated by increasing the
yield (calculated as above) for a class of shares by the amount necessary to
reflect the payment of federal and Ohio or Pennsylvania income tax at stated tax
rates. A Fund's tax-equivalent yield for a class of shares will always be higher
than its yield.
Each Fund calculates its total returns for each class of shares on an
"average annual total return" basis for various periods from the date they
commenced investment operations and for other periods as permitted under the
rules of the SEC. Average annual total return reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns for each class of shares may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the shares
and assume that any dividends and capital gain distributions made by the Fund
with respect to a class during the period are reinvested in shares of that
class. When considering
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<PAGE> 110
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 investment in a Fund.
Shareholders should note that the yields and total returns of Retail shares
and B shares will be lower than those of the Institutional 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 Retail 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).
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 valua-
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tions are provided by one or more independent pricing services when such
valuations are believed to reflect fair market value. When valuing securities,
pricing services consider institutional size trading in similar groups of
securities and any developments related to specific issues, among other things.
Short-term investments with maturities of 60 days or less are generally valued
on the basis of amortized cost, unless the Trust's Board of Trustees determines
that this does not represent fair value. The net asset value per share of each
class of shares will fluctuate as the value of its investment portfolio changes.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Trust's sponsor
and distributor. The Distributor is a registered broker/dealer with principal
offices located at Oaks, Pennsylvania 19456.
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 RETAIL SHARES AND B SHARES
Retail 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 Retail shares and B shares of the Funds,
investors should read "Characteristics of Retail Shares and B Shares" and
"Factors to Consider When Selecting Retail Shares or B Shares" below.
Retail shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail 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
Retail 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 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 Retail shares or
B shares in a Fund. All
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subsequent investments for Retail shares and B shares are subject to a minimum
investment of $250. All purchases made by check should be in U.S. dollars.
Please make the check payable to Armada Funds (fund name), or, in the case of a
retirement account, the custodian or trustee for the account. We will not accept
third-party checks under any circumstance. Investments made in Retail 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 Retail shares or B
shares of a Fund, in a consistent manner each month, with a minimum amount of
$50. Monies may be automatically withdrawn from a shareholder's checking or
savings account available through an investor's financial institution and
invested in additional Retail shares at the Public Offering Price 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 Retail 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 RETAIL SHARES
The Public Offering Price for Retail shares of each Fund is the sum of the
net asset value of the shares being purchased plus any applicable sales charge
per account, which is assessed as follows:
<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.......... 3.00 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>
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 Retail shares made by:
(a) trustees and officers of the Trust;
(b) directors, employees and participants in employee
benefit/retirement plans (annuitants) of National City Corporation or any
of its affiliates;
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above;
(d) individuals investing in a Fund by way of a direct transfer or a
rollover from a qualified plan distribution where affiliates of National
City Corporation are serving as a
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<PAGE> 113
trustee or agent, or certain institutions having relationships with
affiliates of National City Corporation;
(e) investors purchasing Fund shares through a payroll deduction plan;
(f) investors investing in the Armada Plus account through National
City's Retirement Plan Services; and
(g) investors purchasing fund shares through "one-stop" mutual fund
networks.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail shares of
each Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND (3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in Retail shares in
determining the applicable sales charge. An Investor's aggregate investment in
Retail shares is the total value (based on the higher of current net asset value
or any Public Offering Price originally paid) of:
(a) current purchases;
(b) Retail shares that are already beneficially owned by the Investor
for which a sales charge has been paid;
(c) Retail shares that are already beneficially owned by the Investor
which were purchased prior to July 22, 1990; and
(d) Retail shares purchased by dividends or capital gains that are
reinvested.
If, for example, an Investor beneficially owns Retail shares of a Fund with
an aggregate current value of $90,000 and subsequently purchases Retail shares
of that Fund having a current value of $10,000, the sales charge applicable to
the subsequent purchase would be reduced to 2.0% of the Public Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. A Letter of Intent option is found on the account
application which may be obtained from the Investor's financial institution or
directly from the Trust by calling 1-800-622-FUND (3863). If an Investor so
elects, the 13-month period may begin up to 30 days prior to the Investor's
signing the Letter of Intent. The initial investment under the Letter of Intent
must be equal to at least 4.0% of the amount indicated in the Letter of Intent.
During the term of a Letter of Intent, the Transfer Agent will hold Retail
shares representing 4.0% of the amount indicated in the Letter of Intent in
escrow for payment of a higher sales charge if the entire amount is not
purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13-month period, or is redeemed within one year from the
time of fulfillment, the Investor will be required to pay an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge the Investor would have had to pay on the aggregate purchases if
the total of such purchases had been made at a single time.
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 six years of
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<PAGE> 114
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 Retail 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........................ 4.0%
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%
More than five, but less than
six........................ 1.0%
After six years............ None
</TABLE>
When an Investor redeems his 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 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 Retail
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
18
<PAGE> 115
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 RETAIL SHARES AND B SHARES
The primary difference between Retail 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 Retail shares and B shares are the same.
Retail 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.
Retail and Institutional 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 Retail and Institutional 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 Retail shares, will cause B shares to have a higher expense ratio and
pay lower dividends than Retail 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
Retail 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 Retail shares takes place at net asset value, as a result of which
an Investor receives dollar-for-dollar the same value of Retail shares as he 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 Retail 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 Retail shares of the Fund on the
same date.
FACTORS TO CONSIDER WHEN SELECTING RETAIL 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 Retail shares purchased at the same time, and to what
extent such differential would be offset by the higher yield of Retail shares.
In this regard, to the extent that the sales charge for Retail shares is waived
or reduced by one of the methods described above, investments in Retail shares
become more desirable. The Trust will refuse all purchase orders for B shares of
over $250,000.
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<PAGE> 116
Although Retail shares are subject to a distribution fee, they are not
subject to the higher distribution fee applicable to B shares. For this reason,
Retail 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 Retail 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 six-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 six-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 Retail 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 Retail 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 Retail 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
Retail shares as described above at the end of such eight-year period.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to banks and trust companies which
are affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
registered investment advisers and financial planners affiliated with National
City ("RIAs") who charge an advisory, consulting or other fee for their services
and buy shares for their own accounts or the accounts of their clients
("Customers"). Institutional shares are sold without a sales charge imposed by
the Trust or the Distributor. However, depending on the terms governing the
particular account, the Banks, NAM or RIAs may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his investment in a Fund. There is no
minimum investment.
It is the responsibility of the Banks, NAM and RIAs to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will normally be held of record by the Banks, NAM or RIAs. Confirmations
of share purchases and redemptions will be sent to the Banks, NAM and RIAs.
Beneficial ownership of Institutional shares will be recorded by the Banks, NAM
or RIAs and reflected in the account statements provided by them to their
Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of 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.
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<PAGE> 117
Purchase orders for which payment has not been received or accepted will be
returned after prompt inquiry to the sending Bank or institution.
REDEMPTION OF RETAIL SHARES 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 financial
institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks. It is the responsibility of the Banks to transmit redemption orders to
the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a minimum
balance in his account at the Bank and the balance in such account falls below
that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly with the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $10,000, no
signature guarantee is needed. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly with the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
21
<PAGE> 118
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares 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. Additional information regarding this service
may be obtained from an investor's financial institution or the Transfer Agent
at 1-800-622-FUND(3863). 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.
OTHER REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A FUND, SHAREHOLDERS SHOULD INDICATE WHETHER THEY
ARE REDEEMING RETAIL SHARES OR B SHARES. In the event a redeeming shareholder
owns both Retail shares and B shares in a Fund, the Retail 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 investment should purchase shares by federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
federal funds.
Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES AND B SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (a "no load Fund") at the net asset value per share on the date of
exchange. As a result, no additional sales charge will be incurred with respect
to such an exchange. Shareholders may also exchange Retail shares of a no load
Fund for Retail shares of another no load Fund at the net asset value per share
without payment of a sales charge. In addition, shareholders of a no load Fund
may exchange Retail shares for Retail shares of a load Fund subject to payment
of the applicable sales charge.
Shareholders who have purchased B shares of one or more of the Funds
(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
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<PAGE> 119
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). However, shareholders exchanging Retail shares of a no
load Fund which were received in a previous exchange transaction involving
Retail shares of a load Fund will not be required to pay an additional sales
charge upon notification of the reinvestment of the equivalent amount into the
Retail shares of a load Fund. Shareholders contemplating an exchange should
carefully review the Prospectus of the Fund into which the exchange is being
considered. An Armada Funds Prospectus may be obtained from NatCity Investments,
Inc., or an Investor's financial institution or by calling 1-800-622-FUND(3863).
Any Retail shares 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 Retail 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
financial institution, and an Investor who directly purchased shares from the
Trust should mail the exchange request to the Transfer Agent. The exchange
privilege may be modified or terminated at any time upon 60 days notice to
shareholders.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified Funds over a specified period of time, and
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this Prospectus. Because purchases of
Retail shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent indicating an intent to purchase
Retail shares in connection with the systematic exchange program. A shareholder
may apply for participation in this program through his financial institution or
by calling 1-800-622-FUND (3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement, as amended, and Rule 12b-1
under the 1940 Act, the Trust adopted a Service and Distribution Plan relating
to the Institutional and Retail classes of shares ("Institutional and Retail
Plan") and a separate B Shares Distribution and Servicing Plan relating to the B
class of shares ("B Shares Plan"). Under the Institutional and Retail Plan, the
Trust pays the following compensation to the Distributor for services provided
and expenses assumed in pro-
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<PAGE> 120
viding the Trust advertising, marketing, prospectus printing and other
distribution services: an annual base fee of $1,250,000 plus incentive fees
related to asset growth. Such compensation is payable monthly and accrued daily
among the Retail and Institutional shares of the Trust's investment funds with
respect to which the Distributor is distributing shares. In the case of each
such fund, such compensation shall not exceed .10% per annum of the average
aggregate net assets of its Institutional and Retail classes. 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 Institutional and Retail 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 Retail 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 Retail or B shares in consideration
for the payment of up to .10% (on an annualized basis) of the average daily net
asset value of such shares. Persons entitled to receive compensation for
servicing Retail shares or B shares may receive different compensation with
respect to those shares than with respect to Institutional shares in the same
Fund. Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Fund on
behalf of customers, providing information periodically to customers showing
their position in Retail shares or B shares, and providing sub-transfer agent
services or the information necessary for sub-transfer agent services, with
respect to Retail 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 Retail
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 the
Funds' net asset values per share by the per share amount thereof.
Shareholders may elect to have their dividends reinvested in additional
full and fractional Fund shares of the same class of any Armada Funds at the net
asset value of such shares on the payment date. Shareholders must make such
election, or any revocation thereof, in writing to their Banks or financial
institutions. The election will become effective with respect to dividends and
distributions paid after its receipt.
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.
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<PAGE> 121
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its net tax-exempt
interest income and 90% of its investment company taxable income, if any, for
such year. Each Fund intends to distribute substantially all of its net
tax-exempt income (such distributions are known as "exempt-interest dividends")
and investment company taxable income, if any, each taxable year.
Exempt-interest dividends may be treated by shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code unless under
the circumstances applicable to the particular shareholder the exclusion would
be disallowed. See the Statement of Additional Information under "Additional
Information Concerning Taxes." In general, the Fund's investment company taxable
income will be the sum of its net investment income and the excess of any net
short-term capital gain for the taxable year over the net long-term capital
loss, if any, for such year. To the extent, if any, dividends paid to
shareholders are derived from taxable income or from net long-term capital
gains, such dividends will not be exempt from federal income tax and may also be
subject to state and local taxes. The Funds do not intend to earn any investment
company taxable income or net long-term capital gains. None of their
distributions are expected to be eligible for the dividends received deduction
for corporations.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by the Funds on December
31 of such year in the event such dividends are actually paid during January of
the following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
If the Funds should hold certain private activity bonds issued after August
7, 1986, shareholders must include, as an item of tax preference, the portion of
dividends paid by the Funds that is attributable to interest on such bonds in
their federal alternative minimum taxable income for purposes of determining
liability (if any) for the alternative minimum tax applicable to individuals and
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum tax purposes. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of the Fund depending upon the tax
basis of such shares and their price at the time of redemption, transfer or
exchange. If a shareholder has held shares for six months or less and during
that time received an exempt-interest dividend, then any loss the shareholder
might realize on the sale of those shares will be disallowed to the extent of
the earlier exempt-interest dividend. Generally, a shareholder may include sales
charges incurred upon the purchase of Fund shares in his tax basis for such
shares for the purpose of determining gain or loss on a redemption, transfer or
exchange of such shares. However, if the shareholder effects an exchange of such
shares for shares of another Fund within 90 days of the purchase and is able to
reduce the sales charges applicable to the new shares (by virtue of the Trust's
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged shares but may be included (subject
to this limitation) in the tax basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local
25
<PAGE> 122
taxes which may differ from federal tax consequences described above.
STATE AND LOCAL TAXES
Ohio Taxes
Under current Ohio law, individuals and estates that are subject to the
Ohio personal income tax, or municipal or school district income taxes in Ohio
will not be subject to such taxes on distributions with respect to shares of the
Ohio Tax Exempt Fund ("Distributions") to the extent that the Distributions are
properly attributable to interest on obligations of the State of Ohio or its
political subdivisions ("Ohio Obligations"). Corporations that are subject to
the Ohio corporation franchise tax will not be required to include Distributions
in their tax base for purposes of calculating the Ohio corporation franchise tax
on the net income basis to the extent that such Distributions either represent
exempt-interest dividends for federal income tax purposes or are properly
attributable to interest on Ohio Obligations. However, shares of the Fund will
be included in a corporation's tax base for purposes of calculating the Ohio
corporation franchise tax on the net worth basis.
Distributions that consist of interest on obligations of the United States
or its territories or possessions or of any authority, commission, or
instrumentality of the United States the interest on which is exempt from state
income taxes under the laws of the United States are exempt from the Ohio
personal income tax, and municipal and school district income taxes in Ohio,
and, provided such interest is excluded from gross income for federal income tax
purposes, are excluded from the net income base of the Ohio corporation
franchise tax.
Distributions properly attributable to gain on the sale, exchange or other
disposition of Ohio Obligations will not be subject to the Ohio personal income
tax, or municipal or school district income taxes in Ohio, and will not be
included in the net income base of the Ohio corporation franchise tax.
Distributions attributable to other sources generally will not be exempt from
the Ohio personal income tax, municipal or school district income taxes in Ohio,
or the net income base of the Ohio corporation franchise tax.
It is assumed for purposes of this discussion of Ohio state and local taxes
that the Fund will continue to qualify as a regulated investment company under
the Code and that at all times at least 50% of the value of the total assets of
the Fund consists of Ohio Obligations or similar obligations of other states or
their subdivisions.
Pennsylvania Taxes
Under current Pennsylvania law, shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Pennsylvania
Municipal Fund attributable to interest income from obligations of the State of
Pennsylvania or its political subdivisions, the United States, its territories
or certain of its agencies and instrumentalities ("Exempt Securities"). However,
Pennsylvania Personal Income Tax will apply to distributions from the Fund
attributable to gain realized on the disposition of any investment, including
Exempt Securities, or to interest income from investments other than Exempt
Securities. Shareholders also will be subject to the Pennsylvania Personal
Income Tax on any gain they realize on the disposition of shares in the Fund.
Distributions attributable to interest from Exempt Securities are not
subject to the Philadelphia School District Net Income Tax. However,
distributions attributable to gain from the disposition of Exempt Securities are
subject to the Philadelphia School District Net Income Tax, except that
distributions attributable to gain on any investment held for more than six
months are exempt. A shareholder's gain on the disposition of shares in the Fund
that he has held for more than six months will not be subject to the
Philadelphia School District Net Income Tax.
Shareholders are not subject to the county personal property tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended to
the extent that the Fund is comprised of Exempt Securities.
26
<PAGE> 123
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
National City serves as investment adviser to the Ohio Tax Exempt and
Pennsylvania Municipal Funds. The adviser is a wholly owned subsidiary of
National City Corporation. The adviser provides trust and banking services to
individuals, corporations, and institutions, both nationally and
internationally, including investment management, estate and trust
administration, financial planning, corporate trust and agency, and personal and
corporate banking. The adviser is a member bank of the Federal Reserve System
and the Federal Deposit Insurance Corporation.
On September 30, 1997, the Trust Department of National City had
approximately $11.1 billion in assets under management, and had approximately
$23.0 billion in total trust assets. National City 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 Ohio Tax Exempt and Pennsylvania Municipal Funds' investment
policies, the adviser has agreed to manage such Funds, make decisions with
respect to and place orders for all purchases and sales of such Funds'
securities, and maintain records relating to such purchases and sales.
The Fixed Income Team of National City's Asset Management Group is
primarily responsible for the day to day management of the Funds. No individual
is primarily responsible for making investment recommendations. Members of the
team are:
- - Michael E. Santelli, CFA, Vice President and Director of the Fixed Income
Team, joined National City in 1995. Previously, he spent a total of 4 years in
the mortgage research departments of Donaldson, Lufkin and Jenrette and
Merrill Lynch. He specializes in the mortgage market.
- - Stephen P. Carpenter, Vice President, joined National City in 1989. He has
more than 23 years of investment experience with expertise in the area of
municipal bonds (taxable as well as tax-free) and money market instruments.
- - Stanley F. Martinez, Investment Officer, joined National City in 1996.
Previously he managed taxable money market funds and short duration fixed
income portfolios for Mercantile Safe Deposit & Trust. Stanley's focus is on
short duration investments across all fixed income sectors.
- - Douglas J. Carey, Investment Officer, joined National City in 1995. Prior to
joining National City, Mr. Carey was a graduate assistant for the Economics
Department of Miami University from August 1994 through July 1995. He now
specializes in the asset-backed sector.
- - Marilou C. Hitt, Assistant Vice President, has worked in National City's Funds
Management Trading Department since 1984. She has managed short-term money
market instruments for
27
<PAGE> 124
more than ten years. Her responsibilities also include fixed income trading of
government and corporate securities.
- - Frederick W. "Ted" Ramsey, Vice President of the Fixed Income Research Team,
oversees the Fixed Income Team's credit and research area. His experience
includes 25 years in corporate banking and credit administration, including 10
years as senior credit officer. In addition to his responsibilities as head of
credit research, Mr. Ramsey serves as credit advisor on new investment
opportunities and risk management guidelines.
- - Barbara A. Nagy, Assistant Vice President, has been with National City since
1982 where she worked in Commercial Lending credit research before joining the
Fixed Income Team in 1994. Ms. Nagy is experienced in corporate and municipal
credit research. Her investment responsibilities include tax-free money market
instruments.
- - Don M. McConnell, Research Analyst, joined National City in 1996. Mr.
McConnell has responsibility for evaluating portfolio risk measures as well as
fixed income sector relative valuation. His responsibilities also include
duration management of the funds.
For the services provided and expenses assumed pursuant to the Advisory
Agreement relating to the Ohio Tax Exempt and Pennsylvania Municipal 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.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect, wholly
owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
each Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive with respect to each
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .045% of the next $200,000,000 of its net assets
and .02% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 57 separate classes or
series of shares of beneficial interest ("shares"). Six 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) and Pennsylvania
Municipal Fund (Class T, Class T -- Special Series 1, and Class T -- Special
Series 2), are described in this Prospectus. Class K and Class T shares
constitute the Institutional class or series of shares; Class K -- Special
Series 1 and Class T -- Special Series 1 shares constitute the Retail class or
series of shares; Class K -- Special Series 2, and Class T -- Special Series 2
shares 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)
28
<PAGE> 125
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)
Equity Growth Fund
(Class H, Class H -- Special Series 1 and Class H -- Special Series 2)
Intermediate Bond Fund
(Class I, Class I -- Special Series 1 and Class I -- Special Series 2)
National Tax Exempt Fund
(Class L and Class L -- Special Series 1)
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 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)
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)
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 Retail 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.
29
<PAGE> 126
As stated above, the Trust is organized as a trust under the laws of
Massachusetts. Shareholders of such a trust may, under certain circumstances, be
held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Trust provides for indemnification out of
the trust property for any shareholder held personally liable solely by reason
of his being or having been a shareholder and not because of his acts or
omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the 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 December 9, 1997, National City held beneficially or of record
approximately 40.65% and 0.20% of the outstanding Institutional shares of the
Ohio Tax Exempt and Pennsylvania Municipal Funds, respectively. National City
does not have any economic interest in such shares which are held solely for the
benefit of its customers, but may be deemed to be a controlling person of the
Funds within the meaning of the 1940 Act by reason of its record ownership of
such shares. The names of beneficial owners and record owners who are
controlling shareholders under the 1940 Act may be found in the Statement of
Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to
P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust
for these services are described in the Statement of Additional Information.
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.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent auditors.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means,
30
<PAGE> 127
with respect to the approval of an investment advisory agreement, a distribution
plan or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
31
<PAGE> 128
LOGO NOTES
<PAGE> 129
[ARMADA FUNDS LOGO]
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, 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:
Acromed Corporation
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishing's 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:
Meridia Health System
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 130
[ARMADA LOGO]
Oaks, Pennsylvania, 19456
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National City Bank of Columbus
155 East Broad Street
Columbus, Ohio 43251
National City Bank of Kentucky
101 South Fifth Street
Louisville, Kentucky 40202
AF-810 (12/97)
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
<PAGE> 131
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 23, 1997
OHIO TAX EXEMPT FUND
PENNSYLVANIA MUNICIPAL FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the above Funds of Armada Funds
(the "Trust"), dated December 23, 1997 (the "Prospectus"). A copy of the
Prospectus may be
<PAGE> 132
obtained by calling or writing the Trust at 1-800-622-FUND (3863), Oaks,
Pennsylvania 19456.
<PAGE> 133
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION..................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES..................................................................... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.......................................................... 18
DESCRIPTION OF SHARES.................................................................................... 21
ADDITIONAL INFORMATION CONCERNING TAXES.................................................................. 22
TRUSTEES AND OFFICERS................................................................................... 27
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS.................................................................... 32
SHAREHOLDER SERVICES PLAN................................................................................ 38
PORTFOLIO TRANSACTIONS................................................................................... 38
AUDITORS................................................................................................. 40
COUNSEL................................................................................................. 41
STANDARDIZED YIELD QUOTATIONS........................................................................... 41
MISCELLANEOUS............................................................................................ 46
FINANCIAL STATEMENTS.................................................................................... 48
APPENDIX A.............................................................................................. A-1
</TABLE>
-i-
<PAGE> 134
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information should be read in
conjunction with the Prospectus of Armada Funds (the "Trust") that describes the
Ohio Tax Exempt and Pennsylvania Municipal Funds (the "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") of Inventor
Funds, Inc., which was organized as a Maryland corporation. On September 9,
1996, the Predecessor Fund was reorganized as a new portfolio of the Trust.
Prior to the reorganization, the Predecessor Fund offered and sold shares of
stock that were similar to the Trust's Retail Shares of beneficial interest.
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the 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 Ohio Tax Exempt and Pennsylvania Municipal Funds also may
invest in "moral obligation" issues, which are normally issued by special
purpose authorities. Municipal Bonds include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, and the extension of loans to public institutions and facilities.
Private activity bonds may be purchased if the interest paid is excludable from
federal income tax. Private activity bonds are issued by or on behalf of states
or political subdivisions thereof to finance privately owned or operated
facilities for business and manufacturing, housing,
-1-
<PAGE> 135
sports, and pollution control and to finance activities of and facilities for
charitable institutions. Private activity bonds are also used to finance public
facilities such as airports, mass transit systems, ports, parking and low income
housing. The payment of the principal and interest on private activity bonds is
dependent solely on the ability of the facility's user to meet its financial
obligations and may be secured by a pledge of real and personal property so
financed.
Pennsylvania Municipal Securities that are payable only from
the revenues derived from a particular facility may be adversely affected by
Pennsylvania laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest and principal,
including, among others, laws and regulations which limit the amount fees, rates
or other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. Pennsylvania Municipal
Securities, the payment of interest and principal on which is insured in whole
or in part by a Pennsylvania governmentally created fund, may be adversely
affected by Pennsylvania laws or regulations which restrict the aggregate
proceeds available for payment of principal and interest in the event of a
default on such municipal securities. Similarly, Pennsylvania Municipal
Securities, the payment of interest and principal on which is secured, in whole
or in part, by an interest in real property may be adversely affected by
Pennsylvania laws which limit the availability of remedies or the scope of
remedies available in the event of a default on such municipal securities.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific Pennsylvania Municipal Securities the
Pennsylvania Municipal Fund will invest from time to time or predicting the
nature or extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the securities
in which the Pennsylvania Municipal Fund may invest and, therefore, on the
shares of the Fund.
There are, of course, variations in the quality of Municipal
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
-2-
<PAGE> 136
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 on the principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
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 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 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
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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.
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
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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 whenissued securities,
the custodian sets aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment, marked to market daily. It is likely that a Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and ability to manage
its portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its total assets.
When the Funds engage in when-issued transactions, they rely
on the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each Fund may invest in securities issued by other investment
companies (including other investment companies advised by the adviser, 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
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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
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guidelines approved by the Board of Trustees, subject to the seller's agreement
to repurchase such securities at a mutually agreed-upon date and price. The
repurchase price generally equals the price paid by the Fund plus interest
negotiated on the basis of current short term rates, which may be more or less
than the rate on the underlying portfolio securities. The seller under a
repurchase agreement will be required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). If the seller were to default on its repurchase obligation or
become insolvent, the Fund holding such obligation would suffer a loss to the
extent that the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price under the agreement, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
Although there is no controlling legal precedent confirming that 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
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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 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;
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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
nonfundamental limitations, which may be changed without the vote of
shareholders:
No Fund may:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles,
spreads, or any combination thereof, except as consistent with the Fund's
investment objective and policies for transactions in options on securities or
indices of securities, futures contracts and options on futures contracts and in
similar investments.
3. Purchase securities on margin, make short sales of
securities or maintain a short position, except that, as consistent with a
fund's investment objective and policies, (a) this investment limitation shall
not apply to the Fund's transactions in futures contracts and related options,
options on securities or indices of securities and similar instruments, and (b)
it may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 15% of its net assets in illiquid
securities.
6. At the end of each quarter of each Fund's 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
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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).
7. 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 investments practices described in its Prospectus or Statement of
Additional Information are not deemed to be pledged for purposes of this
limitation.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making decisions.
SPECIAL RISK CONSIDERATIONS REGARDING INVESTMENT IN OHIO BONDS
- --------------------------------------------------------------
As described in the Prospectus, the Ohio Tax Exempt Fund will
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions (Ohio Obligations). The Fund is
therefore susceptible to general or particular economic, political or regulatory
factors that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connection
with their issuance of securities and from other publicly available information,
and is believed to be accurate. No independent verification has been made of any
of the following information.
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.
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There may be specific factors that at particular times apply
in connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio
Obligations has been guaranteed by bond insurance purchased by the issuers, the
Fund or other parties. Those Ohio Obligations may not be subject to the factors
referred to in this section of the Prospectus.
Ohio is the seventh most populous state; the 1990 Census count
of 10,847,000 indicated a 0.5% population increase from 1980. The Census
estimate for 1995 is 11,157,000.
While diversifying more into the service and other
nonmanufacturing 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 industriallydeveloped states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last six years the State rates were below the national rates
(4.9% versus 5.4% in 1996). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or
state-wide economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value of
Ohio Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in 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
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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 was 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 BSF replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations
needed for debt service on or lease rentals relating to any State obligations.
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
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of possible federal program changes, a human services stabilization
fund.
From a higher than forecast 1996-97 mid-biennium GRF fund
balance, $100 million was transferred for elementary and secondary school
computer network purposes and $30 million to a new State transportation
infrastructure fund. Approximately $400.8 million served as a basis for
temporary 1996 personal income tax reductions aggregating that amount. The
1996-97 biennium-ending GRF fund balance was $834.9 million. Of that, $250
million goes to school building construction and renovation, $94 million to the
school computer network, $44.2 million for school textbooks and instructional
materials and a distance learning program, and $34 million to the BSF (which
had a November 26, 1997 balance of $862.7 million), with the $263 million
balance to a State income tax reduction.
The GRF appropriations act for the 1997-98 biennium was passed
on June 25, 1997 and promptly signed (after selective vetoes) by the Governor.
All necessary GRF appropriations for State debt service and lease rental
payments then projected for the biennium were included in that act.
The State's incurrence or assumption of debt without a vote of
the people is, with limited exceptions, prohibited by current State
constitutional provisions. The State may incur debt, limited in amount to
$750,000, to cover casual deficits or failures in revenues or to meet expenses
not otherwise provided for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. (An exception is made
in both cases for any debt incurred to repel invasion, suppress insurrection or
defend the State in war.)
By 14 constitutional amendments, approved from 1921 to date
(the latest adopted in 1995,) Ohio voters authorized the incurrence of State
debt and the pledge of taxes or excises to its payment. At November 26, 1997,
$948 million (excluding certain highway bonds payable primarily from highway use
receipts) of this debt was outstanding or awaiting delivery. The only such State
debt at that date still authorized to be incurred were portions of the highway
bonds, and the following: (a) up to $100 million of obligations for coal
research and development may be outstanding at any one time ($30.9 million
outstanding); (b) $240 million of obligations authorized for local
infrastructure improvements, no more than $120 million of which may be issued in
any calendar year ($826.8 million outstanding); and (c) up to $200 million in
general obligation bonds for parks, recreation and natural resources purposes
which may be outstanding at any one time ($90.9 million outstanding, with no
more than $50 million to be issued in any one year).
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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 Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer, $4.8
billion of which were outstanding or awaiting delivery at November 26, 1997.
A 1990 constitutional amendment authorizes greater State and
political subdivision participation (including financing) in the provision of
housing. The General Assembly may for that purpose authorize the issuance of
State obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and
credit and taxing power of the State to meeting certain guarantees under the
State's tuition credit program which provides for purchase of tuition credits,
for the benefit of State residents, guaranteed to cover a specified amount when
applied to the cost of higher education tuition. (A 1965 constitutional
provision that authorized student loan guarantees payable from available State
moneys has never been implemented, apart from a "guarantee fund" approach funded
essentially from program revenues.)
State and local agencies issue obligations that are payable
from revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion
(state-wide aggregate approximately 44% in recent years) of their operating
moneys from State subsidies, but are dependent on local property taxes, and in
119 districts from voter-authorized income
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taxes, for significant portions of their budgets. Litigation, similar to that in
other states, has been pending questioning the constitutionality of Ohio's
system of school funding. The Ohio Supreme Court has recently concluded that
aspects of the system (including basic operating assistance and the loan program
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 1998) to permit time for responsive corrective actions. A small
number of the State's 612 local school districts have in any year required
special assistance to avoid year-end deficits. A program has provided for school
district cash need borrowing directly from commercial lenders, with diversion of
State subsidy distributions to repayment if needed. Recent borrowings under this
program totalled $41.1 million for 28 districts in FY 1994, $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), and $87.2 million for 20
districts in FY 1996 (including $42.1 million for one), and $113.2 million for
12 districts in 1997 (including $90 million to one for restructuring 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 24 cities and villages; for 18 of them the fiscal situation
was resolved and the procedures terminated (one village is in preliminary
"fiscal watch" status). As of November 26, 1997, the 1996 school district
"fiscal emergency" provision had been applied to five districts, and nine 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
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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 deceases have resulted in surpluses the last
four years; as of June 30, 1996, the General Fund had a surplus of $635.2
million.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service on
its obligations including suit relating to the following matters: (i) the
American Civil Liberties Union ("ACLU") filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled a
similar suit in the Commonwealth Court of Pennsylvania and is seeking the
dismissal of the federal suit, among other things, because of that settlement.
After its earlier denial of class certification was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU, and the parties are proceeding with 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
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<PAGE> 150
judgment pending enactment by the legislature of funding consistent with the
opinion, and the legislature has yet to consider legislation implementing the
judgment. In 1992, a new action in mandamus was filed seeking to compel the
Commonwealth to comply with the original decision. The Court issued a writ in
mandamus and appointed a special master in 1996 to submit a plan for
implementation, which it intended to require by January 1, 1998. In January
1997, the Court established a committee, consisting of the special master and
representatives of the Executive and Legislative branches, to develop an
implementation plan; (iii) litigation was filed in both state and federal court
by an association of rural and small schools and several individual school
districts and parents challenging the constitutionality of the Commonwealth's
system for funding local school districts -- the federal case has been stayed
pending the resolution of the state case; a trial in the state case commenced in
January 1997 and has recessed; no briefing schedule or date for oral argument
has yet been set; (iv) Envirotest/Synterra Partners ("Envirotest") filed suit
against the Commonwealth asserting that it sustained damages in excess of $350
million, as a result of investments it made in reliance on a contract to conduct
emissions testing before the emission testing program was suspended. Envirotest
has entered into a Standstill Agreement with the Commonwealth pursuant to which
Envirotest will receive $145 million, with interest at 6 percent per annum; and
(v) in 1995, the Commonwealth, the Governor of Pennsylvania, the City of
Philadelphia and the Mayor of Philadelphia were joined as additional respondents
in an enforcement action commenced in Commonwealth Court in 1973 by the
Pennsylvania Human Relations Commission against the School District of
Philadelphia pursuant to the Pennsylvania Human Relations Act. The Commonwealth
and the City were joined to determine their liability, if any, to pay additional
costs necessary to remedy segregation-related conditions found to exist in
Philadelphia public schools. In January 1997, the Pennsylvania Supreme Court
ordered the parties to brief certain issues, but no decision by the Supreme
Court has been issued.
A disaster emergency was declared by the Governor and a
federal major disaster declaration was made by the President of the United
States for certain counties in the Commonwealth for a blizzard and subsequent
flooding in January 1996. The General Assembly authorized $123 million to
provide for the Commonwealth's share of the required match for federal public
assistance and disaster mitigation funds.
Although there can be no assurance that such conditions will
continue, the Commonwealth's general obligation bonds are currently rated AA- by
S&P and A1 by Moody's and Philadelphia's and Pittsburgh's general obligation
bonds are currently rated BBB- and BBB+, respectively, by S&P and Baa and Baa1,
respectively, by Moody's.
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<PAGE> 151
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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<PAGE> 152
As described in the Prospectus, Institutional shares of the
Funds are sold to certain qualified investors at their net asset value without a
sales charge. Retail 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. 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, 1997, sales loads paid by
shareholders of the Ohio Tax Exempt Fund totalled $407.
For the period from June 1, 1996 until September 9, 1996,
shareholders of the Predecessor Fund paid a total of $0 in sales charges. For
the period from September 9, 1996 through May 31, 1997, shareholders of the
Pennsylvania Municipal Fund paid a total of $5 in sales charges.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus permit an investor to use
"dollar cost averaging" in making investments. Under this Program, an agreed
upon fixed dollar amount is invested in Fund shares at predetermined intervals.
This may help investors to reduce their average cost per share because the
Program results in more shares being purchased during periods of lower share
prices and fewer shares during periods of higher share prices. In order to be
effective, dollar cost averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that dollar cost averaging
results in purchases of shares regardless of their price on the day of
investment or market trends and does not ensure a profit, protect against losses
in a declining market, or prevent a loss if an investor ultimately redeems his
shares at a price which is lower than their purchase price. An investor may want
to consider his financial ability to continue purchases through periods of low
price levels. From time to time, in advertisements, sales literature,
communications to shareholders and other materials ("Materials") the Trust may
illustrate the effects of dollar cost averaging through use of or comparison to
an index such as the S&P 500 Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
An illustration of the computation of the offering price per
Retail share of the Funds, based on each Fund's net asset value and number of
outstanding shares on May 31, 1997, follows:
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<PAGE> 153
<TABLE>
<CAPTION>
TABLE
-----
OHIO TAX EXEMPT FUND
--------------------
<S> <C>
Net Assets of Retail Shares............................................................ $3,534,526
Outstanding Retail Shares.............................................................. 326,554
Net Asset Value Per Share
($3,534,526 / 326,554)................................................................. $10.82
Sales Charge, 3.00% of
offering price (3.05% of
net asset value per share)............................................................. $0.33
Offering to Public..................................................................... $11.15
PENNSYLVANIA MUNICIPAL FUND
---------------------------
Net Assets of Retail Shares............................................................ $80,928
Outstanding Retail Shares.............................................................. 7,922
Net Asset Value Per Share
($80,928 / 7,922)...................................................................... $10.22
Sales Charge, 3.00% of
offering price (3.13% of
net asset value per share)............................................................. $0.32
Offering to Public..................................................................... $10.54
</TABLE>
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail 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 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
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<PAGE> 154
the financial institution to be genuine. The Investor or his financial
institution must notify the Transfer Agent of his prior ownership of Retail 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 57
classes or series of shares. Six 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) and Pennsylvania Municipal Fund (Class T, Class T -
Special Series 1 and Class T - 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
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<PAGE> 155
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 Institutional and Retail 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 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
-22-
<PAGE> 156
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 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 exemptinterest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
Shareholders are advised to consult their tax advisers with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if the shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the Funds. A "substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, or
who occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. A "related person" includes certain
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<PAGE> 157
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 which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months (the
"short-short test"): (1) stock and securities (as defined in Section 2(a)(36) of
the 1940 Act); (2) options, futures and forward contracts other than those on
foreign currencies; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are not directly
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<PAGE> 158
related to a Fund's principal business of investing in stock and securities (and
options and futures with respect to stocks and securities). Interest (including
original issue discount and, with respect to taxable debt securities and
non-taxable debt securities acquired after April 30, 1993, accrued market
discount) received by a Fund upon maturity or disposition of a security held for
less than three months will not be treated as gross income derived from the sale
or other disposition of such security within the meaning of this requirement.
However, any other income which is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of securities
for this purpose. Effective for taxable years beginning after August 4, 1997,
the recently enacted Taxpayer Relief Act of 1997 repeals the short-short test.
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
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<PAGE> 159
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 the Ohio corporation franchise tax or the Ohio
dealers in intangibles tax, provided that, if there is a sufficient nexus
between the State of Ohio and such entity that would enable the State to tax
such entity, the Fund timely files the annual report required by Section 5733.09
of the Ohio Revised Code. The Ohio Tax Commissioner has waived the annual filing
requirement for every tax year since 1990, the first year to which such
requirement applied.
Shareholders of the Fund otherwise subject to Ohio personal
income tax, or municipal or school district income taxes in Ohio imposed on
individuals and estates will not be subject to such taxes on distributions with
respect to shares of the Fund ("Distributions") to the extent that such
Distributions are properly attributable to interest on or gain from the sale of
Obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof and agencies and instrumentalities of the State or its political
subdivisions ("Ohio Obligations").
Shareholders otherwise subject to the Ohio corporation
franchise tax will not be required to include Distributions in their tax base
for purposes of calculating the Ohio corporation franchise tax on the net income
basis to the extent that such distributions either (a) are properly attributable
to interest on or gain from the sale of Ohio Obligations, (b) represent
"exemptinterest 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
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<PAGE> 160
authority, commission, or instrumentality of the United States that is exempt
from state income taxes under the laws of the United States (including
obligations issued by the governments of Puerto Rico, the Virgin Islands or Guam
and their authorities or municipalities) are exempt from the Ohio personal
income tax, and municipal and school district income taxes in Ohio, and,
provided such interest is excluded from gross income for federal income tax
purposes, are excluded from the net income base of the Ohio corporation
franchise tax.
It is assumed for purposes of this discussion of State and
Local Taxes that the Fund will continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and that at all
times at least 50% of the value of the total assets of the Fund consists of Ohio
Obligations or similar obligations of other states or their subdivisions.
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994;
Director, Zurn Industries,
Inc. (building products
and construction
services), since June
1995.
</TABLE>
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<PAGE> 161
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
Herbert R. Martens, Jr.* President and Trustee Executive Vice President,
c/o NatCity Investments, Inc. National City Corporation
1965 East Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman,
Age 45 President and Chief Executive,
Officer, NatCity
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
13901 Shaker Blvd., #6B Operating Officer, B.F.
Cleveland, OH 44120 Goodrich Company, August 1986
Age 72 to September 1990; Director,
Adams Express Company
(closed-end investment
company), April 1982 to December
1997; Director, Acromed Corporation
(producer of spinal implants),
since June 1992; Director,
Petroleum & Resources Corp.,
April 1987 to December 1997;
Director, Morrison Products
(manufacturer of blower fans
and air moving equipment),
since April 1983; Director,
Kirtland Capital Corp.
(privately funded investment
group), since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 53 Center, Inc., since
January 1982; partner, Kittles
Bloomington Property Company,
since January 1981; partner,
KK&D (Affiliated Real Estate
Companies of Kittle's Home
Furnishing's Center), since
January 1989.
Robert J. Farling Trustee Retired Chairman, President and
1608 Balmoral Way Chief Executive Officer,
Westlake, OH 44145 Centerior Energy (electric
Age 61 utility), March 1992 to
October 1997; Director, National City
Corporation (bank holding
company) until October 1997;
Director, Republic Engineered
Steels, since October 1997.
</TABLE>
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<PAGE> 162
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed Corporation
(restaurant group), since
1990; Director; Foam Design,
Inc. (manufacturer of
industrial and commercial foam
products), since 1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health System
(four hospital health system);
Trustee, WVIZ Educational
Television (public
television).
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
Executive Officer, American
Contractors Rentals & Sales
(rental subsidiary of Whayne
Supply Co.), since 1988.
</TABLE>
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<PAGE> 163
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- -----------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP, Philadelphia,
1345 Chestnut Street Pennsylvania.
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP.
</TABLE>
- --------------------
* Messrs. Carter and Martens are considered by the Trust to be "interested
persons" of the Trust as defined in the 1940 Act.
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as Administrator to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
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<PAGE> 164
The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1997:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Approval Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Robert D. Neary, $18,750 $ 0 $ 0 $18,750
Chairman and Trustee
Thomas R. Benua, Jr., $17,500 $ 0 $ 0 $17,500
Trustee*
Leigh Carter, Trustee $17,500 $ 0 $ 0 $17,500
John F. Durkott, Trustee $17,500 $ 0 $ 0 $17,500
Robert J. Farling, Trustee ** ** ** **
Richard W. Furst, Trustee $17,500 $ 0 $ 0 $17,500
Gerald L. Gherlein, Trustee ** ** ** **
Herbert R. Martens, Jr.,
President and Trustee ** ** ** **
J. William Pullen, Trustee $17,500 $ 0 $ 0 $17,500
Richard B. Tullis, Trustee* $18,750 $ 0 $ 0 $18,750
</TABLE>
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
- --------
* Mr. Benua resigned as Trustee as of July 17, 1997. Mr.
Tullis resigned as Trustee as of November 19, 1997.
* Messrs. Farling, Gherlein and Martens were not Trustees of
the Trust during the fiscal year ended May 31, 1997.
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<PAGE> 165
reason of his being or having been a shareholder and not because of his acts or
omissions or some other reason. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES
AND TRANSFER AGENCY AGREEMENTS
----------------------------------------------------------
ADVISORY AGREEMENT
- ------------------
National City serves as investment adviser to the Ohio Tax
Exempt Fund and Pennsylvania Municipal Fund, as described in the Prospectus. The
adviser and NAM are affiliates of National City Corporation, a bank holding
company with $52 billion in assets, and headquarters in Cleveland, Ohio and
nearly 900 branch offices in four states. Through its subsidiaries, National
City Corporation has been managing investments for individuals, pension and
profit-sharing plans and other institutional investors for over 75 years and
currently manages over $41 billion in assets. From time to time, the adviser may
voluntarily waive fees or reimburse the Trust for expenses.
Pursuant to the previous advisory agreement, the Trust
incurred with respect to the Ohio Tax Exempt Fund advisory fees of
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<PAGE> 166
$490,179, $443,670 and $379,718, and the advisers waived such amounts, for the
fiscal years ended May 31, 1997, 1996 and 1995.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, National City, the adviser of the
Pennsylvania Municipal Fund, earned advisory fees of $147,646 and waived fees in
the amount of $2,684 with respect to that Fund. For the period from June 1, 1996
until September 9, 1996, for the one-month period ended May 31, 1996, for the
fiscal year ended April 30, 1996 and for the period from August 10, 1994
(commencement of operations) through April 30, 1995, Integra Trust Company
("Integra"), the investment adviser to the Predecessor Fund, earned advisory
fees of $73,107, $23,057, $264,836 and $128,093, and Integra waived fees in the
amount of $26,413, $6,792, $44,126 and $39,805, respectively.
The existing Advisory Agreement provides that the adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the adviser in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder. In addition, the adviser has undertaken in its Advisory
Agreement to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Department.
The Advisory Agreement relating to the Ohio Tax Exempt and
Pennsylvania Municipal Funds was approved by the shareholders of each of these
Funds on November 19, 1997. Unless sooner terminated, the Advisory Agreement
will continue in effect with respect to the Fund to which it relates until
September 30, 1998 and from year to year thereafter, subject to annual approval
by the Trust's Board of Trustees, or by a vote of a majority of the outstanding
shares of such Fund (as defined in the Prospectus) and a majority of the
trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. Each Advisory Agreement may be terminated by the Trust or the
adviser(s) on 60 days written notice, and will terminate immediately in the
event of its assignment.
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
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<PAGE> 167
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 Agreement with the Trust as described in
such agreement 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 Trust
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 AND ACCOUNTING SERVICES AGREEMENT
- ------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred with respect to the Ohio Tax
Exempt Fund the following fees for the fiscal years ended May 31, 1997, 1996 and
1995: $89,124, $81,680 and $70,839, respectively.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, PFPC
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<PAGE> 168
earned administration fees of $26,845 with respect to the Pennsylvania Municipal
Fund. For the period from June 1, 1996 until September 9, 1996, for the
one-month period ended May 31, 1996, for the fiscal year ended April 30, 1996
and for the period from August 10, 1994 (commencement of operations) through
April 30, 1995, SEI Financial Management Corporation, a wholly-owned subsidiary
of SEI Corporation, served as administrator to the Predecessor Fund and earned
the following fees: $18,799, $5,929, $68,101 and $23,985, respectively, and
waived fees of $0, $0, $9,681 and $19,188, respectively.
DISTRIBUTION PLAN AND RELATED AGREEMENT
- ---------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreements 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 Retail and Institutional shares (the "Retail
and Institutional 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
Institutional and Retail 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 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
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<PAGE> 169
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 Retail and Institutional Shares Plan provides that each
fund will compensate the Distributor for distribution expenses related to the
distribution of Institutional and Retail shares in an amount not to exceed .10%
per annum of the average aggregate net assets of such shares. The Retail and
Institutional Plan provides that the Trust will pay the Distributor an annual
base fee of $1,250,000 plus incentive fees based upon asset growth payable
monthly and accrued daily by all of the Trust's investment funds with respect
to the Institutional and Retail 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 such class's average net assets. Distribution
expenses payable 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 distributing 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.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor a total of $5,015 with respect to the Ohio Tax Exempt Fund,
all of which was attributable to general compensation to the Distributor.
For the period from June 1, 1996 through March 7, 1997, the
Trust paid its previous distributor, 440 Financial Distributors, Inc. ("440
Financial") $54,647 with respect to the Ohio Tax Exempt Fund.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $1,956 with respect to the Pennsylvania Municipal Fund. For
the period from September 9, 1996 (date of reorganization of the Predecessor
Fund) through March 7, 1997, the Trust paid 440 Financial $5,839 with respect to
the Pennsylvania Municipal Fund.
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<PAGE> 170
Of the aggregate amounts paid to the Distributor by the Trust
with respect to the Ohio Tax Exempt Fund, $1,505 was attributable to
distribution services and $3,510 was attributable to marketing/consultation. Of
the aggregate amount paid to the Distributor by the Trust with respect to the
Pennsylvania Municipal Fund, $587 was attributable to distribution services and
$1,369 was attributable to marketing/consultation. Distribution services include
broker/dealer and investor support, voice response development, wholesaling
services, legal review and NASD filings and transfer agency management.
Marketing/Consulting includes planning and development, market and industry
research and analysis and marketing strategy and planning.
Class A Shares of the Predecessor Fund were subject to a plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). The Plan
provided for reimbursement to the Predecessor Fund's distributor of the Fund's
distribution expenses, including (1) the cost of prospectuses, reports to
shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
Inventor's shares including the distributor's expenses for travel, communication
compensation and benefits for sales personnel; and (4) any other expenses
reasonably incurred in connection with the distribution and marketing of Class A
shares subject to approval by a majority of disinterested directors of Inventor.
For the period from June 1, 1996 until September 9, 1996, the distributor of the
Predecessor Fund received $0 from the Fund (after waivers of $26,110).
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank also serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (v) respond to correspondence by security brokers
and others relating to its duties; and (vi) make periodic reports to the Board
of Trustees concerning the Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Funds harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Funds reimburse National City Bank for its
direct and indirect costs and expenses incurred in rendering custodial services,
except that the costs and expenses borne by each Fund in
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<PAGE> 171
any year may not exceed $.225 for each $1,000 of average gross assets of such
Fund.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLANS
--------------------------
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan relating to each fund's Retail shares and the B Shares
Plan for each Fund offering such 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
Retail shares or B shares in consideration for the payment of up to .15% or .25%
(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 Retail or B shares; (iii) processing dividend
payments from the Funds; (iv) providing information periodically to customers
showing their position in Retail or B shares; (v) arranging for bank wires; (vi)
responding to customer inquiries relating to the services performed with respect
to Retail 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
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<PAGE> 172
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.
For the fiscal years ended May 31, 1997, 1996 and 1995, the
Ohio Tax Exempt Fund did not pay any brokerage commissions.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Fund) until May 31, 1997, the Pennsylvania Municipal Fund
paid brokerage commissions of $0. For the period from June 1, 1996 until
September 9, 1996, for the one-month period ended May 31, 1996, for the fiscal
year ended April 30, 1996 and for the period from August 10, 1994 (commencement
of operations) through April 30, 1995, the Pennsylvania Municipal Fund paid no
brokerage commissions.
While the 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 advisers
are 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
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<PAGE> 173
correspondents with respect to such transactions, securities, savings deposits,
repurchase agreements and reverse repurchase agreements.
While serving as adviser to the Trust, National City has
agreed to maintain its policy and practice of conducting its Trust departments
independently of its Commercial Departments. In making investment
recommendations for the Trust, Trust Department personnel will not inquire or
take into consideration whether the issuer of securities proposed for purchase
or sale for the Trust's account are customers of the Commercial Department. In
dealing with commercial customers, the Commercial Department will not inquire or
take into consideration whether securities of those customers are held by the
Trust.
Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the 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 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, 1997 for the Ohio Tax Exempt Fund and for
the Pennsylvania Municipal Fund, which are incorporated by reference in this
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report referred to under "Financial
Statements," and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements for periods or years prior to May 31,
1997 with respect to the Predecessor Fund, which are incorporated by reference
in this Statement of Additional
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<PAGE> 174
Information, were audited by Coopers & Lybrand, L.L.P., independent accountants
for the Predecessor Fund, whose report dated July 26, 1996 expressed an
unqualified opinion on such financial statements, and are included in reliance
upon such report given upon the authority of such firm 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."
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.
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<PAGE> 175
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 thenremaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" 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.
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<PAGE> 176
For the 30-day period ended May 31, 1997, the respective
yields of the Retail and Institutional shares of the Ohio Tax Exempt and
Pennsylvania Municipal Funds were: 4.50% and 4.64%; 4.26% and 4.50%,
respectively. The tax equivalent yields (assuming a 39.6% federal tax rate and
7.5% Ohio tax rate) for the Ohio Tax Exempt Fund's Retail and Institutional
shares for the same period were 8.05% and 8.30%, respectively. The tax
equivalent yields (assuming a 39.6% federal tax rate and a 2.8% Pennsylvania tax
rate) for the Pennsylvania Municipal Fund's Retail and Institutional shares for
the same period were 7.26% and 7.66%, respectively.
Each Fund computes its average annual total returns by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
Each Fund computes its aggregate total returns by determining
its aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
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
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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, 1997 were 3.19% (after taking into
account the sales load) and 6.38% (without taking into account any sales load)
for the Retail shares and 6.37% for the Institutional shares. The average annual
total returns since the Fund's commencement of operations through May 31, 1997
were 5.44% (after taking into account the sales load) and 5.88% (without taking
into account any sales load) for the Retail shares and 5.88% for the
Institutional shares. The Ohio Tax Exempt Fund commenced investment operations
on January 5, 1990.
The average annual total returns for the fiscal year ending
May 31, 1997 for the Pennsylvania Municipal Fund were 2.96%, (after taking into
account the sales load) and 6.13% (without taking into account any sales load)
for the Retail shares and 6.21% for the Institutional shares. The average annual
total returns since the Predecessor Fund's commencement of operations through
May 31, 1997 were 4.04% (after taking into account the sales load) and 5.17%
(without taking into account any sales load) for the Retail shares and 5.20% for
the Institutional shares. The Predecessor Fund commenced investment operations
on August 10, 1994.
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the 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 charge and will also disclose that the
performance
-44-
<PAGE> 178
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.
-45-
<PAGE> 179
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to the Fund"
means the consideration received by the Trust upon the issuance of shares in
that particular Fund, together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular Fund. In determining a Fund's net asset value, assets belonging to a
particular Fund are charged with the respective liabilities in respect of that
Fund.
The Trust bears all costs in connection with its organization,
including the fees of registering and qualifying its shares for distribution
under federal and state securities regulations. All organizational expenses are
amortized on the straight-line method over a period of five years from the date
of the commencement of operations.
As of November 30, 1997, the following persons owned of record
5 percent or more of the shares of the Funds of the Trust:
Ohio Tax Exempt Fund (Institutional)
------------------------------------
<TABLE>
<CAPTION>
Outstanding Shares Percentage
------------------ ----------
<S> <C> <C>
National City 6,233,346.63 64.60%
Corporation Non-
Contributory Pension
Plan
1900 East Ninth Street
Cleveland, OH 44114
Pennsylvania Municipal Fund (Institutional)
- -------------------------------------------
Outstanding Shares Percentage
------------------ ----------
National City 1,893,587.28 64.23%
Corporation Non-
Contributory Pension
Plan
1900 East Ninth Street
Cleveland, OH 44114
Ohio Tax Exempt Fund (Retail)
- -----------------------------
Outstanding Shares Percentage
------------------ ----------
</TABLE>
-46-
<PAGE> 180
<TABLE>
<S> <C> <C>
Wheat First FBO David J. 91,172.855 24.61%
Beverly & Pamela C.
Beverly
1128 Laguna Drive
Huron, OH 44839-2605
Wheat First FBO Edward 45,629.737 12.32%
B. Brandon
Lakepoint Office Park
3201 Enterprise Parkway,
Suite 470
Beachwood, OH 44122-7320
</TABLE>
-47-
<PAGE> 181
<TABLE>
Pennsylvania Municipal Fund (Retail)
- ------------------------------------
Outstanding Shares Percentage
------------------ ----------
<S> <C> <C>
Helen M. Weyer 5,921.175 78.76%
James N. Weyer, Jr.
2600 Mohawk Drive
White Oak, PA 15131-3121
Robert H. Rhone 1,104.134 14.69%
C/O Michael Rhone
P. O. Box 175
Rew, PA 16744-0175
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1997 are hereby incorporated herein by
reference. Copies of the annual report may be obtained by calling the Trust at
1-800-622-FUND (3863) or by writing to the Trust, Oaks, Pennsylvania 19456.
-48-
<PAGE> 182
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 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
A-1
<PAGE> 183
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 riskfree
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:
"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.
A-2
<PAGE> 184
"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
- ----------------------------------------------
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.
A-3
<PAGE> 185
"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.
"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-4
<PAGE> 186
"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.
"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-5
<PAGE> 187
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 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.
MUNICIPAL NOTE RATINGS
- ----------------------
A-6
<PAGE> 188
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - 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,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-7
<PAGE> 189
[ARROW GRAPHIC]
PROSPECTUS
December 23, 1997
ARMADA TOTAL RETURN ADVANTAGE FUND
ARMADA INTERMEDIATE BOND FUND
ARMADA ENHANCED INCOME FUND
ARMADA GNMA FUND
ARMADA BOND FUND
ARMADA
FUNDS
INCOME
SERIES
[ARMADA FUNDS LOGO]
<PAGE> 190
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction.............................................................................. 2
Expense Table............................................................................. 3
Financial Highlights...................................................................... 6
Investment Objectives and Policies........................................................ 12
Investment Limitations.................................................................... 25
Yield and Performance Information......................................................... 25
Pricing of Shares......................................................................... 26
How to Purchase and Redeem Shares......................................................... 27
Distribution and Servicing Arrangements................................................... 36
Dividends and Distributions............................................................... 36
Taxes..................................................................................... 37
Management of The Trust................................................................... 38
Description of the Trust and Its Shares................................................... 40
Custodian and Transfer Agent.............................................................. 41
Expenses.................................................................................. 42
Miscellaneous............................................................................. 42
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY
BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and National Asset Management Corporation serve as investment
advisers to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
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> 191
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments, Inc.
please call your Financial Consultant for information.
For current performance, fund information, account redemption
information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following five investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
TOTAL RETURN ADVANTAGE FUND'S investment objective is to provide a total
rate of return, income and price appreciation greater than that of popular
market indices with similar maturity and quality characteristics. Under normal
market conditions, the Fund maintains an average dollar-weighted portfolio
maturity of two years above or below the average maturity of the Lehman Brothers
Government/Corporate Bond Index.
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 Bank ("National City") serves as investment adviser to the
Intermediate Bond Fund, GNMA Fund and Bond Fund; National Asset Management
Corporation ("NAM") serves as investment adviser to the Total Return Advantage
Fund and Enhanced Income Fund. These investment advisers are referred to herein
individually as an "adviser" and collectively as the "advisers."
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 BANK, ITS PARENT COMPANY OR
ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR
STATE. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
December 23, 1997
<PAGE> 192
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 -- Retail shares, B shares and 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. Retail shares, B shares and
Institutional 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, Retail
shares and B shares are sold through selected broker-dealers and other financial
intermediaries to individual or institutional customers. Retail 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> 193
EXPENSE TABLE
<TABLE>
<CAPTION>
TOTAL TOTAL
RETURN TOTAL RETURN INTERMEDIATE
ADVANTAGE RETURN ADVANTAGE BOND INTERMEDIATE
RETAIL ADVANTAGE B INSTITUTIONAL RETAIL BOND B
SHARES(1) SHARES(1,2) SHARES SHARES(1) SHARES(1,2)
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(3)............................... 4.75% None None 4.75% None
Sales Charge Imposed on Reinvested
Dividends.................................. None None None None None
Deferred Sales Charge(4)..................... 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)(5)..... .35% .35% .35% .40% .40%
12b-1 Fees(5,6)............................ .02% .75% .02% .06% .75%
Other Expenses............................. .41% .41% .16% .46% .46%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(5)................... .78% 1.51% .53% .92% 1.61%
==== ==== ==== ==== ====
<CAPTION>
INTERMEDIATE ENHANCED ENHANCED ENHANCED
BOND INCOME INCOME INCOME
INSTITUTIONAL RETAIL B INSTITUTIONAL
SHARES SHARES(1) SHARES(1,2) SHARES
------------- ------- ----------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases(3)............................... None 2.75% None None
Sales Charge Imposed on Reinvested
Dividends.................................. None None None None
Deferred Sales Charge(4)..................... 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)(5)..... .40% .20% .20% .20%
12b-1 Fees(5,6)............................ .06% .02% .75% .02%
Other Expenses............................. .21% .33% .33% .23%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(5)................... .67% .55% 1.28% .45%
==== ==== ==== ====
</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 Retail 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 Retail
shares or B shares in consideration for the payment of up to .25% (on an
annualized basis) of the net asset value of such Retail 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 Retail shares or B shares of the Enhanced Income Fund. For further
information concerning these plans, see "Distribution and Servicing
Arrangements".
(2) As of the date of this Prospectus, the Funds' B share classes have not
commenced operations, and therefore, "Other Expenses" for these classes are
estimates only.
(3) A reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges Applicable to Purchases of Retail Shares."
(4) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 4.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. For more information, see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of B
Shares."
(5) The expense information in the table relating to each Fund has been restated
to reflect current fees. For the current fiscal year, the Intermediate Bond
Fund's adviser will voluntarily waive fees in the amount of .15% of the
Fund's average daily net assets and NAM will waive .20% and .25% of the
average daily net assets of the Total Return Advantage and Enhanced Income
Funds, respectively, (the advisers are 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 their respective Advisory Agreements with the
Trust). Without such fee waivers, Total Fund Operating Expenses would be
.98%, 1.71% and .73% for the Retail, B and Institutional shares of the Total
Return Advantage Fund, respectively, 1.07%, 1.76% and .82% for the Retail, B
and Institutional shares of the Intermediate Bond Fund, respectively, .80%,
1.53% and .70% for the Retail, B and Institutional shares of the Enhanced
Income Fund, respectively. Additionally, if the maximum distribution fee
permitted under the 12b-1 Plans were imposed, Total Fund Operating Expenses
would be 1.06%, 1.71% and .81%, 1.11%, 1.76% and .86%, .88%, 1.53% and .78%,
1.13%, 1.78% and .88% and 1.10%, 1.75% and .85% for the Retail, B and
Institutional shares of the Total Return Advantage Fund, Intermediate Bond
Fund, Enhanced Income Fund, GNMA Fund and Bond Fund, respectively.
(6) The Funds have in effect a 12b-1 Plan for the Retail and Institutional
classes of shares pursuant to which each Fund's Retail and Institutional
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 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.
3
<PAGE> 194
EXPENSE TABLE
<TABLE>
<CAPTION>
GNMA GNMA GNMA
RETAIL B INSTITUTIONAL
SHARES(1) SHARES(1,2) SHARES
------- ----------- -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases(3)........................................................... 4.75% None None
Sales Charge Imposed on Reinvested Dividends........................................ None None None
Deferred Sales Charge(4)............................................................ 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(5).................................................................. .55% .55% .55%
12b-1 Fees (after fee waivers)(5,6)................................................. .06% .75% .06%
Other Expenses...................................................................... .48% .48% .23%
---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(5).......................................................... 1.09% 1.78% .84%
==== ==== ====
<CAPTION>
BOND BOND BOND
RETAIL B INSTITUTIONAL
SHARES(1) SHARES(1,2) SHARES
------- ----------- -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases(3)........................................................... 4.75% None None
Sales Charge Imposed on Reinvested Dividends........................................ None None None
Deferred Sales Charge(4)............................................................ 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(5).................................................................. .55% .55% .55%
12b-1 Fees (after fee waivers)(5,6)................................................. .06% .75% .06%
Other Expenses...................................................................... .45% .45% .20%
---- ---- ----
TOTAL FUND OPERATING EXPENSES
(after fee waivers)(5).......................................................... 1.06% 1.75% .81%
==== ==== ====
</TABLE>
- ---------------
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to Retail 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 Retail
shares or B shares in consideration for the payment of up to .25% (on an
annualized basis) of the net asset value of such Retail 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 Retail shares or B shares of the Enhanced Income Fund. For further
information concerning these plans, see "Distribution and Servicing
Arrangements."
(2) As of the date of this Prospectus, the Funds' B share classes have not
commenced operations, and therefore, "Other Expenses" for these classes are
estimates only.
(3) A reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges Applicable to Purchases of Retail Shares."
(4) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 4.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. For more information, see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of B
Shares."
(5) The expense information in the table relating to each Fund has been restated
to reflect current fees. For the current fiscal year, the Intermediate Bond
Fund's adviser will voluntarily waive fees in the amount of .15% of its
advisory fee of .55% of the Fund's average daily net assets and NAM will
waive .20% and .25% of its advisory fees of .55% and .45% of the average
daily net assets of the Total Return Advantage and Enhanced Income Funds,
respectively, (the advisers are 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 their respective Advisory Agreements with the
Trust). Without such fee waivers, Total Fund Operating Expenses would be
.98%, 1.71% and .73% for the Retail, B and Institutional shares of the Total
Return Advantage Fund, respectively, 1.07%, 1.76% and .82% for the Retail, B
and Institutional shares of the Intermediate Bond Fund, respectively, .80%,
1.53% and .70% for the Retail, B and Institutional shares of the Enhanced
Income Fund, respectively. Additionally, if the maximum distribution fee
permitted under the 12b-1 Plans were imposed, Total Fund Operating Expenses
would be 1.06%, 1.71% and .81%, 1.11%, 1.76% and .86%, .88%, 1.53% and .78%,
1.13%, 1.78% and .88% and 1.10%, 1.75% and .85% for the Retail, B and
Institutional shares of the Total Return Advantage Fund, Intermediate Bond
Fund, Enhanced Income Fund, GNMA Fund and Bond Fund, respectively.
(6) The Funds have in effect a 12b-1 Plan for the Retail and Institutional
classes of shares pursuant to which each Fund's Retail and Institutional
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 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.
4
<PAGE> 195
- ---------------
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 Retail Shares(1)................ $ 55 $ 71 $ 89 $ 140
Total Return Advantage B Shares(2)..................... $ 65 $ 88 $ 102 $ 160(3)
Total Return Advantage Institutional Shares............ $ 5 $ 17 $ 30 $ 66
Intermediate Bond Retail Shares(1)..................... $ 56 $ 75 $ 96 $ 155
Intermediate Bond B Shares(2).......................... $ 66 $ 91 $ 108 $ 173(3)
Intermediate Bond Institutional Shares................. $ 7 $ 21 $ 37 $ 83
Enhanced Income Retail Shares(1)....................... $ 33 $ 44 $ 57 $ 94
Enhanced Income B Shares(2)............................ $ 63 $ 81 $ 90 $ 134(3)
Enhanced Income Institutional Shares................... $ 5 $ 14 $ 25 $ 57
GNMA Retail Shares(1).................................. $ 58 $ 81 $ 105 $ 174
GNMA B Shares(2)....................................... $ 68 $ 96 $ 116 $ 191(3)
GNMA Institutional Shares.............................. $ 9 $ 27 $ 47 $ 104
Bond Fund Retail Shares(1)............................. $ 58 $ 80 $ 103 $ 171
Bond Fund B Shares(2).................................. $ 68 $ 95 $ 115 $ 188(3)
Bond Fund Institutional Shares......................... $ 8 $ 26 $ 45 $ 100
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
(3) Based on conversion of B shares to Retail shares after eight years.
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
advisers or other institutions directly to their customer accounts for services
related to an investment in shares of any of the Funds are in addition to and
are not reflected in the fees and expenses described above.
5
<PAGE> 196
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
TOTAL RETURN ADVANTAGE FUND
The following information has been derived from financial statements audited
by Ernst & Young LLP, independent auditors, whose report is incorporated by
reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Total Return Advantage Fund is
contained in the Trust's Annual Report to Shareholders, which may be obtained
without charge by contacting the Trust at its telephone number or address
provided on page 1.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, ENDED MAY 31,
--------------------------------------------------- ------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(3) RETAIL(3)
------------- ------ ------------- ------ ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 9.88 $ 9.87 $ 10.55 $10.54 $ 10.00 $ 10.16
-------- ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ .67 .64 .70(7) .62(7) .65(7) .49(7)
Net Gain (Loss) on Securities
(Realized and Unrealized).......... .15 .16 (.24) (.22) .43 .40
-------- ------ -------- ------ -------- ------
Total from Investment
Operations.................. .82 .80 .46 .40 1.08 .89
-------- ------ -------- ------ -------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income............................. (.67) (.64) (.70) (.62) (.53) (.49)
Dividends in Excess of Net Investment
Income............................. (.00) (.00) (.12) (.14) (.00) (.02)
Dividends from Net Realized Capital
Gains.............................. (.00) (.00) (.31) (.31) (.00) (.00)
Dividends in Excess of Net Realized
Capital Gains...................... (.14) (.14) (.00) (.00) (.00) (.00)
-------- ------ -------- ------ -------- ------
Total Distributions........... (.81) (.78) (1.13) (1.07) (.53) (.51)
-------- ------ -------- ------ -------- ------
Net Asset Value, End of Period......... $ 9.89 $ 9.89 $ 9.88 $ 9.87 $ 10.55 $ 10.54
======== ====== ======== ====== ======== ======
TOTAL RETURN........................... 8.51% 8.35%(5) 4.22% 3.74%(5) 12.52%(4,6) 12.65%(4,5,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)............................. $ 259,228 $2,186 $ 280,401 $2,040 $261,403 $ 106
Ratio of Expenses to Average Net
Assets............................. .16%(1) .41%(2) .13%(1) .36%(2) .18%(1,4) .31%(2,4)
Ratio of Net Investment Income to
Average Net Assets................. 6.70%(1) 6.46%(2) 6.67%(1) 6.12%(2) 7.23%(1,4) 6.92%(2,4)
Portfolio Turnover Rate.............. 169% 169% 268% 268% 166% 166%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Institutional class for the year ended May
31, 1997 would have been .71% and 6.15%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the adviser
and custodian for the Institutional class for the year ended May 31, 1996
would have been .69% and 6.11%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the adviser,
administrator and custodian for the Institutional class for the period ended
May 31, 1995 would have been .77% and 6.64%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Retail class for the year ended May 31, 1997
would have been .96% and 5.91%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the adviser and
custodian for the Retail class for the year ended May 31, 1996 would have
been .89% and 5.59%, respectively. The operating expense ratio and the net
investment income ratio before fee waivers by the adviser, administrator and
custodian for the Retail class for the period ended May 31, 1995 would have
been .87% and 6.36%, respectively.
(3) Institutional and Retail classes commenced operations on July 7, 1994 and
September 6, 1994, respectively.
(4) Annualized.
(5) Total Return excludes sales charge.
(6) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the
Institutional and Retail classes for the period were 11.22% and 9.14%,
respectively.
(7) Calculated based upon average shares outstanding.
6
<PAGE> 197
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.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED YEAR
YEAR ENDED MAY YEAR ENDED MAY YEAR ENDED ENDED
MAY 31, 31, MAY 31, 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------ ------------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period......................... $ 10.30 $10.35 $ 10.54 $10.60 $ 10.24 $10.30
--------- ------ --------- ------ --------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .60 .57 .61 .59 .63 .61
Net Gain/(Loss) on Securities (Realized and
Unrealized)............................... .07 .07 (.22) (.23) .30 .30
--------- ------ --------- ------ --------- ------
Total from Investment Operations.......... .67 .64 .39 .36 .93 .91
--------- ------ --------- ------ --------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.60) (.57) (.61) (.59) (.63) (.61)
Dividends in Excess of Net Investment
Income.................................... (.00) (.00) (.00) (.00) (.00) (.00)
Dividends from Net Realized Capital Gains... (.00) (.00) (.00) (.00) (.00) (.00)
Dividends in Excess of Net Realized Capital
Gains..................................... (.00) (.00) (.02) (.02) (.00) (.00)
--------- ------ --------- ------ --------- ------
Total Distributions....................... (.60) (.57) (.63) (.61) (.63) (.61)
--------- ------ --------- ------ --------- ------
Net Asset Value, End of Period.............. $ 10.37 $10.42 $ 10.30 $10.35 $ 10.54 $10.60
========= ====== ========= ====== ========= ======
TOTAL RETURN................................. 6.63% 6.36%(3) 3.79% 3.44%(3) 9.55% 9.26%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $ 121,271 $3,720 $ 111,240 6,216 $ 88,047 $5,527
Ratio of Expenses to Average Net Assets..... .70%(4) .96%(5) .80%(4) 1.04%(5) .85%(4) 1.09%(5)
Ratio of Net Investment Income to Average
Net Assets.............................. 5.76%(4) 5.52%(5) 5.78%(4) 5.50%(5) 6.24%(4) 5.95%(5)
Portfolio Turnover Rate..................... 217% 217% 45% 45% 42% 42%
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1994 1994 1993 1993 1992 1992
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period......................... $ 10.93 $10.98 $ 10.60 $10.63 $ 10.15 $10.15
------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .61 .58 .70 .65 .81 .79
Net Gain/(Loss) on Securities (Realized and
Unrealized)............................... (.59) (.58) .46 .48 .45 .45
------- ------ ------- ------ ------- ------
Total from Investment Operations.......... .02 .00 1.16 1.13 1.26 1.24
------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.61) (.58) (.70) (.65) (.81) (.76)
Dividends in Excess of Net Investment
Income.................................... (.05) (.05) (.02) (.02) (.00) (.00)
Dividends from Net Realized Capital Gains... (.03) (.03) (.11) (.11) (.00) (.00)
Dividends in Excess of Net Realized Capital
Gains..................................... (.02) (.02) (.00) (.00) (.00) (.00)
------- ------ ------- ------ ------- ------
Total Distributions....................... (.71) (.68) (.83) (.78) (.81) (.76)
------- ------ ------- ------ ------- ------
Net Asset Value, End of Period.............. $ 10.24 $10.30 $ 10.93 $10.98 $ 10.60 $10.63
======= ====== ======= ====== ======= ======
TOTAL RETURN................................. .00% (.23%) (3) 11.32% 11.03% (3) 12.96% 12.64%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $95,907 $5,480 $95,246 $5,208 $40,414 $1,033
Ratio of Expenses to Average Net Assets..... .83% 1.08% .32%(4) .57% (5) .30%(4) .55 %(5)
Ratio of Net Investment Income to Average
Net Assets.............................. 5.59% 5.34% 6.64%(4) 6.21% (5) 7.84%(4) 7.57 %(5)
Portfolio Turnover Rate..................... 34% 34% 33% 33% 13% 13%
<CAPTION>
FOR THE PERIOD
YEAR DECEMBER 20,
YEAR ENDED ENDED 1989
MAY 31, MAY 31, (COMMENCEMENT OF
1991 1991 OPERATIONS) TO
INSTITUTIONAL RETAIL(1) MAY 31, 1990
------------- -------- ----------------
<C> <C> <C>
Net Asset Value,
Beginning of Period......................... $ 9.83 $ 10.11 $ 10.00
------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .76 .10 .33
Net Gain/(Loss) on Securities (Realized and
Unrealized)............................... .39 .01 (.24)
------- ------- --------
Total from Investment Operations.......... 1.15 .11 .09
------- ------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.76) (.07) (.26)
Dividends in Excess of Net Investment
Income.................................... (.07) (.00) (.00)
Dividends from Net Realized Capital Gains... (.00) (.00) (.00)
Dividends in Excess of Net Realized Capital
Gains..................................... (.00) (.00) (.00)
------- ------- --------
Total Distributions....................... (.83) (.07) (.26)
------- ------- --------
Net Asset Value, End of Period.............. $ 10.15 $ 10.15 $ 9.83
======= ======= ========
TOTAL RETURN................................. 12.20% 8.45 (2,3) 2.21%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $34,664 $ 284 $ 30,699
Ratio of Expenses to Average Net Assets..... .33%(4) .56 (2,5) .37%(2)
Ratio of Net Investment Income to Average
Net Assets.............................. 8.34%(4) 7.89 (2,5) 8.34%(2)
Portfolio Turnover Rate..................... 0% 0% 20%
</TABLE>
- ------------------
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the Institutional class for the year ended May
31, 1997 would have been .79% and 5.66% respectively. The operating expense
ratio and net investment income ratio before fee waivers by the custodian
for the Institutional class for the years ended May 31, 1996 and 1995 would
have been .82% and 5.76%, and .86% and 6.23%, respectively. The operating
expense ratio and net investment income ratio before fee waivers by the
advisers for the Institutional class for the years ended May 31, 1993, 1992
and 1991 would have been .80% and 5.98%, .85% and 7.29%, and .88% and 7.79%,
respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers for the Retail class for the year ended May 31, 1997
would have been 1.05% and 5.44%, respectively. The operating expense ratio
and net investment income ratio before fee waivers by the custodian for the
Retail class for the years ended May 31, 1996 and 1995 would have been 1.06%
and 5.48% and 1.10% and 5.94%, respectively. The operating expense ratio and
net investment income ratio before fee waivers by the advisers for the
Retail class for the years ended May 31, 1993 and 1992 and for the period
ended May 31, 1991 would have been 1.05% and 5.73%, 1.10% and 7.02%, and
1.11% and 7.34%, respectively.
7
<PAGE> 198
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
ENHANCED INCOME FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Enhanced Income Fund is contained in
the Trust's Annual Report to Shareholders, which may be obtained without charge
by contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, ENDED MAY 31,
------------------------------------------------- ------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------------
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(3) RETAIL(3)
------------- ------ ------------- ------ ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 10.01 $10.02 $ 10.16 $10.18 $ 10.00 $ 10.10
-------- ------ -------- ------ -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................ .58 .57 .58 .56 .51(7) .43(7)
Net Gain/(Loss) on Securities
(Realized and Unrealized).......... .01 .01 (.05) (.05) .06 .06
-------- ------ -------- ------ -------- ------
Total from Investment
Operations.................. .59 .58 .53 .51 .57 .49
-------- ------ -------- ------ -------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income............................. (.58) (.57) (.58) (.56) (.41) (.41)
Dividends in Excess of Net Investment
Income............................. (.00) (.00) (.10) (.11) (.00) (.00)
Dividends in Excess of Net Realized
Capital Gains...................... (.03) (.03) (.00) (.00) (.00) (.00)
-------- ------ -------- ------ -------- ------
Total Distributions........... (.61) (.60) (.68) (.67) (.41) (.41)
-------- ------ -------- ------ -------- ------
Net Asset Value, End of Period......... $ 9.99 $10.00 $ 10.01 $10.02 $ 10.16 $ 10.18
======== ====== ======== ====== ======== ======
TOTAL RETURN........................... 6.02% 5.91%(5) 5.36% 5.13%(5) 6.54%(4,6) 6.84%(4,5,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)............................. $61,031 $2,051 $66,918 $1,718 $ 60,467 $ 2,547
Ratio of Expenses to Average Net
Assets............................. .21%(1) .31%(2) .23%(1) .33%(2) .21%(1,4) .32%(2,4)
Ratio of Net Investment Income to
Average Net Assets................. 5.74%(1) 5.63%(2) 5.72%(1) 5.55%(2) 5.70%(1,4) 5.89%(2,4)
Portfolio Turnover Rate.............. 225% 225% 98% 98% 36% 36%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Institutional class for the year ended May
31, 1997 would have been .66% and 5.29%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the adviser
and custodian for the Institutional class for the year ended May 31, 1996
would have been .70% and 5.25%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the adviser,
administrator and custodian for the Institutional class for the period ended
May 31, 1995 would have been .71% and 5.20%, respectively.
(2) The operating expense ratio and the net investment income ratio before fee
waivers by the adviser for the Retail class for the year ended May 31, 1997
would have been .75% and 5.18%, respectively. The operating expense ratio
and the net investment income ratio before fee waivers by the adviser and
custodian for the Retail class for the year ended May 31, 1996 would have
been .80% and 5.08%, respectively. The operating expense ratio and the net
investment income ratio before fee waivers by the adviser, administrator and
custodian for the Retail class for the period ended May 31, 1995 would have
been .79% and 5.42%, respectively.
(3) Institutional and Retail classes commenced operations on July 7, 1994 and
September 9, 1994, respectively.
(4) Annualized.
(5) Total Return excludes sales charge.
(6) Total returns have been annualized based upon the period from each class'
commencement date through May 31, 1995. Gross total returns of the
Institutional and Retail classes for the period were 5.87% and 4.92%,
respectively.
(7) Calculated based upon average shares outstanding.
8
<PAGE> 199
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 Retail shares that were similar to the Funds'
Retail shares.
The financial highlights presented below set forth certain information
concerning the investment results of the Predecessor Funds' Retail shares (the
series that are similar to the Retail 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 year ended 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.
9
<PAGE> 200
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
GNMA FUND
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE FOR THE FOR THE
MAY 31, 1997(4) PERIOD ENDED YEAR ENDED PERIOD ENDED
-------------------------- MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(5) 1996(4) 1996(4) 1995(4)
------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 10.03 $ 10.02 $ 10.12 $ 10.16 $ 10.00
------- ------ ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................... .65 .45 .05 .66 .48
Net Gain/(Loss)........................... .22 .23 (.09) .14 .16
------- ------ ------- ------- -------
Total from Investment Operations... .87 .68 (.04) .80 .64
------- ------ ------- ------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income...... (.65) (.45) (.05) (.66) (.48)
Dividends from Realized Capital Gains..... (.01) (.01) (.00) (.18) (.00)
Dividends in Excess of Net Realized
Capital Gains........................... (.09) (.09) (.00) (.00) (.00)
------- ------ ------- ------- -------
Total Distributions................ (.75) (.55) (.05) (.84) (.48)
------- ------ ------- ------- -------
Net Asset Value, End of Period.............. $ 10.15 $ 10.15 $ 10.03 $ 10.12 $ 10.16
======= ====== ======= ======= =======
TOTAL RETURN................................ 9.03% 8.83%(6) (.35)%(3,6) 7.97%(6) 6.61%(3,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)...... $64,501 $ 128 $ 60,532 $ 62,161 $ 42,212
Ratio of Expenses to Average Net Assets... .86%(1) 1.12%(2) .85%(1,2) .85%(1) .85%(1,2)
Ratio of Net Investment Income to Average
Net Assets.............................. 6.45%(1) 6.17%(2) 6.33%(1,2) 6.30%(1) 6.68%(1,2)
Portfolio Turnover Rate................... 57% 57% 1% 149% 226%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers for the Institutional class and the Predecessor Fund for the year
ended May 31, 1997, for the period ended May 31, 1996, for the year ended
April 30, 1996, and for the period ended April 30, 1995 would have been
1.01% and 6.30%, 1.28% and 5.90%, 1.29% and 5.86%, and 1.40% and 6.13%,
respectively.
(2) Annualized.
(3) Not annualized.
(4) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(5) Retail class commenced operations on September 11, 1996.
(6) Total Return excludes sales charge.
10
<PAGE> 201
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
BOND FUND
(Formerly, Intermediate Government Fund)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE FOR THE FOR THE
MAY 31, 1997(4) PERIOD ENDED YEAR ENDED PERIOD ENDED
------------------------ MAY 31, APRIL 30, APRIL 30,
INSTITUTIONAL RETAIL(5) 1996(4) 1996(4) 1995(4)
------------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 9.97 $ 9.97 $ 10.04 $ 10.02 $ 10.00
-------- ------ ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income......................... .59 .41 .05 .64 .44
Net Gain/(Loss) on Securities (Realized and
Unrealized)................................. .13 .13 (.07) .07 .02
-------- ------ ------- ------ -------
Total from Investment Operations............ .72 .54 (.02) .71 .46
-------- ------ ------- ------ -------
LESS DISTRIBUTIONS
Dividends from Net Investment Income.......... (.59) (.41) (.05) (.64) (.44)
Dividends from Net Realized Capital Gains..... (.00) (.00) (.00) (.05) (.00)
Dividends in Excess of Net Realized Capital
Gains....................................... (.08) (.08) (.00) (.00) (.00)
-------- ------ ------- ------ -------
Total Distributions......................... (.67) (.49) (.05) (.69) (.44)
-------- ------ ------- ------ -------
Net Asset Value, End of Period.................... $ 10.02 $ 10.02 $ 9.97 $ 10.04 $ 10.02
======== ====== ======= ====== =======
TOTAL RETURN...................................... 7.41% 7.22%(6) (0.19)%(3,6) 7.09%(6) 4.75%(3,6)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's).......... $91,161 $ 23 $ 88,829 $ 89,901 $ 53,316
Ratio of Expenses to Average Net Assets....... 0.83%(1) 1.07%(2) 0.85%(1,2) 0.85%(1) 0.85%(1,2)
Ratio of Net Investment Income to Average Net
Assets...................................... 5.83%(1) 5.64%(2) 5.88%(1,2) 6.20%(1) 6.17%(1,2)
Portfolio Turnover Rate....................... 96% 96% 2% 94% 172%
</TABLE>
- ---------------
(1) The operating expense ratio and the net investment income ratio before fee
waivers by the advisers and other service providers for the Institutional
class and the Predecessor Fund for the year ended May 31, 1997, for the
period ended May 31, 1996, for the year ended April 30, 1996 and for the
period ended April 30, 1995 would have been .96% and 5.71%, 1.25% and 5.48%,
1.25% and 5.80%, and 1.33% and 5.69%, respectively.
(2) Annualized
(3) Not annualized.
(4) Activity for the period presented includes that of the Predecessor Fund
through September 6, 1996. The Predecessor Fund commenced operations on
August 10, 1994. During 1996, the Predecessor Fund changed its fiscal
year-end from April 30 to May 31.
(5) Retail class commenced operations on September 11, 1996.
(6) Total Return excludes sales charge.
11
<PAGE> 202
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.
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.
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
12
<PAGE> 203
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 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
13
<PAGE> 204
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.
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
14
<PAGE> 205
principal and interest payments, but do not address market value risk. Because
the ratings of the rating agencies may not always reflect current conditions and
events, in addition to using recognized rating agencies and other sources, the
Fund's adviser performs its own analysis of the issuers of lower rated
securities purchased by the Fund. Because of this, the Fund's performance may
depend more on its own credit analysis than is the case for mutual funds
investing in higher rated securities.
The Total Return Advantage Fund's adviser continuously monitors the issuers
of lower rated securities held by the Fund for their ability to make required
principal and interest payments, as well as in an effort to control the
liquidity of the Fund so that it can meet redemption requests.
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 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.
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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.
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.
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Exchange Rate-Related Securities
The Total Return Advantage and Enhanced Income Funds may each invest in
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is denominated in U.S.
dollars and is not subject to foreign currency risk and, in most cases, is paid
at rates higher than most other similarly rated securities in recognition of the
foreign currency risk component of Exchange Rate-Related Securities.
Investments in Exchange Rate-Related Securities entail certain risks. There
is the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid secondary market will exist for a particular Exchange
Rate-Related Security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may, from time to time, combine to
make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
Forward Currency Exchange Contracts
The Total Return Advantage and Enhanced Income Funds may enter into forward
currency exchange contracts in an effort to reduce the level of volatility
caused by changes in foreign currency exchange rates or where such transactions
are economically appropriate for the reduction of risks inherent in the ongoing
management of the Funds. The Funds may not enter into such contracts for
speculative purposes. A forward currency exchange contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of contract. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time, they tend to limit any potential gain that might be realized should the
value of such currency increase. Consequently, a Fund may choose to refrain from
entering into such contracts. In connection with forward currency exchange
contracts, the Funds will create a segregated account of liquid assets, such as
cash, U.S. government securities or other liquid high grade debt obligations, or
will otherwise cover their position in accordance with applicable requirements
of the SEC.
Interest Rate Swaps
In order to protect its value from interest rate fluctuations, each of the
Total Return Advantage, Enhanced Income and GNMA Funds may enter into interest
rate swaps. The Funds expect to enter into these hedging transactions primarily
to preserve a return or spread of a particular investment or portion of their
holdings and to protect against an increase in the price of securities the Funds
anticipate purchasing at a later date. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (i.e., an exchange of floating rate payments for fixed rate payments).
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of liquid assets, such as cash, U.S. government securities
or other liquid high grade debt securities, having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated account
by the Fund's custodian. A Fund will not enter into any interest rate swap
unless the unsecured commercial paper, senior debt, or claims paying ability of
the other party is rated, with respect to the Enhanced Income and Total Return
Advantage Funds, either "A" or "A-1" or better by S&P, Duff or Fitch, or "A" or
"P-1" or better by Moody's or, with respect to the GNMA Fund, the claims paying
ability of the other party is deemed creditworthy and any such obligation the
GNMA Fund may have under such an arrangement will be covered by setting aside
liquid high grade securities in a segregated account.
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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 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
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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
ability to predict correctly movements in the direction of securities prices,
interest rates and other economic factors. For example, if the Funds have hedged
against the possibility of a decline in the market adversely affecting the value
of securities held in their funds and prices increase instead, the Funds will
lose part or all of the benefit of the increased value of securities which they
have hedged because they will have offsetting losses in their futures positions.
In addition, in such situations, if a Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Funds may have to sell securities at a time when it may
be disadvantageous to do so.
Although the Total Return Advantage, Enhanced Income, GNMA and 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 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.
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Variable and Floating Rate Obligations
The Funds may purchase rated and unrated variable and floating rate
instruments. These instruments may include variable amount master demand notes
and adjustable rate mortgages that permit the indebtedness thereunder to vary in
addition to providing for periodic adjustments in the interest rate. The absence
of an active secondary market with respect to particular variable and floating
rate instruments could, however, make it difficult for the Funds to dispose of
instruments if the issuer defaulted on its payment obligation or during periods
that the Funds are not entitled to exercise their demand rights, and the Funds
could, for these or other reasons, suffer a loss with respect to such
instruments.
Short Term Obligations
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 Fund's adviser deem
creditworthy under guidelines approved by the Board of Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed-upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short term rates, which may be more
or less than the rate on the underlying fund securities. The seller under a
repurchase agreement will be required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest).
If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying fund securities were less than
the repurchase price under the agreements, or to the extent that the disposition
of such securities by the Fund were delayed pending court action. Although there
is no controlling legal precedent confirming that a Fund would be entitled, as
against a claim by such seller or its receiver or trustee in bankruptcy, to
retain the underlying securities, the Board of Trustees of the Trust believes
that, under the regular procedures normally in effect for custody of a Trust's
securities subject to repurchase agreements and under Federal laws, a court of
competent jurisdiction would rule in favor of the Trust if presented with the
question. Securities subject to repurchase agreements will be held by the
Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
Reverse Repurchase Agreements
Each Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with its investment restrictions. Pursuant
to such agreements, a Fund would sell its portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them at a
mutually agreed-upon date and price. The Funds intend to enter into reverse
repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time a Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account assets such as U.S. government securities or other liquid, high grade
debt securities consistent with the Fund's investment restrictions having a
value equal to the repurchase price (including accrued interest), and will
subsequently monitor the account to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by a Fund may decline below the price at which it is
obligated to repurchase the securities.
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Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
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
their respective advisers believe 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 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 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 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 (including other investment companies advised by
the adviser) which invest in high quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. As a shareholder of another investment company, 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 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 a Fund during any period that
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qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop.
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 advisers have determined that the risk features that most distinguish
derivatives from other investment instruments (and which heavily influence the
market, volatility and leveraging, liquidity, and pricing risks referred to
above) can be described generally as "structural risk." Structural risk refers
to the contractual features of an investment that can cause its total return to
vary with changes in interest rates or other variables. Structural risk is not
unique to derivatives, but because derivatives often are created through the
intricate division of the cash flows of the underlying security, they can (but
do not necessarily) present a high degree of structural risk. Structural risk
can arise from variations in coupon levels, principal, and/or average life.
The advisers have adopted the following internal policies concerning
management of the structural risk inherent in derivative instruments on behalf
of the Funds. The risk to the Funds due to the use of derivatives will be
limited to the principal invested in such instruments. When the GNMA Fund
engages in short sales "against the box," risk of loss will be limited to the
value of the securities "in the box." The advisers will evaluate the risks
presented by the derivative instruments purchased by the Funds, and will
determine, in connection with their day-to-day management of the Funds, how they
will be used in furtherance of the Funds' investment objectives.
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 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
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<PAGE> 214
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 advisers do not presently intend to invest in the following types of
derivatives on behalf of the Fund:
- exchange rate-related securities
- forward currency exchange contracts
- interest rate swaps
- futures contracts and related options
- structured instruments, such as range notes, dual index notes, leveraged
or deleveraged bonds, inverse floaters, index amortizing notes and other
structured instruments having similar cash flow characteristics
Total Return Advantage Fund and Enhanced Income Fund. These Funds may
invest in derivative instruments having either moderate structural risk or high
structural risk characteristics (as described above in the section pertaining to
the 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 and/or income by making fund changes in anticipation of expected
movements in interest rates or fixed income security prices or in order to take
advantage of what the Fund's adviser 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.
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<PAGE> 215
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.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of 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 Retail shares, B
shares and Institutional 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
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<PAGE> 216
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.
Shareholders should note that the yields and total returns of Retail shares
and B shares will be lower than those of the Institutional 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 Retail 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,
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<PAGE> 217
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 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 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 RETAIL SHARES AND B SHARES
Retail 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 Retail shares and B shares of the Funds,
investors should read "Characteristics of Retail Shares and B Shares" and
"Factors to Consider When Selecting Retail Shares or B Shares" below.
Retail shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail 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
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<PAGE> 218
their accounts. Investors purchasing shares of a Fund must specify at the time
of investment whether they are purchasing Retail 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 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 for the initial purchase of Retail shares or B
shares in each Fund is $500. All subsequent investments for Retail shares and B
shares are subject to a minimum investment of $250. All purchases made by check
should be in U.S. dollars. Please make the check payable to Armada Funds (fund
name), or, in the case of a retirement account, the custodian or trustee for the
account. We will not accept third-party checks under any circumstance.
Investments made in Retail shares or B shares through the Planned Investment
Program ("PIP"), a monthly savings program described below, are not subject to
the minimum initial and subsequent investment requirements or any minimum
account balance requirements described under "Other Redemption Information."
Purchases for an IRA through the PIP will be considered as contributions for the
year in which the purchases are made.
Under a PIP, Investors may add to their investment in Retail shares or B
shares of a Fund, in a consistent manner each month, with a minimum amount of
$50. Monies may be automatically withdrawn from a shareholder's checking or
savings account available through an investor's financial institution and
invested in additional Retail shares at the Public Offering Price 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 Retail 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 RETAIL SHARES
The Public Offering Price for Retail 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 Retail shares of the Enhanced Income Fund is
the sum of the net asset value of the shares being purchased plus any
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<PAGE> 219
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 purchases of $1,000,000 or more 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 Retail shares made by:
(a) trustees and officers of the Trust
(b) directors, employees and participants in employee benefit/retirement
plans (annuitants) of National City Corporation or any of its affiliates
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above
(d) individuals investing in a Fund by way of a direct transfer or a
rollover from a qualified plan distribution 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
(g) investors purchasing fund shares through "one-stop" mutual fund
networks
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail shares of
each Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND (3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in Retail shares in
determining the applicable sales charge. An Investor's aggregate investment in
Retail shares is the total value (based on the higher of current net asset value
or any Public Offering Price originally paid) of:
(a) current purchases
(b) Retail shares that are already beneficially owned by the Investor for
which a sales charge has been paid
(c) Retail shares that are already beneficially owned by the Investor which
were purchased prior to July 22, 1990
(d) Retail shares purchased by dividends or capital gains that are
reinvested
If, for example, an Investor beneficially owns Retail shares of the
Intermediate Bond Fund with an aggregate current value of $90,000 and
subsequently purchases Retail shares of that Fund having a current value of
$10,000, the sales charge applicable to the subsequent purchase would be reduced
to 2.75% of the Public Offering Price.
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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 Retail
shares representing 4.0% of the amount indicated in the Letter of Intent in
escrow for payment of a higher sales charge if the entire amount is not
purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13-month period or is redeemed within one year from the
time of fulfillment, the Investor will be required to pay an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge the Investor would have had to pay on the aggregate purchases if
the total of such purchases had been made at a single time.
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 six 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 Retail 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....................... 4.0%
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%
More than five, but less
than six.................. 1.0%
After six years........... None
</TABLE>
When an Investor redeems his 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
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<PAGE> 221
$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 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 Retail
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 RETAIL SHARES AND B SHARES
The primary difference between Retail 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 Retail shares and B shares are the same.
Retail 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.
Retail and Institutional 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 Retail and Institutional 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 Retail shares, will cause B shares to have a higher expense ratio and
pay lower dividends than Retail 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
Retail 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 Retail shares takes place at net asset value, as a result of which
an Investor receives dollar-for-dollar the same value of Retail shares as he 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 Retail shares.
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<PAGE> 222
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 Retail shares of the Fund on the
same date.
FACTORS TO CONSIDER WHEN SELECTING RETAIL 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 Retail shares purchased at the same time, and to what
extent such differential would be offset by the higher yield of Retail shares.
In this regard, to the extent that the sales charge for Retail shares is waived
or reduced by one of the methods described above, investments in Retail shares
become more desirable. The Trust will refuse all purchase orders for B shares of
over $250,000.
Although Retail shares are subject to a distribution fee, they are not
subject to the higher distribution fee applicable to B shares. For this reason,
Retail 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 Retail 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 six-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 six-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 Retail 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 Retail 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 Retail 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
Retail shares as described above at the end of such eight-year period.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to banks and trust companies which
are affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
registered investment advisers and financial planners affiliated with National
City ("RIAs") who charge an advisory, consulting or other fee for their services
and buy shares for their own accounts or the accounts of their clients
("Customers"). Institutional shares are sold without a sales charge imposed by
the Trust or the Distributor. However, depending on the terms governing the
particular account, the Banks, NAM or RIAs may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his
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investment in a Fund. There is no minimum investment.
It is the responsibility of the Banks, NAM and RIAs to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will normally be held of record by the Banks, NAM or RIAs. Confirmations
of share purchases and redemptions will be sent to the Banks, NAM and RIAs.
Beneficial ownership of Institutional shares will be recorded by the Banks, NAM
or RIAs and reflected in the account statements provided by them to their
Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Funds which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern Time) on any business day are processed at the
net asset value per share next determined after receipt of the order plus any
applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES 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
financial institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks. It is the responsibility of the Banks to transmit redemption orders to
the Transfer Agent and credit their Customers' accounts with the redemption
proceeds on a timely basis. Redemption orders are effected at the net asset
value per share next determined after receipt of the order by the Transfer
Agent. No charge for wiring redemption payments is imposed by the Trust,
although Banks may charge their Customers' accounts for services. Information
relating to such services and charges, if any, is available from the Banks.
If a Customer has agreed with a particular Bank to maintain a minimum
balance in his account at the Bank and the balance in such account falls below
that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to the Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written request must be guaranteed by a
commercial bank
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or trust company which is a member of the Federal Reserve System or FDIC, a
member firm of a national securities exchange or a savings and loan association.
A signature guaranteed by a savings bank or notarized by a notary public is not
acceptable. For a redemption amount less than $10,000, no signature guarantee is
needed. The Trust may require additional supporting documents for redemptions
made by corporations, fiduciaries, executors, administrators, trustees,
guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust also may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or the Trust at the address
shown above. Neither the Trust nor its Transfer Agent will be responsible for
the authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (such as the name in which an account is
registered, the account number and recent transactions in the account). To the
extent that the Trust and its Transfer Agent fail to use reasonable procedures
to verify the genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
The Trust reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for redeeming Retail shares 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. Additional information regarding this service
may be obtained from an investor's financial institution or the Transfer Agent
at 1-800-622-FUND(3863). 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.
OTHER REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A FUND, SHAREHOLDERS SHOULD INDICATE WHETHER THEY
ARE REDEEMING RETAIL SHARES OR B SHARES. In the event a redeeming shareholder
owns both Retail shares and B shares in a Fund, the Retail 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 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.
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Payment to shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES AND B SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (each a "no load Fund") at the net asset value per share on the
date of exchange. As a result, no additional sales charge will be incurred with
respect to such an exchange. Shareholders may also exchange Retail shares of a
no load Fund for Retail shares of another no load Fund at the net asset value
per share without payment of a sales charge. In addition, shareholders of a no
load Fund may exchange Retail shares for Retail shares of a load Fund subject to
payment of the applicable sales charge. However, shareholders exchanging Retail
shares of a no load Fund which were received in a previous exchange transaction
involving Retail shares of a load Fund will not be required to pay an additional
sales charge upon notification of the reinvestment of the equivalent amount into
the Retail shares of a load Fund.
Shareholders who have purchased B shares of one or more of the Funds
(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 Retail 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 Retail 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
financial institution, and an Investor who directly purchased shares from the
Trust should mail the exchange request to the Transfer Agent. The exchange
privilege may be modified or terminated at any time upon 60 days notice to
shareholders.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada Funds money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified Funds over a specified period of time, and
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time
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has the effect of reducing the average cost per share of the Funds. This effect
also can be achieved through the systematic investment program described
previously in this Prospectus. Because purchases of Retail Shares are subject to
an initial sales charge, it may be beneficial for an investor to execute a
Letter of Intent indicating an intent to purchase Retail shares in connection
with the systematic exchange program. A shareholder may apply for participation
in this program through his financial institution or by calling 1-800-622-
FUND(3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement, as amended, and Rule 12b-1
under the 1940 Act, the Trust adopted a Service and Distribution Plan relating
to the Institutional and Retail classes of shares ("Institutional and Retail
Plan") and a separate B Shares Distribution and Servicing Plan relating to the B
class of shares ("B Shares Plan"). Under the Institutional and Retail Plan, the
Trust pays the following compensation to the Distributor for services provided
and expenses assumed in providing the Trust advertising, marketing, prospectus
printing and other distribution services: (i) an annual base fee of $1,250,000,
plus (ii) incentive fees related to asset growth. Such compensation is payable
monthly and accrued daily among the Institutional and Retail classes of the
Trust's investment funds with respect to which the Distributor is distributing
shares. In the case of each such fund, such compensation shall not exceed .10%
per annum of the average aggregate net assets of its Institutional and Retail
classes. 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 Institutional and
Retail 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 Retail 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 Retail 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 Retail or B shares may receive different compensation
with respect to those shares than with respect to Institutional shares in the
same Fund. Shareholder administrative services may include aggregating and
processing purchase and redemption orders, processing dividend payments from the
Trust on behalf of customers, providing information periodically to customers
showing their position in Retail or B shares, and providing sub-transfer agent
services or the information necessary for subaccounting, with respect to Retail
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 Retail 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
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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 payment date. Shareholders must make such
election, or any revocation thereof, in writing to their Banks or financial
institutions. The election will become effective with respect to dividends and
distributions paid after its receipt.
TAXES
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for federal income taxes to the
extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by a Fund will be taxable as ordinary income to its
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or to a qualified retirement plan are
deferred under the Code.) Since all of each Fund's net investment income is
expected to be derived from earned interest, it is anticipated that no part of
any distribution will be eligible for the dividends received deduction for
corporations.
Substantially all of each Fund's net realized long-term capital gains, if
any, will be distributed at least annually to Fund shareholders. A Fund will
generally have no tax liability with respect to such gains and the distributions
will be taxable to Fund shareholders who are not currently exempt from federal
income taxes as long-term capital gains, regardless of how long the shareholders
have held Fund shares and whether such gains are received in cash or reinvested
in additional shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date before the end of the year will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year in the event such dividends are actually paid during January of the
following year.
Prior to purchasing Fund shares, the impact of dividends or distributions
which are expected to be declared or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a
purchase of shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a long-
term loss to the extent of the earlier capital gain distribution. Generally, a
shareholder may include sales charges incurred upon the purchase of Fund shares
in his tax basis for such shares for the
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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.
INVESTMENT ADVISERS
NAM serves as the investment adviser to the Total Return Advantage and
Enhanced Income Funds. National City serves as investment adviser to the
Intermediate Bond, GNMA and Bond Funds. National City and NAM are wholly owned
subsidiaries of National City Corporation. National City provides trust and
banking services to individuals, corporations, and institutions, both nationally
and internationally, including investment management, estate and trust
administration, financial planning, corporate trust and agency, and personal and
corporate banking. National City is a member bank of the Federal Reserve System
and the Federal Deposit Insurance Corporation. NAM is a registered investment
adviser providing investment advisory and related services.
On September 30, 1997, the Trust Department of National City had
approximately $11.1 billion in assets under management, and National City had
approximately $23.0 billion in total trust assets. NAM had approximately $8.0
billion in assets under management. The principal offices for each of the
investment advisers are as follows:
National City
1900 East Ninth Street
Cleveland, Ohio 44114;
NAM
101 South Fifth Street
Louisville, Kentucky 40202.
NAM manages the Total Return Advantage and Enhanced Income Funds, makes
decisions with respect to and places orders for all purchases and sales of the
Funds' securities and maintains the Funds' records relating to such purchases
and sales. The Investment Management Group of NAM makes the investment decisions
for these Funds. No individual person is primarily responsible for making
recommendations to the Investment Management Group.
National City manages the Intermediate Bond, GNMA and Bond Funds. It makes
decisions with respect to and places orders for all purchases and
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sales of the Funds' securities, and maintains the Funds' records relating to
such purchases and sales. The Fixed Income Team of National City's Asset
Management Group makes the investment decisions for these Funds. No individual
person is primarily responsible for making recommendations to the Asset
Management Group. Members of the team are:
- - Michael E. Santelli, CFA, Vice President and Director of the Fixed Income
Team, joined National City in 1995. Previously, he spent a total of 4 years in
the mortgage research departments of Donaldson Lufkin and Jenrette and Merrill
Lynch. He specializes in the mortgage market.
- - Stephen P. Carpenter, Vice President, joined National City in 1989. He has
more than 23 years of investment experience with expertise in the area of
municipal bonds (taxable as well as tax-free) and money market instruments.
- - Stanley F. Martinez, Investment Officer, joined National City in 1996.
Previously, he managed taxable money market funds and short duration fixed
income portfolios for Mercantile-Safe Deposit & Trust. His focus is on short
duration investments across all fixed income sectors.
- - Douglas J. Carey, Investment Officer, joined National City in 1995. Prior to
joining National City, Mr. Carey was a graduate assistant for the Economic
Department of Miami University from August 1994 through July 1995. He now
specializes in the asset-backed sector.
- - Marilou C. Hitt, Assistant Vice President, has worked in National City's Funds
Management Trading Department since 1984. She has managed short-term money
market instruments for more than ten years. Her responsibilities also include
fixed income trading of government and corporate securities.
- - Frederick W. "Ted" Ramsey, Vice President of the Fixed Income Research Team,
oversees the Fixed Income Team's credit and research area. His experience
includes 25 years in corporate banking and credit administration, including 10
years as senior credit officer. In addition to his responsibilities as head of
credit research, Mr. Ramsey serves as credit advisor on new investment
opportunities and risk management guidelines.
- - Barbara A. Nagy, Assistant Vice President, has been with National City since
1982 where she worked in Commercial Lending credit research before joining the
Fixed Income Team in 1994. Ms. Nagy is experienced in corporate and municipal
credit research. Her investment responsibilities include tax-free money market
instruments.
- - Don M. McConnell, Research Analyst, joined National City in 1996. Mr.
McConnell has responsibility for evaluating portfolio risk measures as well as
fixed income sector relative valuation. His responsibilities also include
duration management of the funds.
The advisers are entitled to receive advisory fees, computed daily and
payable monthly, at the annual rates of .55% of the average daily net assets of
each of the Total Return Advantage, Intermediate Bond, GNMA and Bond Funds, and
.45% of the average daily net assets of the Enhanced Income Fund. The advisers
may from time to time waive all or a portion of their advisory fees to increase
the net income of the Funds available for distribution as dividends.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist in
the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
each Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects
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of their administration and operation. PFPC is entitled to receive with respect
to each Fund an administrative fee, computed daily and paid monthly, at the
annual rate of .10% of the first $200,000,000 of its net assets, .075% of the
next $200,000,000 of its net assets, .045% of the next $200,000,000 of its net
assets and .02% of its net assets over $600,000,000 and is entitled to be
reimbursed for its out-of-pocket expenses incurred on behalf of each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 57 separate classes or
series of shares of beneficial interest ("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) are described in this Prospectus. Class I, Class O,
Class P, Class R and Class S shares constitute the Institutional class or series
of shares; Class I -- Special Series 1, Class O -- Special Series 1, Class
P -- Special Series 1, Class R -- Special Series 1 and Class S Special Series 1
shares constitute the Retail class or series of shares; 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)
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 and Class L -- Special Series 1)
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)
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)
40
<PAGE> 231
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 Retail 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 being or having been a shareholder and not because of his acts or
omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of December 9, 1997, National City held beneficially or of record
approximately 12.20% of the outstanding Institutional shares of the Total Return
Advantage Fund; approximately 24.26% of the outstanding Institutional shares of
the Intermediate Bond Fund; approximately 5.92% of the outstanding Institutional
shares of the Enhanced Income Fund; approximately 0.28% of the outstanding
Institutional shares of the Bond Fund; and approximately 7.68% of the
outstanding Institutional shares of the GNMA Fund. National City has no economic
interest in such shares which are held solely for the benefit of its customers,
but may be deemed to be a controlling person of the Funds within the meaning of
the 1940 Act by reason of its record ownership of such shares. The names of
beneficial owners and record owners who are controlling shareholders under the
1940 Act may be found in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to P.
O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust for
these services are described in the Statement of Additional Information.
41
<PAGE> 232
EXPENSES
Except as noted below, the Trust's advisers bear all expenses in connection
with the performance of their services. Each Fund of the Trust bears its own
expenses incurred in its operations including: taxes; interest; fees (including
fees paid to its trustees and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; expenses related to the
distribution 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, as National City serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio managers of the Funds and other investment professionals may
from time to time discuss in advertising, sales literature or other material,
including periodic publications, various topics of interest to shareholders and
prospective investors. The topics may include, but are not limited to, the
advantages and disadvantages of investing in tax-deferred and taxable
investments; Fund performance and how such performance may compare to various
market indices; shareholder profiles and hypothetical investor scenarios; the
economy; the financial and capital markets; investment strategies and
techniques; investment products and tax, retirement and investment planning.
Inquiries regarding the Trust or any of its investment funds may be
directed to 1-800-622-FUND(3863).
42
<PAGE> 233
LOGO NOTES
<PAGE> 234
LOGO NOTES
<PAGE> 235
LOGO ARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, 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:
Acromed Corporation
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishing's 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:
Meridia Health System
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 236
[ARMADA LOGO]
Oaks, Pennsylvania, 19456
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National Asset
Management Corporation
101 South Fifth Street
Louisville, Kentucky 40202
AF-809 (12/97)
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
<PAGE> 237
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 23, 1997
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 December 23, 1997 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at 1-800-622-FUND
(3863), Oaks, Pennsylvania 19456.
<PAGE> 238
<TABLE>
TABLE OF CONTENTS
-----------------
PAGE
----
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION................................................... 1
INVESTMENT OBJECTIVES AND POLICIES.................................................... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................................ 12
DESCRIPTION OF SHARES................................................................. 15
ADDITIONAL INFORMATION CONCERNING TAXES............................................... 17
TRUSTEES AND OFFICERS................................................................. 20
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS............................................ 24
SHAREHOLDER SERVICES PLANS............................................................ 31
PORTFOLIO TRANSACTIONS................................................................ 32
AUDITORS.............................................................................. 34
COUNSEL............................................................................... 34
YIELD AND PERFORMANCE INFORMATION..................................................... 35
MISCELLANEOUS......................................................................... 40
FINANCIAL STATEMENTS.................................................................. 45
APPENDIX A............................................................................ A-1
APPENDIX B............................................................................ B-1
</TABLE>
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<PAGE> 239
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 Retail shares of beneficial
interest.
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the advisers' investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for securities which may be held by the Funds.
ASSET-BACKED SECURITIES
- -----------------------
As described in the Prospectus, each Fund may purchase
asset-backed securities, which are securities backed by mortgages, installment
contracts, credit card receivables or other assets. Asset-backed securities
represent interests in "pools" of assets in which payments of both interest and
principal on the securities are made monthly, thus in effect "passing through"
monthly payments made by the individual borrowers on the assets that underlie
the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of asset-backed securities varies with the
maturities of the underlying instruments, and the average life of a
mortgage-backed instrument, in particular, is likely to be
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<PAGE> 240
substantially less than the original maturity of the mortgage pools underlying
the securities as a result of mortgage prepayments. For this and other reasons,
an asset-backed security's stated maturity may be shortened, and the security's
total return may be difficult to predict precisely. Asset-backed securities
acquired by a Fund may include collateralized mortgage obligations ("CMOS")
issued by private companies.
Each Fund may invest in securities the timely payment of
principal and interest on which are guaranteed by the Government National
Mortgage Association ("GNMA") a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to predict
accurately the average maturity of a particular GNMA pool. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. The scheduled monthly
interest and principal payments relating to mortgages in the pool are "passed
through" to investors. In addition, there may be unscheduled principal payments
representing prepayments on the underlying mortgages. Although GNMA certificates
may offer yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a GNMA certificate originally purchased at a premium to decline in price to its
par value, which may result in a loss.
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.
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<PAGE> 241
Treasury to make payments under its guarantee. Mortgage-backed securities issued
by the FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also
known as "Fannie Maes") which are solely the obligations of the FNMA and are not
backed by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which have given debtors the right to set off certain
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.
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<PAGE> 242
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 Total Return Advantage and Enhanced Income Funds'
adviser anticipates that a particular foreign currency may decline substantially
relative to the U.S. dollar or other leading currencies, in order to reduce
risk, a Fund may enter into a forward contract to sell, for a fixed amount, the
amount of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency. Similarly, when the obligations
held by a Fund create a short position in a foreign currency, the Fund may enter
into a forward contract to buy, for a fixed amount, an amount of foreign
currency approximating the short position. With respect to any forward foreign
currency contract, it will not generally be possible to match precisely the
amount covered by that contract and the value of the securities involved due to
the changes in the values of such securities resulting from market movements
between the date the forward contract is entered into and the date it matures.
In addition, while forward contracts may offer protection from losses resulting
from declines or appreciation in the value of a particular foreign currency,
they also limit potential gains which might result from changes in the value of
such currency. A Fund will also incur costs in connection with forward foreign
currency exchange contracts and conversions of foreign currencies and U.S.
dollars.
A separate account consisting of liquid assets, such as cash,
U.S. government securities or other liquid high grade debt obligations equal to
the amount of the Enhanced Income and Total Return Advantage Funds' assets that
could be required to consummate forward contracts will be established with the
Funds'
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<PAGE> 243
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
advisers believe that such obligations do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Funds' borrowing restrictions. The net amount of the excess, if any, of
the Funds' obligations over their entitlements with respect to each interest
rate swap will be accrued on a daily basis and an amount of liquid assets, such
as cash, U.S. government securities or other liquid high grade debt securities,
having an aggregate net asset value at least equal to such accrued excess will
be maintained in a segregated account by the Funds' custodian.
If there is a default by the other party to an interest rate
swap transaction, the Fund involved will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as
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principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with markets for
other similar instruments which are traded in the Interbank market.
FUTURES CONTRACTS AND RELATED OPTIONS
- -------------------------------------
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
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<PAGE> 245
the value of the account remains equal to the amount of the Fund's commitment,
marked to market daily. It is likely that a Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because a Fund will set aside cash or
liquid assets to satisfy its purchase commitments in the manner described, the
Fund's liquidity and ability to manage its fund might be affected in the event
its commitments to purchase when-issued securities ever exceeded 25% of the
value of its total assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between a Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, a Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the advisers. In the event an issuer
of a variable or floating rate obligation defaulted on its payment obligation, a
Fund might be unable to dispose of the instrument because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
SHORT TERM OBLIGATIONS
- ----------------------
Each Fund may invest in various short term obligations
including those described below.
Investments include commercial paper and other short term
promissory notes issued by corporations (including variable
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<PAGE> 246
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 a U.S. bank which is
a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances, certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. The Total
Return Advantage, 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. insurance companies. When investing in GICs, a
Fund makes cash contributions to a deposit fund or an insurance company's
general account. The insurance company then credits to that Fund monthly a
guaranteed minimum interest which is based on an index. The insurance company
may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. A Fund will purchase a GIC only when its advisers have determined, under
guidelines established by the Board of Trustees, that the GIC presents minimal
credit risks to the Fund and is of comparable quality to instruments that are
rated high quality by one or more rating agencies.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As described in the Prospectus, each Fund may purchase
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Some of these obligations are supported by the full faith and
credit of the U.S. Treasury, such as obligations issued by the Government
National Mortgage Association. Others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to
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<PAGE> 247
borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the agency or instrumentality issuing the obligation. No assurance can be given
that the U.S. government would provide financial support to U.S.
government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Funds will invest in the obligations of such agencies or
instrumentalities only when the advisers believe that the credit risk with
respect thereto is minimal.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each Fund currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
PORTFOLIO TURNOVER
- ------------------
The portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes U.S. Government securities and all securities whose maturities at the
time of acquisition were one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares and by requirements which enable
the Trust to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making fund decisions.
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectus).
-9-
<PAGE> 248
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.
-10-
<PAGE> 249
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.
-11-
<PAGE> 250
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 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 B shares class for each Fund is expected to commence
operations on or about January 1, 1998.
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, Institutional shares of the
Funds are sold to certain qualified investors at their net asset value without a
sales charge. Retail 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, 1997, sales loads paid by
shareholders of the Total Return Advantage, Intermediate Bond, Enhanced Income,
GNMA and Bond Funds totalled $50, $6, $68, $6 and $6, respectively.
-12-
<PAGE> 251
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Funds permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
protect against losses in a declining market, or prevent a loss if an investor
ultimately redeems his shares at a price which is lower than their purchase
price. An investor may want to consider his financial ability to continue
purchases through periods of low price levels. From time to time, in
advertisements, sales literature, communications to shareholders and other
materials ("Materials"), the Trust may illustrate the effects of dollar cost
averaging through use of or comparison to an index such as the S&P 500 Index or
Lehman Intermediate Government Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Total Return Advantage, 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, 1997 are as follows:
TABLE
-----
TOTAL RETURN ADVANTAGE FUND
---------------------------
<TABLE>
<S> <C>
Net Assets of Retail Shares............................................ $2,186,227
Outstanding Retail Shares.............................................. 221,051
Net Asset Value Per Share
($2,186,227 / 221,051)................................................. $ 9.89
Sales Charge, 4.75% of
offering price (4.95% of
net asset value per share)*............................................ 0.49
Offering to Public..................................................... $ 10.38
</TABLE>
* Reflects current sales charge
-13-
<PAGE> 252
<TABLE>
INTERMEDIATE BOND FUND
----------------------
<S> <C>
Net Assets of Retail Shares............................................ $3,719,976
Outstanding Retail Shares.............................................. 357,016
Net Asset Value Per Share
($3,719,976 / 357,016)................................................. $ 10.42
Sales Charge, 4.75% of
offering price (4.99% of
net asset value per share)*............................................ 0.52
Offering to Public..................................................... $ 10.94
ENHANCED INCOME FUND
--------------------
Net Assets of Retail Shares............................................ $2,050,874
Outstanding Retail Shares.............................................. 205,025
Net Asset Value Per Share
($2,050,874 / 205,025)................................................. $ 10.00
Sales Charge, 2.75% of
offering price (2.80% of
net asset value per share)............................................. 0.28
Offering to Public..................................................... $ 10.28
GNMA FUND
---------
Net Assets of Retail Shares............................................ $ 128,326
Outstanding Retail Shares.............................................. 12,644
Net Asset Value Per Share
($128,326 / 12,644).................................................... $ 10.15
Sales Charge, 4.75% of
offering price (5.02% of
net asset value per share)*............................................ 0.51
Offering to Public..................................................... $ 10.66
BOND FUND
---------
Net Assets of Retail Shares............................................ $ 23,394
Outstanding Retail Shares.............................................. 2,335
</TABLE>
* Reflects current sales charge
-14-
<PAGE> 253
<TABLE>
<S> <C>
Net Asset Value Per Share
($23,394 / 2,335)...................................................... $ 10.02
Sales Charge, 4.75% of
offering price (4.99% of
net asset value per share)*............................................ 0.50
Offering to Public..................................................... $ 10.52
</TABLE>
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail 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 financial institution to act on telephonic or
written instructions from any person representing himself or herself to be the
shareholder and believed by the Transfer Agent or the financial institution to
be genuine. The Investor or his financial institution must notify the Transfer
Agent of his prior ownership of Retail 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 57 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) are
* Reflects current sales charge
-15-
<PAGE> 254
described in this Statement of Additional Information and the related
Prospectus.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, and a
proportionate distribution, based upon the relative asset values of the
respective Funds, of any general assets of the Trust not belonging to any
particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter
required by the 1940 Act, applicable state law, or otherwise, to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
investment fund affected by such matter. Rule 18f-2 further provides that an
investment fund is affected by a matter unless the interests of each fund in the
matter are substantially identical or the matter does not affect any interest of
the fund. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment fund only if approved by a majority of the
outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to a particular fund. In addition, shareholders of each
class in a particular investment fund have equal voting rights except that only
Institutional and Retail 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
-16-
<PAGE> 255
consideration received from the sale and conveyance; (b) sell and convert an
investment fund's assets into money and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at their net asset
value; or (c) combine the assets belonging to an investment fund with the assets
belonging to another investment fund of the Trust, if the Board of Trustees
reasonably determines that such combination will not have a material adverse
effect on shareholders of any fund participating in such combination, and, in
connection therewith, to cause all outstanding shares of any fund to be redeemed
at their net asset value or converted into shares of another class of the Trust
shares at net asset value. In the event that shares are redeemed in cash at
their net asset value, a shareholder may receive in payment for such shares an
amount that is more or less than his original investment due to changes in the
market prices of the fund's securities. The exercise of such authority by the
Board of Trustees will be subject to the provisions of the 1940 Act, and the
Board of Trustees will not take any action described in this paragraph unless
the proposed action has been disclosed in writing to the fund's shareholders at
least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
Each Fund of the Trust will be treated as a separate corporate
entity under the Code and intends to qualify as a regulated investment company.
In order to qualify for tax treatment as a regulated investment company under
the Code, each Fund must satisfy, in addition to the distribution requirement
described in the Prospectus, certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in
-17-
<PAGE> 256
stock or securities, or options and futures with respect to stock or securities.
Any income derived by a Fund from a partnership or trust is treated as derived
with respect to the Fund's business of investing in stock, securities or
currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust. Some of the investments that the
Funds may make (such as equipment lease and trust certificates) may not be
securities or may not produce qualifying income. Therefore, it may be necessary
for the advisers to restrict the investments of the Funds to ensure that
nonqualifying income does not exceed 10% of its total gross income for a taxable
year.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months (the
"short-short test"): (1) stock and securities (as defined in Section 2(a)(36) of
the 1940 Act); (2) options, futures and forward contracts other than those on
foreign currencies; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock and securities (and options and futures
with respect to stocks and securities). Interest (including original issue
discount and, with respect to taxable debt securities, accrued market discount)
received by a Fund upon maturity or disposition of a security held for less than
three months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of this requirement. However,
any other income which is attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose. Effective for taxable years beginning after August 4, 1997, the
recently enacted Taxpayer Relief Act of 1997 repeals the short-short test.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instrument. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as
-18-
<PAGE> 257
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 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> 258
TRUSTEES AND OFFICERS
---------------------
The trustees and executive officers of the Trust, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994;
Director, Zurn Industries,
Inc. (building products
and construction
services), since June
1995.
Herbert R. Martens, Jr.* President and Trustee Executive Vice President,
c/o NatCity Investments National City Corporation
1965 E. Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman,
Age 45 President and Chief Executive
Officer, NatCity
Investments, Inc., since
July 1995 (investment
banking); President and
Chief Executive Officer,
Raffensperger, Hughes &
Co., from 1993 until 1995
(broker-dealer);
President, Reserve Capital
Group, from 1990 until
1993.
Leigh Carter* Trustee Retired President and
13901 Shaker Blvd., #6B Chief Operating Officer,
Cleveland, OH 44120 B.F. Goodrich Company,
Age 72 August 1986 to September
1990; Director, Adams
Express Company (closed-
end investment company),
April 1982 to December 1997;
Director, Acromed
Corporation (producer of
spinal implants), since
June 1992; Director,
Petroleum & Resources
Corp., April 1987 to
December 1997; Director,
Morrison Products (manufacturer
of blower fans and air
moving equipment), since April
1983; Director, Kirtland Capital
Corp. (privately funded investment
group), since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 53 Center, Inc., since
January 1982; partner,
Kittles Bloomington
Property Company, since
January 1981; partner,
KK&D (Affiliated Real
Estate Companies of
Kittle's Home Furnishing's
Center), since January
1989.
</TABLE>
-20-
<PAGE> 259
<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
1608 Balmoral Way and Chief Executive Officer,
Westlake, OH 44145 Centerior Energy (electric
Age 61 utility), March 1992
to October 1997; Director,
National City Corporation (bank
holding company) until
October 1997; Director,
Republic Engineered Steels,
since October 1997.
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed
Corporation (restaurant
group), since 1990;
Director, Foam Design,
Inc. (manufacturer of
industrial and commercial
foam products), since
1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health
System (four hospital
health system); Trustee,
WVIZ Educational
Television (public
television).
</TABLE>
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<PAGE> 260
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- -------------- ----------------------
<S> <C> <C>
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
Executive Officer,
American Contractors
Rentals & Sales (rental
subsidiary of Whayne
Supply Co.), since 1988.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP, Philadelphia,
1345 Chestnut Street Pennsylvania
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP
</TABLE>
- --------------------
* 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., President of the Trust, is Executive
Vice President of National City Corporation, which is the parent company of both
advisers, and Chairman and Chief Executive Officer of NatCity Investments, Inc.,
a registered broker-dealer that is affiliated with the advisers. W. Bruce
McConnel, III, Esq., Secretary of the Trust, is a partner of the law firm
Drinker Biddle & Reath LLP, which receives fees as counsel to the Trust. Neal J.
Andrews, Treasurer of the Trust, is employed by PFPC Inc., which receives fees
as administrator to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
-22-
<PAGE> 261
The following table summarizes the compensation for each of
the trustees of the Trust for the fiscal year ended May 31, 1997:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Annual Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Robert D. Neary, $18,750 $0 $0 $18,750
Chairman and Trustee
Thomas R. Benua, Jr., $17,500 $0 $0 $17,500
Trustee*
Leigh Carter, Trustee $17,500 $0 $0 $17,500
John F. Durkott, Trustee $17,500 $0 $0 $17,500
Robert J. Farling, Trustee ** ** ** **
Richard W. Furst, Trustee $17,500 $0 $0 $17,500
Gerald L. Gherlein, Trustee ** ** ** **
Herbert R. Martens, Jr., ** ** ** **
President and Trustee
J. William Pullen, Trustee $17,500 $0 $0 $17,500
Richard B. Tullis, Trustee* $18,750 $0 $0 $18,750
</TABLE>
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
- -------------
* Messrs. Benua and Tullis resigned as Trustees as of July 17, 1997 and
November 19, 1997, respectively.
* Messrs. Farling, Gherlein and Martens were not Trustees of the Trust during
the fiscal year ended May 31, 1997.
-23-
<PAGE> 262
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Trust shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust, and shall satisfy any judgment thereon.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
---------------------------------------
ADVISORY AGREEMENTS
- -------------------
As described in the Prospectus, National Asset Management
Corporation ("NAM") serves as investment adviser to the Total Return Advantage
and Enhanced Income Funds; National City Bank ("National City") serves as
investment adviser to the Intermediate Bond, GNMA and Bond Funds. The advisers
are affiliates of National City Corporation, a bank holding company with $52
billion in assets, and headquarters in Cleveland, Ohio and nearly 900 branch
offices in four states. Through its subsidiaries, National City Corporation has
been managing investments for individuals, pension and profit-sharing plans and
other institutional investors for over 75 years and currently
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manages over $41 billion in assets. From time to time, the advisers may
voluntarily waive fees or reimburse the Trust for expenses.
Pursuant to advisory agreements relating to the Total Return
Advantage, Intermediate Bond and Enhanced Income Funds, the Trust incurred
advisory fees in the following respective amounts for the fiscal years ended May
31, 1997, 1996 and 1995: (i) $0 (after waivers of $1,530,963), $0 (after waivers
of $1,545,558) and $0 (after waivers of $1,176,389) for the Total Return
Advantage Fund; (ii) $550,261 (after waivers of $118,288), $588,875 and $493,595
(after waivers of $0) for the Intermediate Bond Fund; and (iii) $0 (after
waivers of $296,129), $0 (after waivers of $298,505) and $0 (after waivers of
$236,026) for the Enhanced Income Fund.
Pursuant to an advisory agreement relating to the GNMA and
Bond Funds, the Trust incurred advisory fees in the following amounts for the
fiscal year ended May 31, 1997: (i) $323,854 (after fee waivers of $50,450) for
the GNMA Fund and (ii) $485,145 (after fee waivers of $54,417) for the Bond
Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, National City, the adviser of the
GNMA and Bond Funds, 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 current 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 under the Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the advisers in the
performance of their duties or from reckless disregard by them of their duties
and obligations thereunder. In addition, the advisers have undertaken in their
respective Advisory Agreements to maintain their policy and practice of
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conducting their Trust Departments independently of their Commercial
Departments.
The current Advisory Agreement with respect to the Total
Return Advantage and Enhanced Income 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
Advisory Agreement relating to the Intermediate Bond, GNMA and Bond Funds was
approved by the shareholders of each such Fund at a Special Meeting of
Shareholders held on November 19, 1997 in order to approve such Advisory
Agreement. Unless sooner terminated, each Advisory Agreement will continue in
effect with respect to each Fund to which it relates until September 30, 1998
and from year to year thereafter, subject to annual approval by the Trust's
Board of Trustees, or by a vote of a majority of the outstanding shares of such
Fund (as defined in the Fund's Prospectus) and a majority of the trustees who
are not parties to the Agreement or interested persons (as defined in the 1940
Act) of any party by votes cast in person at a meeting called for such purpose.
Each Advisory Agreement may be terminated by the Trust or the adviser(s) on 60
days written notice, and will terminate immediately in the event of its
assignment.
AUTHORITY TO ACT AS INVESTMENT ADVISERS
Banking laws and regulations, including the Glass-Steagall Act
as presently interpreted by the Board of Governors of the Federal Reserve
System, (a) prohibit a bank holding company registered under the Federal Bank
Holding Company Act of 1956 or any affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a bank holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company. The advisers believe that
they may perform the services for the Funds contemplated by their Advisory
Agreements with the Trust as described in such agreements and this Prospectus
without violation of applicable banking laws or regulations. However, there are
no controlling judicial precedents and future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well as
future interpretations of present requirements, could prevent the advisers from
continuing to perform services for the Trust. If the advisers were prohibited
from providing services to the Funds, the Board of Trustees would consider
selecting another 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
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advisers, or their affiliated and correspondent banks in connection with
shareholder purchases of Fund shares, the advisers and their affiliated and
correspondent banks might be required to alter materially or discontinue the
services offered by them to shareholders. It is not anticipated, however, that
any resulting change in the Trust's method of operations would affect its net
asset value per share or result in financial losses to any shareholder.
If current restrictions preventing a bank or its affiliates
from legally sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the advisers, or an affiliate of the advisers,
would consider the possibility of offering to perform additional services for
the Trust. Legislation modifying such restrictions has been proposed in past
sessions in Congress. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which the
advisers, or such an affiliate, might offer to provide such services.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
- ------------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following respective fees
to PFPC for the fiscal years ended May 31, 1997, 1996 and 1995: (i) $258,768,
$260,951 and $150,557 (after waivers of $55,353) for the Total Return Advantage
Fund; (ii) $121,554, $107,068 and $89,856 for the Intermediate Bond Fund; and
(iii) $65,807, $866,336 and $37,396 (after waivers of $14,882) for the Enhanced
Income Fund.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, PFPC earned administration fees of
$46,576 and $66,618 for the GNMA and 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.
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DISTRIBUTION PLANS AND RELATED AGREEMENT
- ----------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreements 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 Retail and Institutional shares (the "Retail
and Institutional 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
Institutional and Retail 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 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 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.
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The Retail and Institutional Shares Plan provides that each
fund will compensate the Distributor for distribution expenses related to the
distribution of Institutional and Retail shares in an amount not to exceed .10%
per annum of the fund's average aggregate net assets of such shares. The Retail
and Institutional Shares Plan provides that the Trust will pay the Distributor
an annual base fee of $1,250,000 plus incentive fees based upon asset growth
payable monthly and accrued daily by all of the Trust's investment funds with
respect to the Institutional and Retail 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 such class's average net assets.
Distribution expenses payable 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 distributing 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.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $13,764, $6,603 and $3,317 with respect to the Total Return
Advantage, Intermediate Bond and Enhanced Income Funds under the Retail and
Institutional Shares Plan. Of the aggregate amounts paid to the Distributor by
the Trust with respect to the Total Return Advantage Fund, $4,129 was
attributable to distribution services and $9,635 was attributable to
marketing/consultation. Of the aggregate amount paid to the Distributor by the
Trust with respect to the Intermediate Bond Fund, $1,981 was attributable to
distribution services and $4,622 was attributable to marketing/consultation. Of
the aggregate amounts paid to the Distributor by the Trust with respect to the
Enhanced Income Fund, $995 was attributable to distribution services and $2,322
was attributable to marketing/consultation. Distribution services include
broker/dealer and investor support, voice response development, wholesaling
services, legal review and NASD filings and transfer agency management.
Marketing/ Consultation includes planning and development, market and industry
research and analysis and marketing strategy and planning.
For the period from June 1, 1996 through March 7, 1997, the
Trust paid its previous distributor, 440 Financial Distributors, Inc. ("440
Financial") $15,367, $50,925 and $3,612 with respect to the Total Return
Advantage, Intermediate Bond and
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Enhanced Income Funds under the Retail and Institutional Shares Plan.
For the period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $3,416 and $4,827 with respect to the GNMA and the Bond
Fund under the Retail and Institutional Shares Plan. Of the aggregate amounts
paid the Distributor by the Trust with respect to the GNMA Fund, $1,025 was
attributable to distribution services and $2,391 was attributable to
marketing/consultation. Of the aggregate amount paid to the Distributor by the
Trust with respect to the Bond Fund, $1,448 was attributable to distribution
services and $3,379 was attributable to marketing/consultation. Distribution
services include broker/dealer and investor support, voice response development,
wholesaling services, legal review and NASD filings and transfer agency
management. Marketing/ Consultation includes planning and development, market
and industry research and analysis and marketing strategy and planning. For the
period from September 9, 1996 (date of reorganization of the Predecessor Funds)
through March 7, 1997, the Trust paid 440 Financial $10,100 and $14,614 for the
GNMA and Bond Funds under the Retail and Institutional Shares Plan.
Class A Shares of the Predecessor GNMA and Bond Funds were
subject to a plan adopted pursuant to Rule 12b-1 under the 1940 Act (the
"Plan"). The Plan provided for reimbursement to the Predecessor Funds'
distributor of the Funds' distribution expenses, including (1) the cost of
prospectuses, reports to shareholders, sales literature and other materials for
potential investors; (2) advertising; (3) expenses incurred in connection with
the promotion and sale of Inventor's shares excluding the distributor's expenses
for travel, communication, compensation and benefits for sales personnel; and
(4) any other expenses reasonably incurred in connection with the distribution
and marketing of Class A shares subject to approval by a majority of
disinterested directors of Inventor. For the period from June 1, 1996 until
September 9, 1996, the distributor of the Predecessor GNMA and Bond Funds
received $0 (after waivers of $42,191) and $0 (after waivers of $61,844),
respectively.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse fund securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (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
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to its duties; and (vi) make periodic reports to the Board of Trustees
concerning the Funds' operations. National City Bank is authorized to select one
or more banks or trust companies to serve as sub-custodian on behalf of the
Funds, provided that it shall remain responsible for the performance of all of
its duties under the Custodian Services Agreement and shall hold the Funds
harmless from the acts and omissions of any bank or trust company serving as
sub-custodian. The Funds reimburse National City Bank for its direct and
indirect costs and expenses incurred in rendering custodial services, except
that the costs and expenses borne by each Fund in any year may not exceed $.225
for each $1,000 of average gross assets of such Fund.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
shareholder of record a monthly statement showing the total number of shares
owned as of the last business day of the month (as well as the dividends paid
during the current month and year), and provides each shareholder of record with
a daily transaction report for each day on which a transaction occurs in the
shareholder's account with each Fund.
SHAREHOLDER SERVICES PLANS
--------------------------
As stated in the Prospectus, the Trust has implemented the
Shareholder Services Plan relating to each Fund's Retail 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
Retail 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 accounts in Retail or B shares; (iii) processing dividend payments
from the Funds; (iv) providing information periodically to customers showing
their position in Retail or B shares; (v)
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arranging for bank wires; (vi) responding to customer inquiries relating to the
services performed with respect to Retail 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, NAM is
responsible for making decisions with respect to and placing orders for all
purchases and sales of fund securities for the Total Return Advantage and
Enhanced Income Funds. Under 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 Intermediate Bond, GNMA
and Bond Funds. The advisers purchase portfolio securities for the Funds either
directly from the issuer or from an underwriter or dealer making a market in the
securities involved. Purchases from an underwriter of portfolio securities
include a commission or concession paid by the issuer to the underwriter and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market, but the price includes
an undisclosed commission or mark-up.
For the fiscal years ended May 31, 1997, 1996 and 1995, the
Total Return Advantage Fund paid brokerage commissions in the amounts of $0, $0
and $14,093. For the fiscal years ended May 31, 1997, 1996 and 1995, the
Intermediate Bond and Enhanced Income Funds did not pay any brokerage
commissions.
For the period from September 9, 1996 (date of reorganization
of the Predecessor Funds) until May 31, 1997, the GNMA and 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 advisers generally seek competitive spreads or
commissions, they may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the advisers in their best judgment and in a manner
deemed fair and reasonable to shareholders. Under the current
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Advisory Agreements, pursuant to Section 28(e) of the Securities Exchange Act of
1934, as amended, the advisers are 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 advisers may receive orders for
transactions by a Fund. Information so received is in addition to and not in
lieu of services required to be performed by the advisers and does not reduce
the fees payable to them by the Funds. Such information may be useful to the
advisers in serving both the Trust and other clients, and, similarly,
supplemental information obtained by the placement of business of other clients
may be useful to the advisers in carrying out their obligations to the Trust.
Portfolio securities will not be purchased from or sold to
the Funds' advisers, the Distributor, or any "affiliated person" (as such term
is defined under the 1940 Act) of any of them acting as principal, except to the
extent permitted by the SEC. In addition, a Fund will not give preference to its
advisers' correspondents with respect to such transactions, securities, savings
deposits, repurchase agreements and reverse repurchase agreements.
As adviser to the Total Return Advantage and Enhanced Income
Funds, NAM has agreed to maintain its policy and practice of conducting its
investment management activities independently of the Commercial Departments of
all banking affiliates. While serving as adviser to the Trust, National City has
similarly agreed to maintain its policy and practice of conducting its Trust
Department independently of its Commercial Department. In making investment
recommendations for the Trust, personnel will not inquire or take into
consideration whether the issuers of securities proposed for purchase or sale
for the Trust's account are customers of the Commercial Department. In dealing
with commercial customers, the Commercial Department will not inquire or take
into consideration whether securities of those customers are held by the Trust.
The Trust is required to identify any securities of its
"regular brokers or dealers" during its most recent fiscal year. At May 31,
1997, (i) the Total Return Advantage Fund held Prudential Insurance corporate
bonds with a value of $2,598,244 and maturing on July 15, 2015; (ii) the
Intermediate Bond Fund held Prudential Home Mortgage Securities Series 1996-7,
Class A7 security with a value of $2,399,609 and maturing on January 2, 2007;
and also held Prudential Insurance corporate bonds with a value of $5,050,000
and maturing on July 1, 2007; (iii) the Bond Fund held Prudential Home Mortgage
Securities Series 1996-7, Class A7 security with a value of $1,439,766 and
maturing on January 2, 2007.
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Investment decisions for each Fund are made independently from
those for the other Funds and for other investment companies and accounts
advised or managed by the advisers. Such other Funds, investment companies and
accounts may also invest in the same securities as the Funds. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, the transaction will be averaged
as to price, and available investments allocated as to amount, in a manner which
the advisers believe to be equitable to the Fund and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by such Fund. In connection therewith, and to the extent permitted by
law and by each of the current Advisory Agreements, the advisers may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or 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, 1997, 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,
1997 with respect to the Predecessor Funds, which are incorporated by reference
in this Statement of Additional Information, were audited by Coopers & Lybrand,
L.L.P., independent accountants for the Predecessor Funds whose report dated
July 26, 1996 expressed an unqualified opinion on such financial statements, and
are included in reliance upon such report given upon the authority of such firm
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
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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 sixth 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
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date. With respect to debt obligations purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect changes
in the market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. For applicable sales charges, see "How to Purchase
and Redeem Shares -- Sales Charges Applicable to Purchases of Retail Shares" and
"Sales Charges Applicable to Purchases of B Shares" in the Prospectus.
For the 30-day period ended May 31, 1997, the yields of the
Retail and Institutional shares of the Total Return Advantage Fund, Intermediate
Bond Fund, Enhanced Income Fund, GNMA Fund and Bond Fund were 6.20% and 6.70%,
5.39% and 5.86%, 5.94% and 6.19%, 5.71% and 6.19%, and 5.19% and 5.64%,
respectively.
Each Fund computes its average annual total return by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result.
This calculation can be expressed as follows:
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<PAGE> 275
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
Each Fund computes its aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
(-----) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to such Funds' mean (or median) account size for any fees that vary with
the size of the account. The maximum sales load and other charges deducted from
payments are deducted from the initial $1,000 payment (variable "P" in the
formula). The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all 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, 1997 were 4.33% (after taking the
sales load into account) and 8.35% (without taking into account any sales load)
for its Retail shares and 8.51% for its Institutional shares. The average annual
total returns since the Total Return Advantage Fund's commencement of operations
through May 31, 1997 were 6.24% (after taking into account the sales load) and
7.75% (without taking into account any sales load) for its Retail shares and
8.22% for its
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Institutional shares. The Retail share class of the Total Return Advantage Fund
commenced operations on September 6, 1994 and the Institutional share class of
the Total Return Advantage Fund commenced operations on July 7, 1994.
The average annual total returns for the Intermediate Bond
Fund's fiscal year ended May 31, 1997 were 2.40% (after taking the sales load
into account) and 6.36% (without taking into account any sales load) for its
Retail shares and 6.63% for its Institutional shares. The average annual total
returns since the Intermediate Bond Fund's commencement of operations through
May 31, 1997 were 6.82% (after taking into account the sales load) and 7.37%
(without taking into account any sales load) for its Retail shares and 7.61% for
its Institutional shares. The 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, 1997 were 3.03% (after taking the sales load
into account) and 5.91% (without taking into account any sales load) for its
Retail shares and 6.02% for its Institutional shares. The average annual total
returns since the Enhanced Income Fund's commencement of operations through May
31, 1997 were 4.77% (after taking into account the sales load) and 5.87%
(without taking into account any sales load) for its Retail shares and 5.95% for
its Institutional shares. The Retail share class of the Enhanced Income Fund
commenced operations on September 9, 1994 and the Institutional share class of
the Enhanced Income Fund commenced operations on July 7, 1994.
The average annual total returns for the GNMA Fund's one year
period ending May 31, 1997 were 4.76% (after taking the sales load into account)
and 8.83% (without taking into account any sales load) for its Retail shares and
9.03% for its Institutional shares. The average annual total returns since the
GNMA Fund's commencement of operations through May 31, 1997 were 6.75% (after
taking into account the sales load) and 8.21% (without taking into account any
sales load) for its Retail shares and 8.27% for its Institutional shares. The
GNMA Fund commenced operations on August 10, 1994.
The average annual total returns for the Bond Fund's one year
period ending May 31, 1997 were 3.19% (after taking the sales load into account)
and 7.22% (without taking into account any sales load) for its Retail shares and
7.41% for its Institutional shares. The average annual total returns since the
Bond Fund's commencement of operations through May 31, 1997 were 5.27% (after
taking into account the sales load) and 6.72% (without taking into account any
sales load) for its Retail shares and 6.78% for its Institutional shares. The
Bond Fund commenced operations on August 10, 1994.
-38-
<PAGE> 277
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value. A Fund
does not, for these purposes, deduct from the initial value invested 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 sale charges
would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Materials,
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, high-quality investments, economic conditions,
the relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical performance
of various asset classes, including but not limited to, stocks, bonds and
Treasury securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the advisers as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to a Fund. The Funds may also include in Materials charts, graphs
or drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the
-39-
<PAGE> 278
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 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 November 30, 1997, the following persons owned of record
5 percent or more of the shares of the Funds of the Trust:
-40-
<PAGE> 279
<TABLE>
INTERMEDIATE BOND FUND (INSTITUTIONAL)
- ---------------------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
Columbus Foundation 710,755.536 5.13%
Field of Interest
Attn: Trust Mutual
Funds
P. O. Box 94777
Cleveland, OH
44101-4777
ENHANCED INCOME FUND (INSTITUTIONAL)
- ------------------------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
Key Trust Company 665,345.033 9.57%
FBO St. Luke's Self
Ins.
800 Superior Avenue
Cleveland, OH
44101-4717
INTERMEDIATE BOND FUND (RETAIL)
- -------------------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
Wheat First FBO 103,132.320 31.02%
Intrac
Attn: Gary Ream
8440 Woodfield
Crossing Blvd.
Indianapolis, IN
46240-2476
Wheat First FBO 52,083.682 15.67%
B.F. Beverage Co.,
Inc.
3150 Shelby Street
Indianapolis, IN
46227-3165
</TABLE>
-41-
<PAGE> 280
<TABLE>
ENHANCED INCOME FUND (RETAIL)
- -----------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
Wheat First FBO 185,423.434 78.15%
Intrac
Attn: Gary Ream
8440 Woodfield
Crossing Blvd.
Indianapolis, IN
46240-2476
Wheat First FBO B.F. 33,515.487 14.13%
Beverage Co, Inc.
3150 Shelby Street
Indianapolis, IN
46227-3165
Wheat First FBO 12,711.054 5.36%
Harvey M. Brunner,
Jr. IRA
700 Brick Mill
Run, Apt. 106
Westlake, OH 44145-
1655
BOND FUND (RETAIL)
- ------------------
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
SEI Trust Company 2,374.799 59.34%
Cust for the IRA
Account
FBO William J.
Fortwangler
353 Conniston Avenue
Pittsburgh, PA
15210-3231
FirstCinco FBO Cash 1,463.648 36.57%
Account
P. O. Box 640229
Cincinnati, OH
45264
</TABLE>
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<PAGE> 281
<TABLE>
GNMA FUND (RETAIL)
- -----------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
SEI Trust Company 3,962.834 29.92%
Cust for the IRA
Account
FBO Virginia A.
Jasek
1701 Iowa Drive
West Mifflin, PA
15122-3931
SEI Trust Company 2,970.988 22.43%
Cust for the IRA
Account
FBO R/O Helen M.
Weyer
2600 Mohawk Drive
White Oak, PA
15131-3121
SEI Trust Company 2,256.666 17.04%
Cust for the IRA
Account
FBO R/O William C.
Rodgers
177 C. Pennwood
Avenue
Pittsburgh, PA
15218-1458
June C. Muraco & 1,740.054 13.14%
Joseph E. Muraco
116 Patterson
Avenue
Carnegie, PA 15106-
2827
Edith DeShantz & 1,053.450 7.95%
Herman H. DeShantz
590 Dorchester
Avenue
Pittsburgh, PA
15226-2020
FirstCinco FBO 721.671 5.45%
Cash Account
P. O. Box 640229
Cincinnati, OH
45264
</TABLE>
-43-
<PAGE> 282
<TABLE>
TOTAL RETURN ADVANTAGE FUND (RETAIL)
- -----------------------------------
<CAPTION>
OUTSTANDING SHARES PERCENTAGE
------------------ ----------
<S> <C> <C>
Wheat First FBO 219,062.274 97.60%
Intrac
Attn: Gary Ream
8440 Woodfield
Crossing Blvd.
Indianapolis, IN
46240-2476
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the Funds for the fiscal year ended May 31, 1997 are hereby
incorporated herein by reference. Copies of the annual report may be obtained by
calling the Trust at 1-800-622-FUND (3863) or by writing to the Trust, Oaks,
Pennsylvania 19456.
-44-
<PAGE> 283
APPENDIX A
----------
DESCRIPTION OF RATINGS
CORPORATE LONG-TERM DEBT RATINGS
- --------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
A-1
<PAGE> 284
conditions will likely impair capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating and is
currently highly vulnerable to nonpayment.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate
long-term debt:
A-2
<PAGE> 285
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
A-3
<PAGE> 286
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate bonds:
A-4
<PAGE> 287
"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 principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the instrument.
"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in
payments of interest seems probable over time.
A-5
<PAGE> 288
"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.
"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
A-6
<PAGE> 289
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.
A-7
<PAGE> 290
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions
have a strong ability for repayment of senior short-term promissory
obligations. This will normally be evidenced by many
A-8
<PAGE> 291
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 alternative liquidity is maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the
Prime rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
A-9
<PAGE> 292
"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:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
A-10
<PAGE> 293
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment.
"A3" - Obligations are supported by an adequate capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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APPENDIX B
----------
As stated in their Prospectus, the Total Return Advantage,
Enhanced Income, GNMA and Bond Funds may enter into certain futures transactions
and options for hedging purposes. Such transactions are described in this
Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Funds, through using
futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest
rate futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected by
a Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges --principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. The
Funds would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury Bonds
and Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Funds may trade in any interest rate futures
contracts for which there exists a public market, including, without limitation,
the foregoing instruments.
EXAMPLE OF FUTURES CONTRACT SALE. The Funds may engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security held by a
particular Fund tends to move in concert with the futures market prices of
long-term United States Treasury bonds ("Treasury bonds"). The advisers wish to
fix the current market value of this fund security until some point in the
future. Assume the fund security has a market value of 100, and the advisers
believe that because of an anticipated rise in interest rates, the value will
decline to 95. The Fund might enter into futures contract sales of Treasury
bonds for a equivalent of 98. If the market value of the fund security does
indeed decline
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from 100 to 95, the equivalent futures market price for the Treasury bonds might
also decline from 98 to 93.
In that case, the five point loss in the market value of the
fund security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The advisers could be wrong in their forecast of interest
rates and the equivalent futures market price could rise above 98. In this case,
the market value of the fund securities, including the fund security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above
example might incur a loss (which might be reduced by a offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE. The Funds may engage in
a interest rate futures contract purchase when they are not fully invested in
long-term bonds but wish to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of a
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond
that the Fund may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The advisers wish to fix the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the advisers believe that, because
of an anticipated fall in interest rates, the price will have risen to 105 (and
the yield will have dropped to about 9 1/2%) in four months. The Fund might
enter into futures contracts purchases of Treasury bonds for an equivalent price
of 98. At the same time, the Fund would assign a pool of investments in
short-term securities that are either maturing in four months or earmarked for
sale in four months, for purchase of the long-term bond at an assumed market
price of 100. Assume these short-term securities are yielding 15%. If the market
price of the long-term bond does indeed rise from 100 to 105, the
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<PAGE> 297
equivalent futures market price for Treasury bonds might also rise from 98 to
103. In that case, the 5 point increase in the price that the Fund pays for the
long-term bond would be offset by the 5 point gain realized by closing out the
futures contract purchase.
The advisers could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Fund would continue with its purchase
program for long-term bonds. The market price of available long-term bonds would
have decreased. The benefit of this price decrease, and thus yield increase,
will be reduced by the loss realized on closing out the futures contract
purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that the Fund would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the fund,
including those originally in the pool assigned to the particular long-term
bond, would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing out
the futures contract purchase. In each transaction, expenses would also be
incurred.
II. INDEX FUTURES CONTRACTS
GENERAL. A bond index assigns relative values to the bonds
included in the index which fluctuates with changes in the market values of the
bonds included.
A Fund may sell index futures contracts in order to offset a
decrease in market value of its fund securities that might otherwise result from
a market decline. A Fund may do so either to hedge the value of its fund as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund may purchase index
futures contracts in anticipation of purchases of securities. A long futures
position may be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its fund holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in
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<PAGE> 298
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of the fund
will decline prior to the time of sale.
III. MARGIN PAYMENTS
Unlike purchase or sales of fund securities, no price is paid
or received by a Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian or a subcustodian an amount of cash or
cash equivalents, known as initial margin, based on the value of the contract.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, the
advisers may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures
by the Funds as hedging devices. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which
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<PAGE> 299
are the subject of the hedge. The price of the future may move more than or less
than the price of the instruments being hedged. If the price of the futures
moves less than the price of the instruments which are the subject of the hedge,
the hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the futures. If the price of the futures moves more than
the price of the hedged instruments, the Fund involved will experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the instruments which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of instruments being
hedged and movements in the price of futures contracts, the Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
instruments being hedged if the volatility over a particular time period of the
prices of such instruments has been greater than the volatility over such time
period of the futures, or if otherwise deemed to be appropriate by the advisers.
Conversely, the Funds may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the instruments being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by the advisers.
Where futures are purchased to hedge against a possible
increase in the price of securities before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of
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<PAGE> 300
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 advisers may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Funds would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge fund securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Funds is also subject to the
advisers' ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices
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increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. The Funds may have to
sell securities at a time when it may be disadvantageous to do so.
V. OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
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VI. OTHER MATTERS
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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[ARROW GRAPHIC]
ARMADA
FUNDS
EQUITY
SERIES
PROSPECTUS
December 23, 1997
ARMADA MID CAP REGIONAL FUND
ARMADA EQUITY GROWTH FUND
ARMADA EQUITY INCOME FUND
ARMADA SMALL CAP GROWTH FUND
ARMADA INTERNATIONAL EQUITY FUND
ARMADA CORE EQUITY FUND
[ARMADA FUNDS LOGO]
<PAGE> 304
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction.............................................................................. 2
Expense Table............................................................................. 3
Financial Highlights...................................................................... 6
Investment Objectives and Policies........................................................ 12
Investment Limitations.................................................................... 20
Yield and Performance Information......................................................... 21
Pricing of Shares......................................................................... 22
How to Purchase and Redeem Shares......................................................... 23
Distribution and Servicing Arrangements................................................... 31
Dividends and Distributions............................................................... 32
Taxes..................................................................................... 32
Management of The Trust................................................................... 34
Description of the Trust and Its Shares................................................... 36
Custodian and Transfer Agent.............................................................. 37
Expenses.................................................................................. 38
Miscellaneous............................................................................. 38
</TABLE>
- - SHARES OF ARMADA FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK, NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES OR ANY
BANK.
- - SHARES OF ARMADA FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
FDIC, OR ANY GOVERNMENTAL AGENCY OR STATE.
- - AN INVESTMENT IN ARMADA FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
National City Bank and National Asset Management Corporation serve as investment
advisers to Armada Funds for which they receive an investment advisory fee. Past
performance is not indicative of future performance, and the investment return
will fluctuate, so that you may have a gain or loss when you sell your shares.
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> 305
ARMADA FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Oaks, Pennsylvania 19456 If you purchased your shares through NatCity Investments, Inc.,
please call your Financial Consultant for information.
For current performance, fund information, account redemption
information, and to purchase shares, please call
1-800-622-FUND(3863).
</TABLE>
This Prospectus describes shares in the following six investment funds (the
"Funds") of Armada Funds (the "Trust"), each having its own investment objective
and policies:
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.
The net asset value per share of each Fund will fluctuate as the value of
its investment portfolio changes in response to changing market prices and other
factors.
National City Bank ("National City") serves as investment adviser to the
Small Cap Value, Equity Growth, Equity Income, Small Cap Growth and
International Equity Funds; National Asset Management Corporation ("NAM") serves
as investment adviser to the Core Equity Fund (each an "adviser" and
collectively, the "advisers"). Wellington Management Company, LLP serves as the
investment sub-adviser to the Small Cap Growth Fund (the "sub-adviser").
SEI Investments Distribution Co.(the "Distributor") serves as the Trust's
sponsor and distributor. Each Fund pays a fee to the Distributor for
distributing its shares. See "Distribution Agreement."
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should
carefully read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional Information,
has been filed with the Securities and Exchange Commission ("SEC") and is
available upon request without charge by contacting the Trust at its telephone
number or address shown above. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY BANK OR NATIONAL ASSET
MANAGEMENT CORPORATION, THEIR PARENT COMPANY OR ANY OF THEIR AFFILIATES, AND ARE
NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE
TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
December 23, 1997
<PAGE> 306
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 -- Retail shares, B shares and Institutional shares. Retail shares, B
shares and Institutional 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, Retail shares and B shares are sold through selected broker-dealers and
other financial intermediaries to individual or institutional customers. Retail
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> 307
EXPENSE TABLE
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP SMALL CAP EQUITY EQUITY
VALUE VALUE VALUE GROWTH GROWTH
RETAIL B INSTITUTIONAL RETAIL B
SHARES(1) SHARES(1,2) SHARES SHARES(1) SHARES(1,2)
--------- ----------- ------------- ------- -----------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases(3)...... 5.50% None None 5.50% None
Sales Charge Imposed on Reinvested Dividends...... None None None None None
Deferred Sales Charge(4).......................... 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................................. .75% .75% .75% .75% .75%
12b-1 Fees(5,6)................................. .06% .75% .06% .06% .75%
Other Expenses.................................. .42% .42% .17% .44% .44%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after fee
waivers)(5)..................................... 1.23% 1.92% .98% 1.25% 1.94%
==== ==== ==== ==== ====
<CAPTION>
EQUITY EQUITY EQUITY EQUITY
GROWTH INCOME INCOME INCOME
INSTITUTIONAL RETAIL B INSTITUTIONAL
SHARES SHARES(1) SHARES(1,2) SHARES
------------- ------- ----------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases(3)...... None 5.50% None None
Sales Charge Imposed on Reinvested Dividends...... None None None None
Deferred Sales Charge(4).......................... 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................................. .75% .75% .75% .75%
12b-1 Fees(5,6)................................. .06% .06% .75% .06%
Other Expenses.................................. .19% .49% .49% .24%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after fee
waivers)(5)..................................... 1.00% 1.30% 1.99% 1.05%
==== ==== ==== ====
</TABLE>
- ---------------
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to Retail 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 Retail
shares or B shares in consideration for the payment of up to .25% (on an
annualized basis) of the net asset value of such Retail shares or B shares
of the Funds. For further information concerning these plans, see
"Distribution and Servicing Arrangements."
(2) As of the date of this Prospectus, the Funds' B share classes have not
commenced operations, and therefore, "Other Expenses" for these classes are
estimates only.
(3) A reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges Applicable to Purchases of Retail Shares."
(4) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 4.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. For more information, see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of B
Shares."
(5) The expense information in the table relating to each Fund has been restated
to reflect current fees. If the maximum distribution fee permitted under the
12b-1 Plan were imposed, Total Fund Operating Expenses would be 1.27% and
1.02%, 1.29% and 1.04% and 1.34% and 1.09% for the Retail and Institutional
shares of the Small Cap Value Fund, Equity Growth Fund and Equity Income
Fund, respectively.
(6) The Funds have in effect a 12b-1 Plan for the Retail and Institutional
classes of shares pursuant to which each Fund's Retail and Institutional
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 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.
3
<PAGE> 308
EXPENSE TABLE
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP SMALL CAP INTERNATIONAL
GROWTH GROWTH GROWTH EQUITY INTERNATIONAL
RETAIL B INSTITUTIONAL RETAIL EQUITY
SHARES(1) SHARES(1,2) SHARES SHARES(1) B SHARES(1,2)
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases(3).... 5.50% None None 5.50% None
Sales Charge Imposed on Reinvested Dividends.... None None None None None
Deferred Sales Charge(4)........................ 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................................. .75% .75% .75% .75% .75%
12b-1 Fees(5,6)................................. .06% .75% .06% .06% .75%
Other Expenses.................................. .42% .42% .17% .59% .59%
---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after fee
waivers)(5)..................................... 1.23% 1.92% 0.98% 1.40% 2.09%
==== ==== ==== ==== ====
<CAPTION>
INTERNATIONAL CORE CORE
EQUITY EQUITY EQUITY CORE EQUITY
INSTITUTIONAL RETAIL B INSTITUTIONAL
SHARES SHARES(1) SHARES(1,2) SHARES
------------- ------- ------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases(3).... None 5.50% None None
Sales Charge Imposed on Reinvested Dividends.... None None None None
Deferred Sales Charge(4)........................ 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................................. .75% .75% .75% .75%
12b-1 Fees(5,6)................................. .06% .06% .75% .06%
Other Expenses.................................. .34% .42% .42% .17%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES (after fee
waivers)(5)..................................... 1.15% 1.23% 1.92% 0.98%
==== ==== ==== ====
</TABLE>
- ---------------
(1) The Trust has implemented plans imposing shareholder servicing fees with
respect to Retail 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 Retail
shares or B shares in consideration for the payment of up to .25% (on an
annualized basis) of the net asset value of such Retail shares or B shares
of the Funds. For further information concerning these plans, see
"Distribution and Servicing Arrangements."
(2) As of the date of this Prospectus, the Funds' B share classes have not
commenced operations, and therefore, "Other Expenses" for these classes are
estimates only.
(3) A reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges Applicable to Purchases of Retail Shares."
(4) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 4.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. For more information, see "How to
Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of B
Shares."
(5) 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 Trust's administrator, Other Expenses and Total Fund Operating
Expenses would be : (i) 0.52% and 1.33% for the Retail shares, 0.52% and
2.02% for the B shares and 0.27% and 1.08% for the Institutional shares of
the Small Cap Growth Fund, respectively; (ii) 0.69% and 1.50% for the Retail
shares, 0.69% and 2.19% for the B shares and 0.44% and 1.25% for the
Institutional shares of the International Equity Fund, respectively; and
(iii) 0.52% and 1.33% for the Retail shares, 0.52% and 2.02% for the B
shares and 0.27% and 1.08% for the Institutional shares of the Core Equity
Fund, respectively. Additionally, if the maximum distribution fee permitted
under the 12b-1 Plan were imposed, Total Fund Operating Expenses would be
1.37% and 1.12%, 1.54% and 1.29% and 1.37% and 1.12% for the Retail and
Institutional shares of the Small Cap Growth, International Equity and Core
Equity Funds, respectively.
(6) The Funds have in effect a 12b-1 Plan for the Retail and Institutional
classes of shares pursuant to which each Fund's Retail and Institutional
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 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.
4
<PAGE> 309
- ---------------
EXAMPLE
For example, you would pay the following expenses on a hypothetical $1,000
investment, assuming: (1) a 5% annual return (a hypothetical return required by
SEC regulations); and (2) the redemption of your investment at the end of the
following time periods (none of the Funds charges a redemption fee):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Small Cap Value Retail Shares(1)....................... $ 67 $ 92 $ 119 $196
Small Cap Value B Shares(2)............................ $ 70 $ 100 $ 124 $206(3)
Small Cap Value Institutional Shares................... $ 10 $ 31 $ 54 $120
Equity Growth Retail Shares(1)......................... $ 67 $ 92 $ 120 $198
Equity Growth B Shares(2).............................. $ 70 $ 101 $ 125 $209(3)
Equity Growth Institutional Shares..................... $ 10 $ 32 $ 55 $122
Equity Income Retail Shares(1)......................... $ 68 $ 94 $ 122 $203
Equity Income B Shares(2).............................. $ 70 $ 102 $ 127 $214(3)
Equity Income Institutional Shares..................... $ 11 $ 33 $ 58 $128
Small Cap Growth Retail Shares(1)...................... $ 67 $ 92 N/A N/A
Small Cap Growth B Shares(2)........................... $ 70 $ 100 N/A N/A
Small Cap Growth Institutional Shares.................. $ 10 $ 31 N/A N/A
International Equity Retail Shares(1).................. $ 68 $ 97 N/A N/A
International Equity B Shares(2)....................... $ 71 $ 105 N/A N/A
International Equity Institutional Shares.............. $ 12 $ 37 N/A N/A
Core Equity Retail Shares(1)........................... $ 67 $ 92 N/A N/A
Core Equity B Shares(2)................................ $ 70 $ 100 N/A N/A
Core Equity Institutional Shares....................... $ 10 $ 31 N/A N/A
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
(3) Based on conversion of B shares to Retail shares after eight years.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this Expense Table is to assist an investor in understanding
the various costs and expenses that an investor in the Funds will bear directly
or indirectly. For more complete descriptions of these costs and expenses, see
"Financial Highlights," "Management of the Trust" and "Distribution Agreement"
in this Prospectus and the financial statements and related notes incorporated
by reference into the Statement of Additional Information for the Funds. Any
fees that are charged by affiliates of the advisers or other institutions
directly to their customer accounts for services related to investments in
shares of the Funds are in addition to and not reflected in the fees and
expenses described above.
5
<PAGE> 310
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the 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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(1) RETAIL(1)
------------- ---------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 13.10 $12.94 $ 11.38 $11.26 $ 10.00 $10.16
-------- ------ ------- ------ ------- -----
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............. .09 .08 .08 .06 .10 .07
Net Gains on Securities (Realized
and Unrealized)................. 2.90 2.83 2.41 2.37 1.36 1.11
-------- ------ ------- ------ ------- -----
Total from Investment
Operations............... 2.99 2.91 2.49 2.43 1.46 1.18
-------- ------ ------- ------ ------- -----
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (.09) (.05) (.08) (.06) (.04) (.04)
Dividends in Excess of Net
Investment Income............... (.00) (.00) (.02) (.02) (.00) (.00)
Dividends from Net Realized
Capital Gains................... (.85) (.85) (.67) (.67) (.04) (.04)
-------- ------ ------- ------ ------- -----
Total Distributions........ (.94) (.90) (.77) (.75) (.08) (.08)
-------- ------ ------- ------ ------- -----
Net Asset Value, End of Period...... $ 15.15 $14.95 $ 13.10 $12.94 $ 11.38 $11.26
======== ====== ======= ====== ======= =====
TOTAL RETURN........................ 23.61% 23.26%(3) 22.64% 22.28%(3) 17.42%(2) 14.80%(2,3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's).......................... $ 199,311 $4,929 $99,294 $4,702 $ 50,993 $3,567
Ratio of Expenses to Average Net
Assets.......................... .97% 1.22% 1.05%(4) 1.30%(5) 1.01%(2,4) 1.34%(2,5)
Ratio of Net Investment Income to
Average Net Assets.............. .83% .57% .83%(4) .58%(5) 1.31%(2,4) 1.09%(2,5)
Portfolio Turnover Rate........... 64% 64% 106% 106% 69% 69%
Average Commission Rate........... $ .05 $ .05 $ 0.06 $ 0.06 N/A N/A
</TABLE>
- ---------------
(1) Institutional and Retail classes commenced operations on July 26, 1994 and
August 15, 1994, respectively.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Institutional class for the year ended May
31, 1996 would have been 1.06% and .82%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the adviser,
administrator, and custodian for the Institutional class for the period
ended May 31, 1995 would have been 1.15% and 1.17%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Retail class for the year ended May 31,
1996 would have been 1.32% and .56%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the adviser,
administrator, and custodian for the Retail class for the period ended May
31, 1995 would have been 1.38% and 1.05%, respectively.
6
<PAGE> 311
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
EQUITY GROWTH FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Equity Growth Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 18.02 $18.05 $ 14.77 $14.79 $ 13.66 $13.68
--------- ------ --------- ------ --------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .09 .05 .14 .10 .21 .18
Net Gains on Securities..................... 4.66 4.66 3.46 3.47 1.21 1.21
--------- ------ --------- ------ --------- ------
Total Income from Investment Operations..... 4.75 4.71 3.60 3.57 1.42 1.39
--------- ------ --------- ------ --------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.09) (.05) (.14) (.10) (.20) (.17)
Dividends in Excess of Net Investment
Income.................................... (.02) (.01) (.02) (.02) (.00) (.00)
Dividends from Net Realized Capital Gains... (4.03) (4.03) (.19) (.19) (.00) (.00)
Dividends in excess of Net Realized Capital
Gains..................................... (.00) (.00) (.00) (.00) (.11) (.11)
--------- ------ --------- ------ --------- ------
Total Distributions......................... (4.14) (4.09) (.35) (.31) (.31) (.28)
--------- ------ --------- ------ --------- ------
Net Asset Value, End of Period............... $ 18.63 $18.67 $ 18.02 $18.05 $ 14.77 $14.79
========= ====== ========= ====== ========= ======
TOTAL RETURN................................. 29.57% 29.24%(3) 24.61% 24.34%(3) 10.62% 10.35%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $ 255,594 $6,931 $ 166,671 $6,013 $ 119,634 $5,974
Ratio of Expenses to Average Net Assets..... .97% 1.22% 1.01%(4) 1.26% (5) 1.01%(4) 1.27%(5)
Ratio of Net Investment Income to Average
Net Assets................................ .49% .25% .85%(4) .60% (5) 1.53%(4) 1.23%(5)
Portfolio Turnover Rate..................... 197% 197% 74% 74% 17% 17%
Average Commission Rate..................... $ .05 $ .05 $ 0.06 $ 0.06 N/A N/A
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1994 1994 1993 1993 1992 1992
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 13.78 $13.80 $ 13.13 $13.13 $ 12.35 $12.35
------- ------ ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .18 .15 .27 .23 .30 .25
Net Gains on Securities..................... .01 .00 .67 .68 .78 .78
------- ------ ------- ------ ------- ------
Total Income from Investment Operations..... .19 .15 .94 .91 1.08 1.03
------- ------ ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.18) (.15) (.27) (.23) (.30) (.25)
Dividends in Excess of Net Investment
Income.................................... (.01) (.00) (.02) (.01) (.00) (.00)
Dividends from Net Realized Capital Gains... (.11) (.11) (.00) (.00) (.00) (.00)
Dividends in excess of Net Realized Capital
Gains..................................... (.01) (.01) (.00) (.00) (.00) (.00)
------- ------ ------- ------ ------- ------
Total Distributions......................... (.31) (.27) (.29) (.24) (.30) (.25)
------- ------ ------- ------ ------- ------
Net Asset Value, End of Period............... $ 13.66 $13.68 $ 13.78 $13.80 $ 13.13 $13.13
======= ====== ======= ====== ======= ======
TOTAL RETURN................................. 1.41% 1.12%(3) 7.20% 7.00%(3) 8.90% 8.48%(3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $90,446 $7,521 $85,256 $7,707 $48,673 $2,767
Ratio of Expenses to Average Net Assets..... 1.07% 1.32% .34%(4) .59%(5) .26%(4) .51%(5)
Ratio of Net Investment Income to Average
Net Assets................................ 1.33% 1.08% 2.13%(4) 1.88%(5) 2.36%(4) 2.15%(5)
Portfolio Turnover Rate..................... 15% 15% 15% 15% 9% 9%
Average Commission Rate..................... N/A N/A N/A N/A N/A N/A
<CAPTION>
FOR THE PERIOD
YEAR DECEMBER 20,
YEAR ENDED ENDED 1989
MAY 31, MAY 31, (COMMENCEMENT OF
1991 1991 OPERATIONS) TO
INSTITUTIONAL RETAIL MAY 31, 1990
------------- ------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 10.77 $ 12.04 $ 10.00
------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................... .31 .04 .13
Net Gains on Securities..................... 1.58 .27 .71
------- ------- --------
Total Income from Investment Operations..... 1.89 .31 .84
------- ------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income........ (.31) (.00) (.07)
Dividends in Excess of Net Investment
Income.................................... (.00) (.00) (.00)
Dividends from Net Realized Capital Gains... (.00) (.00) (.00)
Dividends in excess of Net Realized Capital
Gains..................................... (.00) (.00) (.00)
------- ------- --------
Total Distributions......................... (.31) (.00) (.07)
------- ------- --------
Net Asset Value, End of Period............... $ 12.35 $ 12.35 $ 10.77
======= ======= ========
TOTAL RETURN................................. 18.10% 21.82%(1,2,3) 20.09%(2)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s)......... $42,112 $ 1,389 $ 34,034
Ratio of Expenses to Average Net Assets..... .31%(4) .53%(2,5) .36%(2,4)
Ratio of Net Investment Income to Average
Net Assets................................ 2.90%(4) 2.94%(2,5) 3.30%(2,4)
Portfolio Turnover Rate..................... 11% 11% 5%
Average Commission Rate..................... N/A N/A N/A
</TABLE>
- ------------------
(1) Retail class commenced operations on April 15, 1991.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Institutional class for the years ended May
31, 1996 and 1995 would have been 1.03% and .83% and 1.02% and 1.51%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser for the Institutional class for the
years ended May 31, 1993, 1992 and 1991 and for the period ended May 31,
1990 would have been 1.01% and 1.46%, 1.02% and 1.62%, 1.06% and 2.15% , and
1.11% and 2.55%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Retail class for the years ended May 31,
1996 and 1995 would have been 1.28% and .58% and 1.28% and 1.22%,
respectively. The operating expense ratio and the net investment income
ratio before fee waivers by the adviser for the Retail class for the years
ended May 31, 1993 and 1992 and for the period ended May 31, 1991 would have
been 1.26% and 1.21%, 1.27% and 1.40%, and 1.28% and 2.19%, respectively.
7
<PAGE> 312
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
EQUITY INCOME FUND
The following information has been derived from financial statements
audited by Ernst & Young LLP, independent auditors, whose report is incorporated
by reference in the Statement of Additional Information. It should be read in
conjunction with the financial statements and related notes which are
incorporated by reference in the Statement of Additional Information. Additional
information about the performance of the Equity Income Fund is contained in the
Trust's Annual Report to Shareholders, which may be obtained without charge by
contacting the Trust at its telephone number or address provided on page 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1997 1997 1996 1996 1995 1995
INSTITUTIONAL RETAIL INSTITUTIONAL RETAIL INSTITUTIONAL(1) RETAIL(1)
------------- ---------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 12.66 $12.65 $ 11.01 $11.01 $ 10.00 $10.26
------- ------ ------ ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............. .30 .31 .34 .33 .34 .26
Net Gains on Securities (Realized
and Unrealized)................. 2.73 2.68 1.79 1.77 .94 .75
------- ------ ------ ------ ------- ------
Total from Investment
Operations...................... 3.03 2.99 2.13 2.10 1.28 1.01
------- ------ ------ ------ ------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (.31) (.27) (.34) (.32) (.27) (.26)
Dividends from Net Realized
Capital Gains................... (.51) (.51) (.14) (.14) (.00) (.00)
------- ------ ------ ------ ------- ------
Total Distributions........ (.82) (.78) (.48) (.46) (.27) (.26)
------- ------ ------ ------ ------- ------
Net Asset Value, End of Period...... $ 14.87 $14.86 $ 12.66 $12.65 $ 11.01 $11.01
======= ====== ====== ====== ======= ======
TOTAL RETURN........................ 24.62% 24.33%(3) 19.72% 19.37%(3) 14.34%(2) 13.18%(2,3)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's).......................... $ 127,130 $ 410 $61,978 $ 263 $ 36,194 $ 125
Ratio of Expenses to Average Net
Assets.......................... 1.01% 1.26% 1.06%(4) 1.31%(5) .99%(2,4) 1.41%(2,5)
Ratio of Net Investment Income to
Average Net Assets.............. 2.44% 2.17% 3.02%(4) 2.75%(5) 3.87%(2,4) 3.45%(2,5)
Portfolio Turnover Rate........... 35% 35% 53% 53% 12% 12%
Average Commission Rate........... $ 0.05 $ 0.05 $ 0.07 $ 0.07 N/A N/A
</TABLE>
- ---------------
(1) Institutional and Retail classes commenced operations on July 1, 1994 and
August 22, 1994, respectively.
(2) Annualized.
(3) Total Return excludes sales charge.
(4) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Institutional class for the year ended May
31, 1996 would have been 1.08% and 3.00%, respectively. The operating
expense ratio and the net investment income ratio before fee waivers by the
adviser, administrator, and custodian for the Institutional class for the
period ended May 31, 1995 would have been 1.21% and 3.66%, respectively.
(5) The operating expense ratio and the net investment income ratio before fee
waivers by the custodian for the Retail class for the year ended May 31,
1996 would have been 1.32% and 2.74%, respectively. The operating expense
ratio and the net investment income ratio before fee waivers by the adviser,
administrator, and custodian for the Retail class for the period ended May
31, 1995 would have been 1.45% and 3.40%, respectively.
8
<PAGE> 313
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
SMALL CAP GROWTH FUND
The following table includes performance information derived from unaudited
financial statements included in the Statement of Additional Information. The
following table should be read in conjunction with such financial statements and
notes thereto. The Statement of Additional Information may be obtained without
charge by contacting the Trust at its telephone number or address provided on
page 1.
<TABLE>
<CAPTION>
FOR THE
FOUR MONTHS ENDED
NOVEMBER 30, 1997
---------------------------
INSTITUTIONAL(5) RETAIL(5)
-------------- --------
<S> <C> <C>
Net Asset Value, Beginning of Period................................... $ 10.00 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................................................ 0.01 0.00
Net Gains on Securities (Realized and Unrealized).................... 0.46 0.47
------- ------
Total from Investment Operations..................................... 0.47 0.47
------- ------
LESS DISTRIBUTIONS
Total Distributions.......................................... (0.00) (0.00)
------- ------
Net Asset Value, End of Period......................................... $ 10.47 $10.47
======= ======
TOTAL RETURN........................................................... 14.73%(4) 14.73%(3,4)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)................................. $ 30,838 $ 10
Ratio of Expenses to Average Net Assets.............................. 0.96%(1,4) 1.21%(2,4)
Ratio of Net Investment Income to Average Net Assets................. 0.31%(1,4) 0.06%(2,4)
Portfolio Turnover Rate.............................................. 8% 8%
Average Commission Rate.............................................. $ 0.04 $ 0.04
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the administrator for the Institutional class for the period
ended November 30, 1997 would have been 1.06% and .21%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the administrator for the Retail class for the period ended
November 30, 1997 would have been 1.31% and (.04)%, respectively.
(3) Total return excludes sales charge.
(4) Annualized.
(5) Institutional and Retail classes both commenced operations on August 1,
1997.
9
<PAGE> 314
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
INTERNATIONAL EQUITY FUND
The following table includes performance information derived from unaudited
financial statements included in the Statement of Additional Information. The
following table should be read in conjunction with such financial statements and
notes thereto. The Statement of Additional Information may be obtained without
charge by contacting the Trust at its telephone number or address provided on
page 1.
<TABLE>
<CAPTION>
FOR THE
FOUR MONTHS ENDED
NOVEMBER 30, 1997
---------------------------
INSTITUTIONAL(5) RETAIL(5)
-------------- --------
<S> <C> <C>
Net Asset Value, Beginning of Period................................. $ 10.00 $ 10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.............................................. 0.02 0.01
Net Gains on Securities (Realized and Unrealized).................. (0.80) (0.79)
------- ------
Total from Investment Operations................................... (0.78) (0.78)
------- ------
LESS DISTRIBUTIONS
Total Distributions........................................ (0.00) (0.00)
------- ------
Net Asset Value, End of Period....................................... $ 9.22 $ 9.22
======= ======
TOTAL RETURN......................................................... (21.57)%(4) (21.57)%(3,4)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)............................... $ 88,938 $ 4
Ratio of Expenses to Average Net Assets............................ 0.98%(1,4) 1.23%(2,4)
Ratio of Net Investment Income to Average Net Assets............... 0.75%(1,4) 0.50%(2,4)
Portfolio Turnover Rate............................................ 15% 15%
Average Commission Rate............................................ $ 0.05 $ 0.05
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and administrator for the Institutional class for the
period ended November 30, 1997 would have been 1.26% and .47%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and administrator for the Retail class for the period
ended November 30, 1997 would have been 1.51% and .22%, respectively.
(3) Total return excludes sales charge.
(4) Annualized.
(5) Institutional and Retail classes both commenced operations on August 1,
1997.
10
<PAGE> 315
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout the period)
CORE EQUITY FUND
The following table includes performance information derived from unaudited
financial statements included in the Statement of Additional Information. The
following table should be read in conjunction with such financial statements and
notes thereto. The Statement of Additional Information may be obtained without
charge by contacting the Trust at its telephone number or address provided on
page 1.
<TABLE>
<CAPTION>
FOR THE
FOUR MONTHS ENDED
NOVEMBER 30, 1997
---------------------------
INSTITUTIONAL(5) RETAIL(5)
-------------- --------
<S> <C> <C>
Net Asset Value, Beginning of Period................................... $ 10.00 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................................................ 0.03 0.01
Net Gains on Securities (Realized and Unrealized).................... 0.00 0.02
------- ------
Total from Investment Operations..................................... 0.03 0.03
------- ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income................................. (0.02) (0.02)
Total Distributions.......................................... (0.02) (0.02)
------- ------
Net Asset Value, End of Period......................................... $ 10.01 $10.01
======= ======
TOTAL RETURN........................................................... 0.95%(4) 0.94%(3,4)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)................................. $105,199 $ 82
Ratio of Expenses to Average Net Assets.............................. 0.78%(1,4) 1.03%(2,4)
Ratio of Net Investment Income to Average Net Assets................. 0.86%(1,4) 0.61%(2,4)
Portfolio Turnover Rate.............................................. 17% 17%
Average Commission Rate.............................................. $ 0.06 $ 0.06
</TABLE>
- ---------------
(1) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and administrator for the Institutional class for the
period ended November 30, 1997 would have been 1.06% and .57%, respectively.
(2) The operating expense ratio and net investment income ratio before fee
waivers by the adviser and administrator for the Retail class for the period
ended November 30, 1997 would have been 1.32% and .32%, respectively.
(3) Total Return excludes sales charge.
(4) Annualized.
(5) Institutional and Retail classes both commenced operations on August 1,
1997.
11
<PAGE> 316
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.
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 sub-adviser will seek
companies with above-average growth prospects. Factors considered in selecting
such issuers include participation in a fast growing industry, a strategic niche
position in a specialized market, and fundamental value. The sub-adviser will
also consider the relationship between price and book value, and other factors
such as trading volume and bid-ask spreads in an effort to allow the Fund to
achieve diversification. See "Special Risk Factors -- Small Capitalization
Stocks" below.
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 com-
12
<PAGE> 317
panies 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.
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
13
<PAGE> 318
U.S., and in most foreign markets, volume and liquidity are less than in the
U.S. Fixed commissions on foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges, and there is generally less government
supervision and regulation of foreign stock exchanges, brokers and companies
than in the U.S.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets, or diplomatic developments that could affect investment within
those countries. Because of these and other factors, securities of foreign
companies acquired by the Fund may be subject to greater fluctuation in price
than securities of domestic companies.
Since the Fund will invest substantially in securities denominated in or
quoted in currencies other than the U.S. dollar, changes in currency exchange
rates (as well as changes in market values) will affect the value in U.S.
dollars of securities held by the Fund. Foreign exchange rates are influenced by
trade and investment flows, policy decisions of governments, and investor
sentiment about these and other issues. In addition, costs are incurred in
connection with conversions between various currencies.
The expense ratio of the Fund can be expected to be higher than that of
funds investing in domestic securities. The costs of investing abroad are
generally higher for several reasons, including the cost of investment research,
increased costs of custody for foreign securities, higher commissions paid for
comparable transactions involving foreign securities, and costs arising from
delays in settlements of transactions involving foreign securities.
Interest and dividends payable on the Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by tax credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the return to the Fund's shareholders.
CORE EQUITY FUND
The investment objective of the Core Equity Fund is to seek a total rate of
return greater than that of the S&P 500. The two components of total rate of
return are current income and change in the value of portfolio securities. The
Fund seeks to achieve its objective by investing in a diversified portfolio of
common stocks of issuers with large capitalizations. The Fund normally invests
in three types of equity securities: (i) growth securities, defined as common
stocks having a five-year annual earnings-per-share growth rate of 10% or more,
with no decline in the annual earnings-per-share rate during the last five
years; (ii) securities with low price-to-earnings ratios (i.e., at least 20%
below the average of the companies included in the S&P 500); and (iii)
securities that pay high dividend yields (i.e., at least 20% above such
average). Under normal market conditions the Fund will invest 20% to 50% of its
total assets in each of these three types of equity securities.
The S&P 500 is an index composed of approximately 500 common stocks, most
of which are listed on the New York Stock Exchange (the "NYSE"). The adviser
believes that the S&P 500 is an appropriate benchmark for the Fund because it is
diversified, familiar to many investors and widely accepted as a reference for
common stock investments.
Standard & Poor's Ratings Group is not a sponsor of, or in any way
affiliated with, the Fund.
COMMON INVESTMENT POLICIES OF THE FUNDS
Other Investments with Equity Characteristics
Each Fund may hold other instruments with equity characteristics, such as
preferred stocks, securities convertible into common stock, rights, and
warrants.
Futures Contracts and Related Options
Each Fund (other than the Core Equity Fund) may invest in stock index
futures contracts and options on futures contracts in attempting to hedge
against changes in the value of securities that it holds or intends to purchase
or to maintain liquidity.
14
<PAGE> 319
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;
(iii) losses greater than the amount of the principal invested as
initial margin due to unanticipated market movements which are potentially
unlimited; and
(iv) the adviser's ability to predict correctly the direction of
securities prices, interest rates and other economic factors.
Options
Each Fund may write covered call options, buy put options, buy call options
and sell or "write" secured put options on a national securities exchange and
issued by the Options Clearing Corporation for hedging purposes. Such
transactions may be effected on a principal basis with primary reporting dealers
in U.S. government securities in an amount not exceeding 5% of a Fund's net
assets. Such options may relate to particular securities, stock or bond indices,
financial instruments or foreign currencies. Purchasing options is a specialized
15
<PAGE> 320
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.
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 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.
16
<PAGE> 321
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 Fund may invest in
MidCap Standard & Poor's Depository Receipts ("MidCap SPDRs"). The International
Equity Fund may invest in both sponsored and unsponsored ADRs, European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other
similar global instruments. ADRs are receipts issued in registered form by a
U.S. bank or trust company evidencing ownership of underlying securities issued
by a foreign issuer. 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 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
17
<PAGE> 322
interest to create a liquid secondary market will exist for a particular
Exchange Rate-Related Security due to conditions in the debt and foreign
currency markets. Illiquidity in the forward foreign exchange market and the
high volatility of the foreign exchange market may, from time to time, combine
to make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. Each Fund expects that
commitments to purchase when-issued securities will not exceed 25% of the value
of its total assets under normal market conditions. The Funds do not intend to
purchase when-issued securities for speculative purposes but only for the
purpose of acquiring portfolio securities. In when-issued and delayed delivery
transactions, a Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
attractive.
Short-Term Obligations
Each Fund may hold temporary cash balances which may be invested in various
short-term obligations (with maturities of 18 months or less) such as domestic
and foreign commercial paper, bankers' acceptances, certificates of deposit and
demand and time deposits of domestic and foreign branches of U.S. banks and
foreign banks, U.S. government securities, repurchase agreements, reverse
repurchase agreements and guaranteed investment contracts ("GICs"). During
temporary defensive periods, each Fund may hold up to 100% of its total assets
in these types of obligations.
In the case of repurchase agreements, default or bankruptcy of the seller
may expose a Fund to possible loss because of adverse market action or delays
connected with the disposition of the underlying obligations. Further, it is
uncertain whether a Fund would be entitled, as against a claim by such seller or
its receiver or trustee in bankruptcy, to retain the underlying securities.
Reverse repurchase agreements involve the risk that the market value of the
securities held by a Fund may decline below the price of the securities it is
obligated to repurchase.
Lending Portfolio Securities
In order to generate additional income, each Fund may, from time to time,
lend its portfolio securities to broker-dealers, banks or other institutional
borrowers. A Fund must receive 100% collateral in the form of cash or U.S.
government securities. This collateral must be valued daily by the Fund's
adviser 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 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 (including other investment companies advised by the advisers) which
invest in high quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method.
In addition, the International Equity Fund may purchase shares of
investment companies investing primarily in foreign securities, including
"country funds" which have portfolios consisting exclusively of securities of
issuers located in one foreign country. Such "country funds" may be either
open-end or closed-end investment companies, and may include a portfolio or
portfolios of The CountryBas-
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<PAGE> 323
kets Index Fund, Inc. ("CountryBaskets"), a registered, open-end management
investment company that, through its portfolios, seeks to provide investment
results that substantially correspond to the price and yield performance of a
broad-based index of publicly traded equity securities in a particular country,
geographic region or industry sector.
The International Equity Fund may also purchase World Equity Benchmark
Shares(SM) issued by The Foreign Fund, Inc. ("WEBS") and similar securities of
other issuers. WEBS are shares of an investment company that invests
substantially all of its assets in securities included in the Morgan Stanley
Capital International indices for specific countries. Because the expense
associated with an investment in WEBS can be substantially lower than the
expense of small investments directly in the securities comprising the indices
it seeks to track, the adviser believes that investments in WEBS of countries
that are included in the EAFE Index can provide a cost-effective means of
diversifying the Fund's assets across a broader range of equity securities.
WEBS are listed on the American Stock Exchange (the "AMEX"), and were
initially offered to the public in 1996. The market prices of WEBS are expected
to fluctuate in accordance with both changes in the net asset values of their
underlying indices and supply and demand of WEBS on the AMEX. To date, WEBS have
traded at relatively modest discounts and premiums to their net asset values.
However, WEBS have a limited operating history, and information is lacking
regarding the actual performance and trading liquidity of WEBS for extended
periods or over complete market 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 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 and Core Equity Funds will not invest more than 15% of
their respective net assets in securities that are illiquid. Illiquid securities
would generally include repurchase agreements and GICs with notice/termination
dates in excess of seven days and certain securities which are subject to
trading restrictions because they are not registered under the Securities Act of
1933, as amended (the "1933 Act").
Each Fund may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long as it is determined by the Board of Trustees or the Fund's adviser,
acting under guidelines approved and monitored by the Board, that an adequate
trading market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Fund during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop.
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<PAGE> 324
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 advisers will evaluate the risks presented by the derivative
instruments purchased by the Funds, and will determine, in connection with their
day-to-day management of the Funds, how they will be used in furtherance of the
Funds' investment objectives.
Portfolio Turnover
Portfolio turnover will tend to rise during periods of economic turbulence
and decline during periods of stable growth. Each Fund's annual portfolio
turnover is not expected to exceed 100% under normal market conditions. Higher
portfolio turnover may result in increased taxable gains to shareholders (see
"Taxes" below) and increased expenses paid by the Fund due to transaction costs.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. The following
investment limitations are matters of fundamental policy and may not be changed
with respect to a particular Fund without the affirmative vote of the Fund's
outstanding shares (as defined under "Miscellaneous"). (Other 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
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(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.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of 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 Retail shares, B shares and
Institutional 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
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<PAGE> 326
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.
Shareholders should note that the yields and total returns of Retail shares
and B shares will be lower than those of the Institutional 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 Retail 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 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.
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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 in Oaks, Pennsylvania 19456.
The Distributor, adviser and/or their affiliates, at their own expense, may
provide compensation to dealers in connection with the sale and/or servicing of
shares of 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, 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 RETAIL SHARES AND B SHARES
Retail 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 Retail shares and B shares of the Funds,
investors should read "Characteristics of Retail Shares and B Shares" and
"Factors to Consider When Selecting Retail Shares or B Shares" below.
Retail shares and B shares are sold to the public ("Investors") primarily
through financial institutions such as banks, brokers and dealers. Investors may
purchase Retail 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
Retail 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 agreement
with the institution or contact it directly.) For direct purchases of shares,
Investors should call 1-800-622-FUND(3863) or to speak with a NatCity
Investments professional, call 1-888-4NATCTY (462-8289).
Shares may be purchased in conjunction with an individual retirement
account ("IRA") and rollover IRAs where a designated custodian acts as
custodian. Investors should contact NatCity Investments, Inc., the Distributor
or their financial institutions for information as to applications and annual
fees. Investors should also consult their tax advisers to determine whether the
benefits of an IRA are available or appropriate.
The minimum investment is $500 for the initial purchase of Retail shares or
B shares in a Fund. All subsequent investments for Retail shares and B shares
are subject to a minimum investment of $250. All purchases made by check should
be in U.S. dollars. Please make the check payable to Armada Funds (Fund name),
or, in the case of a retirement account, the custodian or trustee for the
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account. We will not accept third-party checks under any circumstance.
Investments made in Retail shares or B shares through the Planned Investment
Program ("PIP"), a monthly savings program described below, are not subject to
the minimum initial and subsequent investment requirements or any minimum
account balance requirements described under "Other Redemption Information."
Purchases for an IRA through the PIP will be considered as contributions for the
year in which the purchases are made.
Under a PIP, Investors may add to their investment in Retail shares or B
shares of a Fund, in a consistent manner each month, with a minimum amount of
$50. Monies may be automatically withdrawn from a shareholder's checking or
savings account available through an Investor's financial institution and
invested in additional Retail shares at the Public Offering Price 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 Retail 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 RETAIL SHARES
The Public Offering Price for Retail shares of each Fund is the sum of the
net asset value of the shares being purchased plus any applicable sales charge
per account, per Fund, which is assessed as follows:
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OFFERING OF NET REALLOWANCE
AMOUNT OF PRICE PER ASSET VALUE AS A % OF
TRANSACTION SHARE PER SHARE OFFERING PRICE
- --------------- ----------- ----------- --------------
<S> <C> <C> <C>
Less than
$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 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 Retail shares made by:
(a) trustees and officers of the Trust;
(b) directors, employees and participants in employee benefit/retirement
plans (annuitants) of National City Corporation or any of its affiliates;
(c) the spouses, children, grandchildren, and parents of individuals
referred to in clauses (a) and (b) above;
(d) individuals investing in a Fund by way of a direct transfer or a
rollover from a qualified plan distribution where affiliates of National City
Corporation are serving as a trustee or agent, or certain
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institutions having relationships with affiliates of National City Corporation);
(e) investors purchasing Fund shares through a payroll deduction plan;
(f) investors investing in the Armada Plus account through National City's
Retirement Plan Services; and
(g) investors purchasing Fund shares through "one-stop" mutual fund
networks.
REDUCED SALES CHARGES APPLICABLE TO PURCHASES OF RETAIL SHARES
The applicable sales charge may be reduced on purchases of Retail shares of
each Fund made under the Right of Accumulation or Letter of Intent, as described
below. To qualify for a reduced sales charge, Investors must so notify their
financial institutions or the Trust directly by calling 1-800-622-FUND(3863) at
the time of purchase. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an Investor's holdings.
Right of Accumulation
Investors may use their aggregate investments in Retail shares in
determining the applicable sales charge. An Investor's aggregate investment in
Retail shares is the total value (based on the higher of current net asset value
or any Public Offering Price originally paid) of:
(a) current purchases
(b) Retail shares that are already beneficially owned by the Investor for
which a sales charge has been paid
(c) Retail shares that are already beneficially owned by the Investor which
were purchased prior to July 22, 1990
(d) Retail shares purchased by dividends or capital gains that are
reinvested
If, for example, an Investor beneficially owns Retail shares of a Fund with
an aggregate current value of $90,000 and subsequently purchases Retail shares
of that Fund having a current value of $10,000, the sales charge applicable to
the subsequent purchase would be reduced to 2.75% of the Public Offering Price.
Letter of Intent
An Investor may qualify for a reduced sales charge immediately upon signing
a nonbinding Letter of Intent stating the Investor's intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge. The Letter of Intent option is included on the
account application which may be obtained from the Investor's financial
institution or directly from the Trust by calling 1-800-622-FUND(3863). If an
Investor so elects, the 13 month period may begin up to 30 days prior to the
Investor's signing the Letter of Intent. The initial investment under the Letter
of Intent must be equal to at least 4.0% of the amount indicated in the Letter
of Intent. During the term of a Letter of Intent, the Transfer Agent will hold
Retail shares representing 4.0% of the amount indicated in the Letter of Intent
in escrow for payment of a higher sales charge if the entire amount is not
purchased.
Upon completing the purchase of the entire amount indicated in the Letter
of Intent, the escrowed shares will be released. If the entire amount is not
purchased within the 13 month period or is redeemed within one year from the
time of fulfillment, the Investor will be required to pay an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge the Investor would have had to pay on the aggregate purchases if
the total of such purchases had been made at a single time.
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 six 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 Retail shares.
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<PAGE> 330
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....................... 4.0%
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%
More than five, but less
than six.................. 1.0%
After six years........... None
</TABLE>
When an Investor redeems his 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 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 Retail
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
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<PAGE> 331
(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 RETAIL SHARES AND B SHARES
The primary difference between Retail 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 Retail shares and B shares are the same.
Retail 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.
Retail and Institutional 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 Retail and Institutional 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 Retail shares, will cause B shares to have a higher expense ratio and
pay lower dividends than Retail 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
Retail 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 Retail shares takes place at net asset value, as a result of which
an Investor receives dollar-for-dollar the same value of Retail shares as he 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 Retail 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 Retail shares of the Fund on the
same date.
FACTORS TO CONSIDER WHEN SELECTING RETAIL 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 Retail shares purchased at the same time, and to what
extent such differential would be offset by the higher yield of Retail shares.
In this regard, to the extent that the sales charge for Retail shares is waived
or reduced by one of the methods described above, investments in Retail shares
become more desirable. The Trust will refuse all purchase orders for B shares of
over $250,000.
Although Retail shares are subject to a distribution fee, they are not
subject to the higher distribution fee applicable to B shares. For this reason,
Retail 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 Retail shares that do not qualify for waivers of or reductions in
the initial sales charge would have less of their purchase price
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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 six-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 six-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 Retail 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 Retail 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 Retail 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
Retail shares as described above at the end of such eight-year period.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares are sold primarily to banks and trust companies which
are affiliated with National City Corporation (the "Banks"), National Asset
Management Corporation ("NAM") customers that are large institutions, and
investment advisers and financial planners affiliated with National City
("RIAs") who charge an advisory, consulting or other fee for their services and
buy shares for their own accounts or the accounts of their clients
("Customers"). Institutional shares are sold without a sales charge imposed by
the Trust or the Distributor. However, depending on the terms governing the
particular account, the Banks, NAM or RIAs may impose account charges such as
account maintenance fees, compensating balance requirements or other charges
based upon account transactions, assets or income which will have the effect of
reducing the shareholder's net return on his investment in a Fund. There is no
minimum investment.
It is the responsibility of the Banks, NAM and RIAs to transmit their
Customers' purchase orders to the Transfer Agent and to deliver required funds
on a timely basis, in accordance with the procedures stated above. Institutional
shares will normally be held of record by the Banks, NAM or RIAs. Confirmations
of share purchases and redemptions will be sent to the Banks and NAM and RIAs.
Beneficial ownership of Institutional shares will be recorded by the Banks, NAM
or RIAs and reflected in the account statements provided by them to their
Customers.
The Trust reserves the right to reject any purchase order.
EFFECTIVE TIME OF PURCHASES
Purchase orders for shares of the Funds which are received by the Transfer
Agent prior to 4:00 p.m. (Eastern Time) on any business day are priced according
to the net asset value per share next determined after receipt of the order plus
any applicable sales charge (the "Public Offering Price"). Immediately available
funds must be received by the Trust's custodian prior to 2:00 p.m. (Eastern
Time) on the third business day following the receipt of such order, at which
time the order will be executed. If funds are not received by such date, the
order will not be accepted and notice thereof will be given to the Bank or
financial institution placing the order. Purchase orders for which payment has
not been received or accepted will be returned after prompt inquiry to the
sending Bank or institution.
REDEMPTION OF RETAIL SHARES 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
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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 financial institution.
REDEMPTION OF INSTITUTIONAL SHARES
Customers may redeem all or part of their Institutional shares in
accordance with instructions and limitations pertaining to their accounts at the
Banks, NAM or RIAs. It is the responsibility of the Banks, NAM or RIAs to
transmit redemption orders to the Transfer Agent and credit their Customers'
accounts with the redemption proceeds on a timely basis. Redemption orders are
effected at the net asset value per share next determined after receipt of the
order by the Transfer Agent. No charge for wiring redemption payments is imposed
by the Trust, although the Banks, NAM or RIAs may charge their Customers'
accounts for services. Information relating to such services and charges, if
any, is available from the Banks, NAM or RIAs.
If a Customer has agreed with a particular Bank to maintain a minimum
balance in his account at the Bank and the balance in such account falls below
that minimum, the Customer may be obliged to redeem all or part of his
Institutional shares to the extent necessary to maintain the required minimum
balance. Customers who have instructed that automatic purchases and redemptions
be made for their accounts receive monthly confirmations of share transactions.
WRITTEN REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by sending a written request to Armada Funds, P.O. Box
8421, Boston, Massachusetts 02266-8421. Redemption requests must be signed by
each shareholder, including each joint owner on redemption requests for joint
accounts, in the exact manner as the Fund account is registered, and must state
the number of shares or the amount to be redeemed and identify the shareholder
account number and tax identification number. For a redemption amount of $10,000
or more, each signature on the written request must be guaranteed by a
commercial bank or trust company which is a member of the Federal Reserve System
or FDIC, a member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. For a redemption amount less than $10,000, no
signature guarantee is needed. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
TELEPHONE REDEMPTION PROCEDURES
A shareholder who purchased shares directly from the Trust may redeem
shares in any amount by calling 1-800-622-FUND(3863) provided the appropriate
election was made on the shareholder's account application.
During periods of unusual economic or market changes, telephone redemptions
may be difficult to implement. In such event, shareholders should mail their
redemption requests to their financial institutions or Armada Funds at the
address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those instructions
and requesting information as to account registration (such as the name in which
an account is 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
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reserves the right to refuse a telephone redemption if it believes it is
advisable to do so. Procedures for redeeming Retail 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. Additional information regarding this service
may be obtained from an Investor's financial institution or the Transfer Agent
at 1-800-622-FUND(3863). 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.
OTHER REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A FUND, SHAREHOLDERS SHOULD INDICATE WHETHER THEY
ARE REDEEMING RETAIL SHARES OR B SHARES. In the event a redeeming shareholder
owns both Retail shares and B shares in a Fund, the Retail 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 investment should purchase shares by Federal funds, bank wire, certified or
cashier's check. Financial institutions normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds.
Payment to Shareholders for shares redeemed will be made within seven days
after receipt of the request for redemption.
EXCHANGE PRIVILEGE APPLICABLE TO RETAIL SHARES AND B SHARES
The Trust offers an exchange program whereby Investors who have paid a
sales charge to purchase Retail shares of one or more of the Funds (each a "load
Fund") may exchange those Retail shares for Retail shares of another load Fund,
or another investment fund offered by the Trust without the imposition of a
sales charge (each a "no load Fund") at the net asset value per share on the
date of exchange. As a result, no additional sales charge will be incurred with
respect to such an exchange. Shareholders may also exchange Retail shares of a
no load Fund for Retail shares of another no load Fund at the net asset value
per share without payment of a sales load. In addition, shareholders of a no
load Fund may exchange Retail shares for Retail shares of a load Fund subject to
payment of the applicable sales load. However, shareholders exchanging Retail
shares of a no load Fund which were received in a previous exchange transaction
involving Retail shares of a load Fund will not be required to pay an additional
sales charge upon notification of the reinvestment of the equivalent amount into
the Retail shares of a load Fund.
Shareholders who have purchased B shares of one or more of the Funds
(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.
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No exchange fee is imposed by the Trust. Shareholders contemplating an
exchange should carefully review the Prospectus of the Fund into which the
exchange is being considered. An Armada Funds Prospectus may be obtained from
NatCity Investments, Inc., an Investor's financial institution or by calling
1-800-622-FUND(3863).
Any Retail shares 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 Retail 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
financial institution, and an Investor who directly purchased shares from the
Trust should mail the exchange request to the Transfer Agent. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
SYSTEMATIC EXCHANGE PROGRAM APPLICABLE TO RETAIL SHARES AND B SHARES
Shares of a Fund may also be purchased through automatic monthly deductions
from a shareholder's account from any Armada money market fund. Under a
systematic exchange program, a shareholder enters an agreement to purchase
shares of one or more specified funds over a specified period of time, and
initially purchases shares of one Armada money market fund in an amount equal to
the total amount of the investment. On a monthly basis, a specified dollar
amount of shares of the Armada money market fund is exchanged for shares of the
Funds specified.
The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described previously in this Prospectus. Because purchases of
Retail shares are subject to an initial sales charge, it may be beneficial for
an investor to execute a Letter of Intent in indicating an intent to purchase
Retail shares in connection with the systematic exchange program. A shareholder
may apply for participation in this program through his financial institution or
by calling 1-800-622-FUND(3863).
DISTRIBUTION AND SERVICING ARRANGEMENTS
Pursuant to the Trust's Distribution Agreement, as amended, and Rule 12b-1
under the 1940 Act, the Trust adopted a Service and Distribution Plan relating
to the Institutional and Retail classes of shares ("Institutional and Retail
Plan") and a separate B Shares Distribution and Servicing Plan relating to the B
classes of shares ("B Shares Plan"). Under the Institutional and Retail Plan,
the Trust pays the following compensation to the Distributor for services
provided and expenses assumed in providing the Trust advertising, marketing,
prospectus printing and other distribution services: (i) an annual base fee of
$1,250,000, plus (ii) incentive fees related to asset growth. Such compensation
is payable monthly and accrued daily among the Institutional and Retail classes
of the Trust's investment funds with respect to which the Distributor is
distributing shares. In the case of each such fund, such compensation shall not
exceed .10% per annum of the average aggregate net assets of its Institutional
and Retail classes. 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 Institutional and
Retail Plan. Such compensation is payable monthly and accrued daily by each
fund's B shares only.
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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 Retail 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 Retail 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 Retail or B shares may receive different compensation with respect to
those shares than with respect to Institutional shares in the same Fund.
Shareholder administrative services may include aggregating and processing
purchase and redemption orders, processing dividend payments from the Fund on
behalf of customers, providing information periodically to customers showing
their position in Retail or B shares, and providing sub-transfer agent services
or the information necessary for sub-transfer agent services, with respect to
Retail 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 Retail 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 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 and Core
Equity Funds are declared and paid quarterly. With respect to each Fund, net
income for dividend purposes consists of dividends, distributions and other
income on the Fund's assets, less the accrued expenses of the Fund. Any net
realized capital gains will be distributed at least annually. Dividends and
distributions will reduce the Funds' net asset value per share by the per share
amount thereof.
Shareholders of the Funds may elect to have their dividends reinvested in
additional full and fractional Fund shares of the same class of any Armada Funds
at the net asset value of such shares on the ex-dividend date. Shareholders must
make such election, or any revocation thereof, in writing to their Banks or
financial institutions. The election will become effective with respect to
dividends and distributions paid after its receipt.
TAXES
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally relieves a Fund of liability for federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any,
for such year. In general, a Fund's investment company taxable income will be
the sum of its net investment income and the excess of any net short-term
capital gain for the taxable year over the net long-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income and net tax-exempt income each taxable year.
Such distributions by the Fund
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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 amount of the dividend or
distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase of
Fund shares in his tax basis for such shares for the purpose of determining gain
or loss on a redemption, transfer or exchange of such shares. However, if the
shareholder effects an exchange of such shares for shares of another Fund within
90 days of the purchase and is able to reduce the sales charge applicable to the
new shares (by virtue of the Trust's exchange privilege), the amount equal to
such reduction may not be included in the tax basis of the shareholder's
exchanged shares but may be included (subject to this limitation) in the tax
basis of the new shares.
Shareholders of the Funds will be advised at least annually as to the
federal income tax consequences of distributions made to them each year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes which may differ from federal tax
consequences described above.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus; such laws and regulations may be
changed by legislative or administrative actions. The foregoing summarizes some
of the important tax considerations generally affecting the Funds and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situation.
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. The trustees of the Trust, their addresses,
principal occupations during the past five years, other affiliations, and the
compensation paid by the Trust and the fees and reimbursed expenses they receive
in connection with each meeting of the Board of Trustees they attend are
included in the Statement of Additional Information.
INVESTMENT ADVISERS
National City serves as the investment adviser to the Small Cap Value,
Equity Growth, Equity Income, Small Cap Growth and International Equity Funds.
NAM serves as investment adviser to the Core Equity Fund. National City and NAM
are wholly-owned subsidiaries of National City Corporation. National City
provides trust and banking services to individuals, corporations, and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. National City is a member bank
of the Federal Reserve System and the Federal Deposit Insurance Corporation. NAM
is a registered investment adviser providing investment advisory and related
services.
On September 30, 1997, the Trust Department of National City had
approximately $11.1 billion in assets under management, and approximately $23.0
billion in total trust assets. As of the same date, NAM managed over $8.0
billion for a diverse group of clients. Principal offices of each of the
investment advisers are as follows:
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National Asset Management Corporation
101 South Fifth Street
Louisville, Kentucky 40202
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Small Cap Value, Equity Growth, Equity Income, Small Cap
Growth, International Equity and Core Equity Funds' investment policies, the
advisers have agreed to manage such Funds, make decisions with respect to and
place orders for all purchases and sales of such Funds' securities, and maintain
such Funds' records relating to such purchases and sales.
- - Lawrence E. Baumgartner, CFA, is the person primarily responsible for the day
to day management of the Small Cap Value Fund. Mr. Baumgartner, employed by
National City as President of Broad Street Asset Management Co. since July
1994, had been managing assets for The State Teachers Retirement System of
Ohio since 1987 and has been the Manager of the Small Cap Value Fund since its
inception.
The Equity Growth Fund is managed by the Equity Growth Style Team of
National City's Asset Management Group. Members of the team are Eric S. Fuchs
and Eugene March.
- - Eric S. Fuchs is the person primarily responsible for the day-to-day
management of the Equity Growth Fund. Mr. Fuchs, a Vice President at National
City, has 21 years of equity investment experience encompassing research and
money management. After co-managing several equity mutual funds at Twentieth
Century Investors, he managed pension accounts at Waddell & Reed Asset
Management. He earned an MBA from the University of Chicago Graduate School of
Business.
- - Eugene C. March, a Chartered Financial Analyst and Vice President, joined the
Equity Growth Style team in January 1997. He has been with National City for
18 years previously holding positions in equity research and as Associate
Director of Research.
- - Alex L. Vallecillo, Assistant Vice President and CFA candidate, joined
National City in 1996. He traded corporate structured securities for Merrill
Lynch in 1993, an was associated with EDS from September 1990 through July
1992.
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- - The Equity Income Fund is managed by Mary Jane Matts, a Chartered Financial
Analyst and a Vice President at National City. She has 10 years of investment
experience including positions in research, portfolio management and
performance measurement. Prior to joining the Equity Value Style Team on
August 19, 1996, Ms. Matts was the Director of Equity Research for Key Corp.
- - The International Equity Fund is managed by David Cooley, Vice President of
National City's Asset Management Group. Mr. Cooley has eight years of
investment experience including fixed income research, equity research and
international equities management. Mr. Cooley is a Chartered Financial Analyst
and has managed the International Equity Fund since its inception. Prior to
joining National City in 1996, he was managing international equity portfolios
for Key Corp.
- - 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 single person is primarily responsible for making recommendations to
the Investment Management Group.
For the services provided and expenses assumed pursuant to the Advisory
Agreements relating to the Small Cap Value, Equity Growth, Equity Income, Small
Cap Growth, International Equity and Core Equity Funds, the advisers are
entitled to receive an advisory fee, computed daily and payable monthly, at the
annual rate of .75% of the average net assets of each of these Funds.
Shareholders should note that these fees are higher than those payable by other
investment companies. However, the Trust believes that the fees are within the
range of fees payable by investment funds with comparable investment objectives
and policies. The advisers may from time to time waive all or a portion of their
advisory fees to increase the net income of the Funds available for distribution
as dividends.
SUB-INVESTMENT ADVISER
Wellington Management Company, LLP (the "sub-adviser") serves as the
sub-adviser to the Small Cap Growth Fund under a sub-advisory agreement (the
"Sub-Advisory Agreement") with National City as the investment adviser.
Wellington Management is a Massachusetts limited liability partnership located
at 75 State Street, Boston, Massachusetts, 02109. Wellington Management is a
professional investment counseling firm which provides investment services to
investment companies, employee benefit plans, endowments, foundations, and other
institutions and individuals. The following persons are managing partners of
Wellington Management: Robert W. Doran, Duncan M. McFarland and John R. Ryan. As
of November 30, 1997, Wellington Management had investment management authority
with respect to approximately $170 billion of assets.
Pursuant to the Sub-Advisory Agreement and subject to the supervision of
the adviser and of the Trust's Board of Trustees and in accordance with the
Small Cap Growth Fund's investment policies, the sub-adviser has agreed to
assist the adviser in providing a continuous investment program for the Small
Cap Growth Fund and in determining investments for the Fund. 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,
calculated daily and payable monthly, at the following annual rates: .75% per
annum on the first $25 million of assets, .65% on the next $25 million, .55% on
the next $50 million, and .45% over $100 million. The sub-adviser may
occasionally waive all or a portion of its fee from the adviser.
ADMINISTRATOR
PFPC Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as the administrator to the Funds. PFPC is an indirect,
wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.
Under its Administration and Accounting Services Agreement with the Trust,
PFPC has agreed to provide the following services with respect to the Funds:
statistical data, data processing services and accounting and bookkeeping
services; prepare tax returns and certain reports filed with the SEC; assist
35
<PAGE> 340
in the preparation of reports to shareholders and the preparation of the Trust's
registration statement; maintain the required fidelity bond coverage; calculate
each Fund's net asset value per share, net income, and realized capital gains
(losses); and generally assist the Funds with respect to all aspects of their
administration and operation. PFPC is entitled to receive with respect to each
Fund an administrative fee, computed daily and paid monthly, at the annual rate
of .10% of the first $200,000,000 of its net assets, .075% of the next
$200,000,000 of its net assets, .045% of the next $200,000,000 of its net assets
and .02% of its net assets over $600,000,000 and is entitled to be reimbursed
for its out-of-pocket expenses incurred on behalf of each Fund.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on January 28,
1986. The Trust is a series fund authorized to issue 57 separate classes or
series of shares of beneficial interest ("shares"). 18 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) and Small Cap Growth Fund (Class X, Class
X -- Special Series 1 and Class X -- Special Series 2), are described in this
Prospectus. Class H, Class M, Class N, Class U, Class W and Class X shares
constitute the Institutional class or series of shares; Class H -- Special
Series 1, Class M -- Special Series 1, Class N -- Special Series 1, Class
U-Special Series 1, Class W -- Special Series 1, and Class X -- Special Series 1
shares constitute the Retail class or series of shares; 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 and Class X -- 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)
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)
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)
36
<PAGE> 341
Equity Index Fund
(Class V and Class V -- Special Series 1)
Real Return Advantage Fund
(Class Y and Class Y -- Special Series 1)
Each share has no par value, represents an equal proportionate interest in
the investment fund with other shares of the same class or series outstanding,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such Fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any unissued shares into any number of
additional classes of shares and to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shareholders will
vote in the aggregate and not by investment fund, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted on affects only the interests of shareholders of a particular investment
fund. The Statement of Additional Information gives examples of situations in
which the law requires voting by investment fund. In addition, shareholders of
each of the investment funds will vote in the aggregate and not by class or
series, except as otherwise expressly required by law or when the Board of
Trustees determines the matter to be voted on affects only the interests of the
holders of a particular class or series of shares. Under the Shareholder
Services Plan and B Shares Plan, only the holders of Retail 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 being or having been a shareholder and not because of his acts or
omissions or some other reason.
The Trust does not presently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The Trust's Code of
Regulations provides that special meetings of shareholders shall be called at
the written request of shareholders entitled to cast at least 10% of the votes
entitled to be cast at such meeting. Such meeting may be called by shareholders
to consider the removal of one or more trustees. Shareholders will receive
shareholder communication assistance with respect to such matter as required by
the 1940 Act.
As of December 9, 1997, National City held beneficially or of record
approximately 54.79%, 44.30%, 59.22%, 75.11%, 88.49% and 99.68%, of the
outstanding Institutional shares of the Small Cap Value, Equity Growth, Equity
Income, Small Cap Growth, International Equity and Core Equity Funds,
respectively. National City does not have any economic interest in such shares
which are held solely for the benefit of its customers, but may be deemed to be
a controlling person of the Funds within the meaning of the 1940 Act by reason
of its record ownership of such shares. The names of beneficial owners and
record owners who are controlling shareholders under the 1940 Act may be found
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT
National City Bank serves as the custodian of the Trust's assets. State
Street Bank and Trust Company serves as the Trust's transfer and dividend
disbursing agent. Communications to the Transfer Agent should be directed to
P.O. Box 8421, Boston, Massachusetts 02266-8421. The fees payable by the Trust
for these services are described in the Statement of Additional Information.
37
<PAGE> 342
EXPENSES
Except as noted below, the Trust's advisers and, in the case of the Small
Cap Growth Fund, the sub-adviser bear all expenses in connection with the
performance of their services. Each Fund of the Trust bears its own expenses
incurred in its operations including: taxes; interest; fees (including fees paid
to its trustees and officers); SEC fees; state securities qualification fees;
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders; expenses related to the distribution 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 accountants.
Pursuant to Rule 17f-2, as National City Bank serves the Trust as both the
custodian and an investment adviser, a procedure has been established requiring
three annual verifications, two of which are to be unannounced, of all
investments held pursuant to the Custodian Services Agreement, to be conducted
by the Trust's independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Trust or a particular investment fund means, with
respect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Trust or such fund or
(b) 67% or more of the shares of the Trust or such fund present at a meeting if
more than 50% of the outstanding shares of the Trust or such fund are
represented at the meeting in person or by proxy.
The portfolio 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).
38
<PAGE> 343
LOGO NOTES
<PAGE> 344
LOGO NOTES
<PAGE> 345
LOGO ARMADA FUNDS
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Zurn Industries, 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:
Acromed Corporation
Kirtland Capital Corporation
Morrison Products
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishing's 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:
Meridia Health System
WVIZ Educational Television
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
<PAGE> 346
[ARMADA LOGO]
Oaks, Pennsylvania, 19456
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1535
ARMADA FUNDS
INVESTMENT ADVISERS
AFFILIATES OF
NATIONAL CITY
CORPORATION
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44114
National Asset
Management Corporation
101 South Fifth Street
Louisville, Kentucky 40202
AF-808 (12/97)
<PAGE> 347
ARMADA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 23, 1997
SMALL CAP VALUE FUND
EQUITY GROWTH FUND
EQUITY INCOME FUND
SMALL CAP GROWTH FUND
INTERNATIONAL EQUITY FUND
CORE EQUITY FUND
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus for the above Funds of Armada Funds
(the "Trust"), dated December 23, 1997 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling or writing the Trust at
1-800-622-FUND(3863), Oaks, Pennsylvania 19456.
<PAGE> 348
<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...................................................................................16
ADDITIONAL INFORMATION CONCERNING TAXES.................................................................18
TRUSTEES AND OFFICERS...................................................................................21
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN SERVICES AND
TRANSFER AGENCY AGREEMENTS..............................................................................26
SHAREHOLDER SERVICES PLANS..............................................................................31
PORTFOLIO TRANSACTIONS..................................................................................31
AUDITORS................................................................................................33
COUNSEL.................................................................................................33
YIELD AND PERFORMANCE INFORMATION.......................................................................33
MISCELLANEOUS...........................................................................................38
FINANCIAL STATEMENTS....................................................................................44
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 and Core Equity Funds. The information contained in this Statement of
Additional Information expands upon matters discussed in the Prospectus. No
investment in shares of a Fund should be made without first reading the
Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
ADDITIONAL INFORMATION ON FUND MANAGEMENT
- -----------------------------------------
Further information on the advisers' investment management
strategies, techniques, policies and related matters may be included from time
to time in advertisements, sales literature, communications to shareholders and
other materials. See also, "Yield and Performance Information" below.
Attached to this Statement of Additional Information is
Appendix A which contains descriptions of the rating symbols used by S&P, Fitch,
Duff, IBCA and Moody's for securities which may be held by the Funds.
FOREIGN SECURITIES
- ------------------
Unanticipated political or social developments may affect the
value of the International Equity Fund's investments in emerging market
countries and the availability to the Fund of additional investments in those
countries. The small size, relatively unseasoned nature of the securities
markets and limited volume of trading in securities in certain of these
countries may make the Fund's investments there illiquid and more volatile than
investments in Japan or most Western European countries. In addition, the Fund
may be required to establish special custodial or other arrangements before
making certain investments. Moreover, there may be little financial or
accounting information available with respect to issuers located in certain
emerging market countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.
FOREIGN GOVERNMENT OBLIGATIONS
- ------------------------------
The International Equity Fund may purchase debt obligations
issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their agencies,
authorities or instrumentalities. The percentage of assets invested in
securities of a particular
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<PAGE> 350
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 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 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.
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<PAGE> 351
A separate account consisting of cash or liquid securities
equal to the amount of the Equity Income or International Equity Fund's assets
that could be required to consummate forward contracts will be established with
the Trust's custodian except to the extent the contracts are otherwise
"covered." For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If the
market or fair value of such securities declines, additional cash or liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the Funds. A forward contract to
sell a foreign currency is "covered" if a Fund owns the currency (or securities
denominated in the currency) underlying the contract, or holds a forward
contract (or call option) 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 will
consider, among other factors, the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of the
Fund's portfolio as to issuers; and the ratings of the securities. Since credit
rating agencies may fail to timely change the credit ratings of securities to
reflect subsequent events, the adviser will consider whether such issuers will
have sufficient cash flow and profits to meet required principal and interest
payments. A Fund may retain a portfolio
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security whose rating has been changed if the adviser deem that retention of
such security is warranted.
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
- -------------------------------------
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 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
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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 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
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<PAGE> 354
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 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 whenissued 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.
Investments include commercial paper and other short-term
promissory notes issued by corporations (including variable and floating rate
instruments). In addition, each Fund may invest in Canadian Commercial Paper
("CCP"), which is commercial paper issued by a Canadian corporation or a
Canadian counterpart of a U.S. corporation, and in Europaper, which is U.S.
dollar denominated commercial paper of a foreign issuer. Each Fund may also
acquire zero coupon obligations, which have greater price volatility than coupon
obligations and which will not result in the payment of interest until maturity.
-6-
<PAGE> 355
Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which is
a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances, certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. Each Fund
may also make interest bearing savings deposits in commercial and savings banks
not in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of a Fund's total assets at the time of
purchase.
Each Fund may also make limited investments in "GICs" issued
by U.S. insurance companies. When investing in GICs, a Fund makes cash
contributions to a deposit fund or an insurance company's general account. The
insurance company then credits to the Fund monthly a guaranteed minimum interest
which is based on an index. The insurance company may assess periodic charges
against a GIC for expense and service costs allocable to it, and the charges
will be deducted from the value of the deposit fund. A Fund will purchase a GIC
only when its adviser 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 deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short
term rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
its repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Although there is no controlling legal
precedent confirming that a Fund would be entitled, as
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<PAGE> 356
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 Investment Company Act of
1940.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
Each Fund may purchase obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Some of these obligations
are supported by the full faith and credit of the U.S. Treasury, such as
obligations issued by the Government National Mortgage Association. Others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality issuing the obligation. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The
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<PAGE> 357
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.
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between the Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, a Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
Government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the 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: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
PORTFOLIO TURNOVER
- ------------------
Each Fund may engage in short term trading and may sell
securities which have been held for periods ranging from several months to less
than a day. Portfolio turnover will tend to rise during periods of economic
turbulence and decline during periods of stable growth. Each Fund's annual
portfolio turnover is not
-9-
<PAGE> 358
expected to exceed 100% under normal market conditions. The portfolio turnover
rate for each Fund is calculated by dividing the lesser of purchases or sales of
portfolio securities for the year by the monthly average value of the portfolio
securities. The calculation excludes U.S. Government securities and all
securities whose maturities at the time of acquisition were one year or less.
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 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.
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
nonfundamental limitations, which may be changed without the vote of
shareholders:
No Fund may:
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<PAGE> 359
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)
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 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 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.
-11-
<PAGE> 360
The B shares class for each Fund is expected to commence
operations on or about January 1, 1998.
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, Institutional shares of the
Funds are sold to certain qualified investors at their net asset value without a
sales charge. Retail 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, 1997, sales loads paid by
shareholders of the Small Cap Value, Equity Growth and Equity Income Funds
totalled $3,160, $5,394 and $72, respectively. As of May 31, 1997, the Small Cap
Growth, International Equity and Core Equity Funds had not commenced operations.
Automatic investment programs such as the monthly savings
program ("Program") described in the Prospectus offered by the Funds permit an
investor to use "dollar cost averaging" in making investments. Under this
Program, an agreed upon fixed dollar amount is invested in Fund shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the Program results in more shares being purchased during
periods of lower share prices and fewer shares during periods of higher share
prices. In order to be effective, dollar cost averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that dollar cost averaging results in purchases of shares regardless of their
price on the day of investment or market trends and does not ensure a profit,
protect against losses in a declining market, or prevent a loss if an investor
ultimately redeems his shares at a price which is lower than their purchase
price. An investor may want to consider his financial ability to continue
purchases through periods of low price levels. From time to time, in
advertisements, sales literature, communications to shareholders and other
materials ("Materials"), the Trust may illustrate the effects of dollar cost
-12-
<PAGE> 361
averaging through use of or comparison to an index such as the S&P
500 Index.
OFFERING PRICE PER RETAIL SHARE OF THE FUNDS
- --------------------------------------------
Illustrations of the computation of the offering price per
Retail share of the Funds, based on the value of the Funds' net assets and
number of outstanding shares on May 31, 1997 are as follows:
<TABLE>
<CAPTION>
TABLE
-----
SMALL CAP VALUE FUND
--------------------
<S> <C>
Net Assets of Retail Shares.......................................................... $4,928,691
Outstanding Retail Shares............................................................ 329,602
Net Asset Value Per Share
($4,928,691 / 329,602)............................................................... $14.95
Sales Charge, 5.50% of
offering price (5.82% of
net asset value per share)*.......................................................... $ 0.87
Offering to Public................................................................... $ 15.82
EQUITY GROWTH FUND
------------------
Net Assets of Retail Shares.......................................................... $6,931,149
Outstanding Retail Shares............................................................ 371,276
Net Asset Value Per Share
($6,931,149 / 371,276)............................................................... $18.67
Sales Charge, 5.50% of
offering price (5.84% of
net asset value per share)*.......................................................... $1.09
Offering to Public................................................................... $19.76
EQUITY INCOME FUND
------------------
Net Assets of Retail Shares.......................................................... $409,603
Outstanding Retail Shares............................................................ 27,558
Net Asset Value Per Share
($409,603 / 27,558).................................................................. $14.86
Sales Charge, 5.50% of
</TABLE>
* Reflects current sales charge
-13-
<PAGE> 362
<TABLE>
<S> <C>
offering price (5.79% of
net asset value per share)*.......................................................... $0.86
Offering to Public................................................................... $15.72
</TABLE>
* Reflects current sales charge
-14-
<PAGE> 363
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND*
--------------------------
<S> <C>
Net Assets of Retail Shares.......................................................... $10,000,000
Outstanding Retail Shares............................................................ 1,000,000
Net Asset Value Per Share............................................................ $10.00
Sales Charge, 5.50% of
offering price (5.80% of
net asset value per share)........................................................... $0.58
Offering to Public................................................................... $10.58
SMALL CAP GROWTH FUND*
----------------------
Net Assets of Retail Shares.......................................................... $10,000,000
Outstanding Retail Shares............................................................ 1,000,000
Net Asset Value Per Share............................................................ $10.00
Sales Charge, 5.50% of
offering price (5.80% of
net asset value per share)........................................................... $0.58
Offering to Public................................................................... $10.58
</TABLE>
* Amounts are estimated as the Fund had not commenced operations
as of May 31, 1997.
-15-
<PAGE> 364
<TABLE>
<CAPTION>
CORE EQUITY FUND*
-----------------
<S> <C>
Net Assets of Retail Shares.......................................................... $10,000,000
Outstanding Retail Shares............................................................ 1,000,000
Net Asset Value Per Share............................................................ $10.00
Sales Charge, 5.50% of
offering price (5.80% of
net asset value per share)........................................................... $ 0.58
Offering to Public................................................................... $ 10.58
</TABLE>
* Amounts are estimated as the Fund had not commenced operations
as of May 31, 1997.
EXCHANGE PRIVILEGE
- ------------------
Investors may exchange all or part of their Retail 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 financial institution must notify the Transfer
Agent of his prior ownership of Retail shares and account number. The Transfer
Agent's records of such instructions are binding.
DESCRIPTION OF SHARES
---------------------
The Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest and to classify or reclassify any
unissued shares of the Trust into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of 57
classes or series of shares. Eighteen of these
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<PAGE> 365
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) and Small Cap Growth Fund (Class X, Class X - Special
Series 1 and Class X 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 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
Institutional and Retail 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.
-17-
<PAGE> 366
Although the following types of transactions are normally
subject to shareholder approval, the Board of Trustees may, under certain
limited circumstances, (a) sell and convey the assets of an investment fund to
another management investment company for consideration which may include
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert an investment fund's assets into money and, in connection
therewith, to cause all outstanding shares of such fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to an investment
fund with the assets belonging to another investment fund of the Trust, if the
Board of Trustees reasonably determines that such combination will not have a
material adverse effect on shareholders of any fund participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any fund to be redeemed at their net asset value or converted into shares of
another class of the Trust shares at net asset value. In the event that shares
are redeemed in cash at their net asset value, a shareholder may receive in
payment for such shares an amount that is more or less than his original
investment due to changes in the market prices of the fund's securities. The
exercise of such authority by the Board of Trustees will be subject to the
provisions of the 1940 Act, and the Board of Trustees will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the fund's shareholders at least 30 days prior thereto.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional tax considerations
generally affecting the Trust and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Trust or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
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,
-18-
<PAGE> 367
interest, payments with respect to securities loans, gains from the sale or
other disposition of stocks, securities or foreign currencies, and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to the Fund's business of investing in such stock,
securities or currencies. The Treasury Department may by regulation exclude from
qualifying income foreign currency gains which are not directly related to the
Fund's principal business of investing in stock or securities, or options and
futures with respect to stock or securities. Any income derived by a Fund from a
partnership or trust is treated as derived with respect to the Fund's business
of investing in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Fund in the same manner as by the partnership or
trust.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months (the
"short-short test"): (1) stock and securities (as defined in Section 2(a)(36) of
the 1940 Act; (2) options, futures and forward contracts other than those on
foreign currencies; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock and securities (and options and futures
with respect to stocks and securities). Interest (including original issue
discount and, with respect to taxable debt securities and non taxable debt
securities acquired after April 30, 1993, accrued market discount) received by a
Fund upon maturity or disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of this requirement. However, any other
income which is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
Effective for taxable years beginning after August 4, 1997, the recently enacted
Taxpayer Relief Act of 1997 repeals the short-short test.
Some investments held by a Fund may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (1)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (2) the accruing of certain trade receivables and payables; and (3) the
entering into or acquisition of any forward contract, futures contract, option
and similar
-19-
<PAGE> 368
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 Bonds) would
be taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits, and would be eligible for
the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service
-20-
<PAGE> 369
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> 370
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board Retired Co-Chairman of
32980 Creekside Drive and Trustee Ernst & Young, April 1984-
Pepper Pike, OH 44124 September 1993; Director,
Age 64 Cold Metal Products, Inc.,
since March 1994;
Director, Zurn Industries,
Inc. (building products
and construction
services), since June
1995.
Herbert R. Martens, Jr.* President and Trustee Executive Vice President,
c/o NatCity Investments, Inc. National City Corporation
1965 East Sixth Street (bank holding company),
Cleveland, OH 44114 since July 1997; Chairman,
Age 45 President and Chief Executive
Officer, NatCity Investments,
Inc., since July 1995
(investment banking);
President and Chief Executive
Officer, Raffensberger, Hughes
& Co. from 1993 until 1995
(broker-dealer); President,
Reserve Capital Group, from
1990 until 1993.
Leigh Carter* Trustee Retired President and
13901 Shaker Blvd., #6B Chief Operating Officer,
Cleveland, OH 44120 B.F. Goodrich Company,
Age 72 August 1986 to September
1990; Director, Adams Express
Company (closed-end investment
company), April 1982 to December
1997; Director, Acromed Corporation;
(producer of spinal implants),
since June 1992; Director,
Petroleum & Resources Corp.,
April 1987 to December 1997;
Director, Morrison Products
(manufacturer of blower fans
and air moving equipment),
since April 1983; Director,
Kirtland Capital Corp .
(privately funded investment
group), since January 1992.
John F. Durkott Trustee President and Chief
8600 Allisonville Road Operating Officer,
Indianapolis, IN 46250 Kittle's Home Furnishings
Age 53 Center, Inc., since
January 1982; partner, Kittles
Bloomington Property Company,
since January 1981; partner,
KK&D (Affiliated Real Estate
Companies of Kittle's Home
Furnishings Center), since
January 1989.
Robert J. Farling Trustee Retired Chairman, President and
1608 Balmoral Way Chief Executive Officer,
Westlake, OH 44145 Centerior Energy (electric
Age 61 utility), March 1992 to October
1997; Director, National City
Corporation (bank holding
company) until October 1997;
Director, Republic Engineered
Steels, since October 1997.
</TABLE>
-22-
<PAGE> 371
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ----------------------
<S> <C> <C>
Richard W. Furst, Dean Trustee Professor of Finance and
600 Autumn Lane Dean, Carol Martin Gatton
Lexington, KY 40502 College of Business and
Age 59 Economics, University of
Kentucky, since 1981;
Director, The Seed Corporation
(restaurant group), since
1990; Director; Foam Design,
Inc., (manufacturer of
industrial and commercial foam
products), since 1993.
Gerald L. Gherlein Trustee Executive Vice-President
3679 Greenwood Drive and General Counsel, Eaton
Pepper Pike, OH 44124 Corporation, since 1991
Age 59 (global manufacturing);
Trustee, Meridia Health System
(four hospital health system);
Trustee, WVIZ Educational
Television (public
television).
J. William Pullen Trustee President and Chief
Whayne Supply Company Executive Officer, Whayne
1400 Cecil Avenue Supply Co. (engine and
P.O. Box 35900 heavy equipment
Louisville, KY 40232-5900 distribution), since 1986;
Age 58 President and Chief
Executive Officer, American
Contractors Rentals & Sales
(rental subsidiary of Whayne
Supply Co.), since 1988.
</TABLE>
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<PAGE> 372
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------- ----------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath
Bank Building LLP, Philadelphia,
1345 Chestnut Street Pennsylvania.
Suite 1100
Philadelphia, PA 19107
Age 54
Neal J. Andrews Treasurer Vice President and
PFPC Inc. Director of Investment
400 Bellevue Parkway Accounting, PFPC Inc.,
Wilmington, DE 19809 since 1992; prior thereto,
Age 31 Senior Auditor, Price
Waterhouse, LLP.
</TABLE>
- --------------------
* Messrs. Carter and Martens are considered by the Trust to be "interested
persons" of the Trust as defined in the 1940 Act.
W. Bruce McConnel, III, Esq., Secretary of the Trust, is a
partner of the law firm Drinker Biddle & Reath LLP, which receives fees as
counsel to the Trust. Neal J. Andrews, Treasurer of the Trust, is employed by
PFPC Inc., which receives fees as Administrator to the Trust.
Each trustee receives an annual fee of $7,500 plus $2,500 for
each Board meeting attended and reimbursement of expenses incurred in attending
meetings. The Chairman of the Board is entitled to receive an additional $2,500
per annum for services in such capacity. For the year ended May 31, 1997, the
Trust's trustees and officers as a group received aggregate fees of $125,000.
The trustees and officers of the Trust own less than 1% of the shares of the
Trust.
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The following table summarizes the compensation for each of
the Trustees of the Trust for the fiscal year ended May 31, 1997:
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total
Aggregate as Part of Estimated Compensation
Name of Compensation the Trust's Approval Benefits from the
Person, Position from the Trust Expenses Upon Retirement Trust
---------------- -------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Robert D. Neary, $18,750 $ 0 $ 0 $18,750
Chairman and Trustee
Thomas R. Benua, Jr., $17,500 $ 0 $ 0 $17,500
Trustee*
Leigh Carter, Trustee $17,500 $ 0 $ 0 $17,500
John F. Durkott, Trustee $17,500 $ 0 $ 0 $17,500
Robert J. Farling, Trustee ** ** ** **
Richard W. Furst, Trustee $17,500 $ 0 $ 0 $17,500
Gerald L. Gherlein, Trustee ** ** ** **
Herbert R. Martens, Jr., ** ** ** **
President and Trustee
J. William Pullen, Trustee $17,500 $ 0 $ 0 $17,500
Richard B. Tullis, Trustee* $18,750 $ 0 $ 0 $18,750
</TABLE>
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
- --------
* Mr. Benua resigned as Trustee as of July 17, 1997. Mr.
Tullis resigned as Trustee as of November 19, 1997.
** Messrs. Farling, Gherlein and Martens were not Trustees of
the Trust during the fiscal year ended May 31, 1997.
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<PAGE> 374
reason of his being or having been a shareholder and not because of his acts or
omissions or some other reason. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
The Declaration of Trust states further that no trustee,
officer, or agent of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Trust; nor shall any trustee be personally liable
to any person for any action or failure to act except by reason of his own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he may be involved or with which he may
be threatened by reason of his being or having been a trustee, and that the
trustees, have the power, but not the duty, to indemnify officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he been a trustee.
ADVISORY, ADMINISTRATION, DISTRIBUTION, CUSTODIAN
SERVICES AND TRANSFER AGENCY AGREEMENTS
-------------------------------------------------
ADVISORY AGREEMENTS
- -------------------
National City serves as investment adviser to the Small Cap
Value, Equity Growth, Equity Income, Small Cap Growth and International Equity
Funds; and NAM serves as investment adviser to the Core Equity Fund. The adviser
and NAM are affiliates of National City Corporation, a bank holding company with
$52 billion in assets, and headquarters in Cleveland, Ohio and nearly 900 branch
offices in four states. Through its subsidiaries, National City Corporation has
been managing investments for individuals, pension and profit-sharing plans and
other institutional investors for over 75 years and currently manages over $41
billion in assets. From time to time, the advisers may voluntarily waive fees or
reimburse the Trust for expenses.
Pursuant to each Fund's respective advisory agreement, the
Trust incurred advisory fees in the following amounts for the
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fiscal years ended May 31, 1997, 1996 and 1995: (i) $982,053, $571,860 and
$183,900 (after waivers of $27,051) with respect to the Small Cap Value Fund;
(ii) $1,612,194, $1,114,914 and $814,885 for the Equity Growth Fund; and (iii)
$669,107, $370,633 and $131,109 (after waivers of $39,122) with respect to the
Equity Income Fund. As of May 31, 1997, the Small Cap Growth, International
Equity and Core Equity Funds had not yet commenced operations.
Each 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. In addition, National City has undertaken in the Advisory Agreement
to maintain its policy and practice of conducting its Trust Department
independently of its Commercial Departments.
The Advisory Agreement with National City relating to the
Small Cap Value, Equity Growth and Equity Income Funds was approved by the
shareholders of each of these Funds on November 19, 1997. The Advisory Agreement
with National City relating to the Small Cap Growth and International Equity
Funds was approved by their sole shareholders prior to the Funds' commencement
of operations. The Advisory Agreement with NAM relating to the Core Equity Fund
was approved by that Fund's sole shareholder prior to the Fund's commencement of
operations. Unless sooner terminated, the Advisory Agreements will continue in
effect with respect to a particular Fund until September 30, 1998 and from year
to year thereafter, subject to annual approval by the Trust's Board of Trustees,
or by a vote of a majority of the outstanding shares of such Fund (as defined in
the Funds' Prospectus) and a majority of the trustees who are not parties to the
Agreement or interested persons (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreements may be terminated by the Trust or the advisers on 60 days written
notice, and will terminate immediately in the event of its assignment.
ADMINISTRATION AND ACCOUNTING SERVICE AGREEMENT
- -----------------------------------------------
PFPC serves as the administrator and accounting agent to the
Trust. The services provided as administrator and accounting agent and current
fees are described in the Prospectus. Pursuant to the Administration and
Accounting Services Agreement, the Trust incurred the following fees to PFPC for
the fiscal years ended May 31, 1997, 1996 and 1995: $130,930, $76,026 and
$23,006 (after waivers of $5,121) with respect to the Small Cap Value Fund;
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$208,810, $148,244 and $108,651 with respect to the Equity Growth Fund and
$89,214, $49,418 and $17,597 (after waivers of $5,100) with respect to the
Equity Income Fund. As of May 31, 1997, the Small Cap Growth, International
Equity and Core Equity Funds had not commenced operations.
DISTRIBUTION PLANS AND RELATED AGREEMENT
- ----------------------------------------
The Distributor acts as distributor of the Funds' shares
pursuant to its Distribution Agreements 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 Retail and Institutional shares (the "Retail
and Institutional 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
Institutional and Retail 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
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
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<PAGE> 377
notice. The selection and nomination of disinterested trustees has been
committed to the discretion of such disinterested trustees as required by the
Rule.
The Retail and Institutional Shares Plan provides that each
fund will compensate the Distributor for distribution expenses related to the
distribution of Institutional and Retail shares in an amount not to exceed .10%
per annum of the fund's average aggregate net assets of such shares. The Retail
and Institutional Plan provides that the Trust will pay the Distributor an
annual base fee of $1,250,000 plus incentive fees based upon asset growth
payable monthly and accrued daily by all of the Trusts's investment funds with
respect to the Institutional and Retail 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 such class's average net assets.
Distribution expenses payable 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.
The Distribution Plans have been approved, and will continue
in effect for successive one year periods provided that such continuance is
specifically approved by (1) the vote of a majority of the trustees who are not
parties to 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 period from March 10, 1997 to May 31, 1997, the Trust
paid the Distributor $10,817, $13,891 and $6,746 with respect to the Small Cap
Value, Equity Growth and Equity Income Funds under the Retail and Institutional
Shares Plan. Of the aggregate amounts paid to the Distributor by the Trust with
respect to the Small Cap Value Fund, $3,245 was attributable to distribution
services and $7,572 was attributable to marketing/consultation. Of the aggregate
amount paid to the Distributor by the Trust with respect to the Equity Growth
Fund, $4,167 was attributable to distribution services and $9,724 was
attributable to marketing/consultation. Of the aggregate amounts paid to the
Distributor by the Trust with respect to the Equity Income Fund, $2,024 was
attributable to distribution services and $4,722 was attributable to
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<PAGE> 378
marketing/consultation. Distribution services include broker/dealer and investor
support, voice response development, wholesaling services, legal review and NASD
filings and transfer agency management. Marketing/Consultation includes planning
and development, market and industry research and analysis and marketing
strategy and planning.
For the period from June 1, 1996 to March 7, 1997, the Trust
paid its previous distributor, 440 Financial Distributors, Inc. ("440
Financial") $53,034, $83,467 and $38,334 with respect to the Small Cap Value,
Equity Growth and Equity Income Funds under the Retail and Institutional Shares
Plan.
As of May 31, 1997, the Small Cap Growth, International Equity
and Core Equity Funds had not commenced operations.
CUSTODIAN SERVICES AND TRANSFER AGENCY AGREEMENTS
- -------------------------------------------------
National City Bank serves as the Trust's custodian with
respect to the Funds. Under its Custodian Services Agreement, National City Bank
has agreed to: (i) maintain a separate account or accounts in the name of each
Fund; (ii) hold and disburse portfolio securities on account of each Fund; (iii)
collect and make disbursements of money on behalf of each Fund; (iv) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (v) respond to correspondence by security brokers
and others relating to its duties; and (vi) make periodic reports to the Board
of Trustees concerning the Funds' operations. National City Bank is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Funds, provided that it shall remain responsible for the
performance of all of its duties under the Custodian Services Agreement and
shall hold the Funds harmless from the acts and omissions of any bank or trust
company serving as sub-custodian. The Funds reimburse National City Bank for its
direct and indirect costs and expenses incurred in rendering custodial services,
except that the costs and expenses borne by each Fund in any year may not exceed
$.225 for each $1,000 of average gross assets of such Fund.
State Street Bank and Trust Company (the "Transfer Agent")
serves as the Trust's transfer agent and dividend disbursing agent with respect
to the Funds. Under its Transfer Agency Agreement, it has agreed to: (i) issue
and redeem shares of each Fund; (ii) transmit all communications by each Fund to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning the Funds' operations. The Transfer Agent sends each
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<PAGE> 379
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 Retail 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
Retail 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 Retail or B shares; (iii) processing dividend
payments from the Funds; (iv) providing information periodically to customers
showing their position in Retail or B shares; (v) arranging for bank wires;
(vi) responding to customer inquiries relating to the services performed with
respect to Retail or B shares beneficially owned by customers; (vii) forwarding
shareholder communications; and (viii) other similar services requested by the
Trust. Agreements between the Trust and financial institutions will be
terminable at any time by the Trust without penalty.
PORTFOLIO TRANSACTIONS
----------------------
Pursuant to its Advisory Agreements with the Trust, National
City is responsible for making decisions with respect to and placing orders for
all purchases and sales of portfolio securities for the Small Cap Value, Equity
Growth, Equity Income, Small Cap Growth and International Equity Funds. Pursuant
to its Advisory Agreement with the Trust, NAM is responsible for making
decisions with respect to and placing orders for all purchases and sales of
portfolio securities for the Core Equity Fund. Each 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
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<PAGE> 380
the case of securities traded in the over-the-counter market, but the price
includes an undisclosed commission or mark-up.
For the fiscal years ended May 31, 1997, 1996 and 1995, the
Small Cap Value, Equity Growth and Equity Income Funds paid $421,322, $356,904
and $217,900; $803,733, $265,644 and $80,991; $102,856, $102,100 and $68,108 in
brokerage commissions, respectively. As of May 31, 1997, the Small Cap Growth,
International Equity and Core Equity Funds had not yet commenced operations.
While the advisers generally seek competitive spreads or
commissions, they may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the advisers in their best judgment and in a manner
deemed fair and reasonable to shareholders. Under the current Advisory
Agreements, pursuant to Section 28(e) of the Securities Exchange Act of 1934, as
amended, the advisers are 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 advisers may receive orders for transactions by a
Fund. Information so received is in addition to and not in lieu of services
required to be performed by the advisers and does not reduce the fees payable to
the adviser by the Fund. Such information may be useful to the advisers in
serving both the Trust and other clients, and, similarly, supplemental
information obtained by the placement of business of other clients may be useful
to the advisers in carrying out their obligations to the Trust.
Portfolio securities will not be purchased from or sold to the
Trust's advisers, 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.
While serving as advisers to the Fund, National City and NAM
have agreed to maintain their policy and practice of conducting their Trust
Departments independently of their Commercial Departments. In making investment
recommendations for the Trust, Trust Department personnel will not inquire or
take into consideration whether the issuer of securities proposed for purchase
or sale for the Trust's account are customers of the Commercial Department. In
dealing with commercial customers, the Commercial Department will not inquire or
take into consideration whether securities of those customers are held by the
Trust.
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<PAGE> 381
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 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, 1997, for the Small Cap Value, Equity Growth
and Equity Income Funds, which are incorporated by reference in this Statement
of Additional Information, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report referred to under "Financial Statements,"
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Trust, is a partner), with offices at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, are counsel to the Trust and will pass upon the legality of
the shares offered hereby.
YIELD AND PERFORMANCE INFORMATION
---------------------------------
The Equity Income Fund's "yield" described in the Prospectus
is calculated by dividing 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
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<PAGE> 382
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 [(------) to the 6th power - 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
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<PAGE> 383
not been declared as a dividend, but is reasonably expected to be and is
declared as a dividend shortly thereafter. For applicable sales charges, see
"How to Purchase and Redeem Shares -- Sales Charges Applicable to Purchases of
Retail Shares" and "Sales Charges Applicable to Purchases of B Shares" in the
Prospectus.
For the 30-day period ended May 31, 1997, the yields of the
Retail and Institutional shares of the Small Cap Value, Equity Growth and Equity
Income Funds were 0.44% and 0.69%, .04% and .31% and 2.29% and 2.61%,
respectively.
Each Fund computes its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested to the ending redeemable
value of such investment by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n (exponent)
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
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<PAGE> 384
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 one year period ended
May 31, 1997 were 18.68% (after taking the sales load into account) and 23.26%
(without taking into account any sales load), for the Small Cap Value Fund's
Retail shares and 23.61% for the Small Cap Value Fund's Institutional shares.
The average annual total returns since the Small Cap Value Fund's commencement
of operations through May 31, 1997 were 18.78% (after taking into account the
sales load) and 20.43% (without taking into account any sales load), for its
Retail shares and 21.37% for the Institutional shares.
The average annual total returns for the one year period
ending May 31, 1997 were 24.41% (after taking the sales load into account) and
29.24% (without taking into account any sales load), for the Equity Growth
Fund's Retail Shares and 29.57% for the Equity Growth Fund's Institutional
shares. The average annual total returns since the Equity Growth Fund's
commencement of operations through May 31, 1997 were 13.48% (after taking into
account the sales load) and 14.06% (without taking into account any sales load),
for its Retail shares and 14.31% for the Institutional shares.
The average annual total returns for the one year period ended
May 31, 1997 were 19.69% (after taking the sales load into account) and 24.33%
(without taking into account any sales load), for the Equity Income Fund's
Retail shares and 24.62% for the Equity Income Fund's Institutional shares. The
average annual total returns since the Equity Income Fund's commencement of
operations through May 31, 1997 were 17.69% (after taking into account the sales
load) and 19.32% (without taking into account any sales load), for its Retail
shares and 19.62% for the Institutional shares.
The Funds may also from time to time include in Materials a
total return figure that is not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for
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<PAGE> 385
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 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 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-
-37-
<PAGE> 386
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 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 November 30, 1997, the following persons owned of
record 5 percent or more of the shares of the Funds of the Trust:
<TABLE>
<CAPTION>
Equity Growth Fund (Institutional)
Outstanding Shares Percentage
------------------ ----------
<S> <C> <C>
National City 3,093,963.821 21.72%
Corporation Non-
Contributory Pension
Plan
1900 East Ninth
Street
Cleveland, OH 44114
International Equity Fund (Institutional)
Outstanding Shares Percentage
------------------ ----------
</TABLE>
-38-
<PAGE> 387
<TABLE>
<S> <C> <C>
National City Non- 6,233,346.634 64.61%
Contributory
Retirement Trust
1900 East Ninth
Street
Cleveland, OH 44114
The Columbus 710,755.54 5.13%
Foundation
1234 East Broad
Street
Columbus, OH 43205-
1463
Small Cap Growth Fund (Institutional)
Outstanding Shares Percentage
------------------ ----------
<S> <C> <C>
National City 1,893,587.275 64.30%
Corporation Non-
Contributory
Retirement Trust
1900 East Ninth
Street
Cleveland, OH 44114
Whayne Supply Co. 1,257,170.42 18.06%
Attn: Ora Nell
Burke
P. O. Box 35900
Louisville, KY
40232
Hanover College 521,534.09 7.49%
Mike Bruce
P.O. Box 108
Hanover, IN 47243-
0108
Core Equity Fund (Institutional)
Outstanding Shares Percentage
------------------ ----------
</TABLE>
-39-
<PAGE> 388
<TABLE>
<S> <C> <C>
National City Non- 10,473,612.686 99.68%
Contributory
Retirement Trust
1900 East Ninth
Street
Cleveland, OH 44114
</TABLE>
-40-
<PAGE> 389
<TABLE>
<CAPTION>
Equity Income Fund (Institutional)
Outstanding Shares Percentage
------------------ ----------
<S> <C> <C>
National City Non- 3,122,233.478 31.88%
Contributory Retirement
Trust
1900 East Ninth Street
Cleveland, OH 44114
Equity Income Fund (Retail)
Outstanding Shares Percentage
------------------ ----------
Wheat First FBO Carroll 5,142.199 11.35%
C. Homas TTEE Alan &
Carroll C. Homans
Declaration of Trust
1190 Sugar Sands Blvd.
Apt. 517
Riviera Beach, FL 33404
The Private Bank & Trust 2,938.011 6.48%
Co. TTEE FBO Seymour
C. Swartz Residual Trust
10 North Dearborn Street
Chicago, IL 60602-4209
James R. Kirk 2,328.065 5.14%
29752 Devonshire Oval
Westlake, OH 44145-3896
Small Cap Value Fund (Retail)
Outstanding Shares Percentage
------------------ ----------
Ann Fairchild Warner 21,443.400 5.02%
Attn: Marie Tardif
C/O State Street Bank and
Trust
P. O. Box 9242
Boston, MA 02114-0042
</TABLE>
-41-
<PAGE> 390
-42-
<PAGE> 391
<TABLE>
<CAPTION>
International Equity Fund (Retail)
Outstanding Shares Percentage
------------------ ----------
<S> <C> <C>
Joseph L. Gnan, Jr. 124.860 31.54%
Jane M. Gnan
1014 Bel Vista Ct.
St. Marys, PA 15857-3072
Mary Jane Matts 102.041 25.78%
425 W. Lakeside Ave.
Apt. 508
Cleveland, OH 44113-1027
SEI Investments Co. 100.000 25.26%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
Cordell G. Lawrence 54.230 13.70%
1615 Two Springs Place
Louisville, Ky 40207-
2377
Small Cap Growth Fund (Retail)
- ------------------------------
Outstanding Shares Percentage
------------------ ----------
Marilyn A. Hayes 538.756 58.08%
John P. Hayes
20807 Sandalwood Lane
Strongsville, OH 44136-
5717
Mary Jane Matts 100.100 10.79%
425 W. Lakeside Ave.
Apt. 508
Cleveland, OH 44113-1027
</TABLE>
-43-
<PAGE> 392
<TABLE>
<CAPTION>
<S> <C> <C>
SEI Investments Co. 100.000 10.78%
Attn: Rob Silvestri
One Freedom Valley Drive
Oaks, PA 19456
Alejandro L. Vallecillo Cust 99.369 10.71%
Talyssa Vallecillo UTMA
32967 Heartwood Avenue
Avon, OH 44011-2761
Cordell G. Lawrence 47.755 5.15%
1615 Two Springs Place
Louisville, KY 40207-2377
Core Equity Fund (Retail)
Outstanding Shares Percentage
------------------ ----------
Wheat First FBO 5,030.757 61.46%
Vincent A. DiGirolamo &
Nancy S. DiGirolamo
2002 Fox Trace Trail
Cuyahoga Falls, OH 44223
Charles W. Edwards, Jr. 2,577.320 31.49%
570 Bennett Way
Florence, AL 35634-2604
</TABLE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements contained in the annual
report for the fiscal year ended May 31, 1997 are hereby incorporated herein by
reference. Copies of the Funds' annual report may be obtained by calling the
Trust at 1-800-622-FUND (3863) or by writing to the Trust, Oaks, Pennsylvania
19456.
-44-
<PAGE> 393
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
A-1
<PAGE> 394
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 "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
A-2
<PAGE> 395
the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" 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:
A-3
<PAGE> 396
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" 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
A-4
<PAGE> 397
adverse changes in economic conditions and circumstances than bonds with higher
ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the 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.
A-5
<PAGE> 398
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
A-6
<PAGE> 399
"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.
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-7
<PAGE> 400
"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 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.
A-8
<PAGE> 401
"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-9
<PAGE> 402
"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
A-10
<PAGE> 403
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.
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.
A-11
<PAGE> 404
APPENDIX B
----------
As stated in the Prospectus, the Small Cap Value, Equity
Growth, Equity Income, Small Cap Growth and International Equity Funds (the
"Funds") may enter into certain futures transactions and options for hedging
purposes. Such transactions are described in this Appendix.
I. Index Futures Contracts
-----------------------
General. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's Ratings Group 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes or indexes based on an industry or market
segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
A Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund may do so either to hedge the value of the Fund as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its Fund holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the Fund will decline prior to the time of sale.
B-1
<PAGE> 405
II. Margin Payments
---------------
Unlike purchases or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with the Custodian an amount of cash or cash equivalents, known as
initial margin, based on the value of the contract. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the 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.
III. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures
by the Funds as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, a Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If
B-2
<PAGE> 406
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 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
B-3
<PAGE> 407
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.
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
B-4
<PAGE> 408
reflect the rising market. A Fund may have to sell securities at
a time when it may be disadvantageous to do so.
IV. Options on Futures Contracts
----------------------------
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Funds will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Funds because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
V. Other Matters
-------------
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
B-5
<PAGE> 409
<TABLE>
<CAPTION>
Armada Funds Equity Series
Statement of Assets and Liabilities
November 30, 1997
(unaudited) Small Cap Growth International Equity Core Equity
--------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments at value (cost $30,267,852, $94,662,344
and $105,141,920, respectively) $31,019,264 $89,773,084 $105,212,559
Interest, dividends, and reclaims receivable 2,059 187,760 157,269
Receivable for Fund shares sold 500 500 0
Receivable for investments sold 13,962 0 161,542
--------------------------------------------------------
TOTAL ASSETS 31,035,785 89,961,344 105,531,370
--------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 35,211 24,433 0
Payable for investments purchased 129,389 908,499 164,797
Accrued expenses 22,979 86,741 85,615
--------------------------------------------------------
TOTAL LIABILITIES 187,579 1,019,673 250,412
--------------------------------------------------------
NET ASSETS $30,848,206 $88,941,671 $105,280,958
========================================================
NET ASSETS CONSIST OF:
Paid-in capital $29,951,503 $95,624,094 $105,147,400
Undistributed net investment income 27,088 209,315 70,796
Undistributed net realized gain/(loss) on
investments sold 118,203 (1,972,586) (7,877)
Accumulated net realized loss on
foreign currency transactions -- (25,805) --
Net unrealized appreciation/(depreciation)
on investments 751,412 (4,889,260) 70,639
Net unrealized depreciation on translation of assets
and liabilities denominated in foreign currencies -- (4,087) --
--------------------------------------------------------
$30,848,206 $88,941,671 $105,280,958
========================================================
Net Assets- Institutional class $30,838,494 $88,938,021 $105,199,042
Shares outstanding- Institutional class 2,944,822 9,647,135 10,507,465
Net asset value, Offering price and Redemption
price per share- Institutional class $10.47 $9.22 $10.01
========================================================
Net Assets- Retail class $9,712 $3,650 $81,916
Shares outstanding- Retail class 928 396 8,186
Net asset value, and Redemption price per
share- Retail class $10.47 $9.22 $10.01
========================================================
Maximum sales load charged- Retail class 3.75% 3.75% 3.75%
Maximum offering price per Retail share $10.88 $9.58 $10.40
========================================================
</TABLE>
See Accompanying Notes
<PAGE> 410
<TABLE>
<CAPTION>
Armada Funds Equity Series
Statement of Operations
For the Four Months Ended November 30, 1997
(unaudited)
Small Cap International Core
Growth Equity Equity
---------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 40,407 $ 401,058 $ 552,890
Interest 70,587 119,694 10,124
Less foreign taxes withheld -- (36,405) --
---------------------------------------------
Total investment income 110,994 484,347 563,014
---------------------------------------------
EXPENSES:
Investment Advisory fees 65,670 210,300 258,295
Administration fees 8,760 28,040 34,439
Registration and filing fees 5,058 19,708 25,001
Transfer Agent fees 4,330 8,971 8,473
12b-1 fees 3,503 11,216 13,776
Custodian fees 1,809 60,480 6,807
Distribution fees 1,379 5,676 7,501
Audit fees 799 2,358 2,474
Legal fees 609 2,432 3,054
Miscellaneous 321 2,978 4,758
Printing and shareholder reports 169 679 855
Trustees' fees 160 641 806
Insurance 95 375 469
Shareholder servicing fees- Retail class only 4 2 28
Fees waived by Investment Adviser -- (50,784) (64,683)
Fees waived by Administrator (8,760) (28,040) (34,439)
---------------------------------------------
Total expenses 83,906 275,032 267,614
---------------------------------------------
NET INVESTMENT INCOME 27,088 209,315 295,400
---------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS
Net realized gain/(loss) on investments sold 118,203 (1,972,586) (7,877)
Net realized loss on foreign currency transactions -- (25,805) --
Net change in unrealized appreciation/(depreciation) on investments 751,412 (4,889,260) 70,639
Net change in unrealized depreciation on translation of assets
and liabilities denominated in foreign currencies -- (4,087) --
---------------------------------------------
Net gain/(loss) on investments 869,615 (6,891,738) 62,762
---------------------------------------------
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $896,703 ($6,682,423) $358,162
=============================================
</TABLE>
See Accompanying Notes
<PAGE> 411
Armada Funds Equity Series
Statement of Changes in Net Assets
For the Four Months Ended November 30, 1997
(unaudited)
<TABLE>
<CAPTION>
International
Small Cap Growth Equity Core Equity
------------------------------------------------
<S> <C> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 27,088 $ 209,315 $ 295,400
Net realized gain/(loss) on investments sold 118,203 (1,972,586) (7,877)
Net realized loss on foreign currency transactions -- (25,805) --
Net change in unrealized appreciation/(depreciation)
on investments 751,412 (4,889,260) 70,639
Net change in unrealized depreciation on translation
of assets and liabilities denominated in foreign
currencies -- (4,087) --
------------------------------------------------
Net increase/(decrease) in net assets resulting from operations 896,703 (6,682,423) 358,162
------------------------------------------------
Distributions to shareholders from net investment income -- -- (224,604)
Increase in net assets derived from capital share 29,951,503 95,624,094 105,147,400
transactions
------------------------------------------------
Total increase in net assets 30,848,206 88,941,671 105,280,958
------------------------------------------------
NET ASSETS:
Beginning of period 0 0 0
End of period $30,848,206 $ 88,941,671 $ 105,280,958
================================================
UNDISTRIBUTED NET INVESTMENT INCOME AS OF
NOVEMBER 30, 1997 $ 27,088 $ 209,315 $ 70,796
================================================
</TABLE>
See Accompanying Notes
<PAGE> 412
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. FUND ORGANIZATION
Armada Funds (the "Trust") is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Trust was organized as a Massachusetts business trust on January
28, 1986. The Trust is a series of twenty-one funds each of which is authorized
to issue two classes of shares designated as Institutional and Retail Shares.
Each share class represents an interest in the same portfolio of investments of
the respective Fund and is substantially the same in all respects, except that
the classes are subject to different shareholder service fees and investment
minimums. In addition, Retail shares are subject to a front-end sales charge,
which may be reduced or waived under certain circumstances.
The Trust currently has four Series in operation that consist of the following
Funds:
MONEY MARKET SERIES Money Market Fund, Government Money Market Fund,
Treasury Money Market Fund, Tax Exempt Money
Market Fund and Pennsylvania Tax Exempt Money Market
Fund;
EQUITY SERIES Small Cap Value Fund, Equity Growth Fund, Equity
Income Fund, Small Cap Growth Fund, International
Equity Fund, Core Equity Fund, and Equity Index Fund;
TAX EXEMPT SERIES Ohio Tax Exempt Fund, Pennsylvania Municipal Fund
and National Tax Exempt Fund;
INCOME SERIES Total Return Advantage Fund, Intermediate Bond Fund,
Enhanced Income Fund, GNMA Fund, Bond Fund and Real
Return Advantage Fund.
As of the date of this report, the National Tax Exempt, Equity Index
and Real Return Advantage Funds have not commenced operations.
The Small Cap Growth, International Equity and Core Equity Funds each
commenced operations on August 1, 1997. Accordingly, the Statements of Assets
and Liabilities, Operations, Changes in Net Assets and Financial Highlights for
each of the Funds is presented as of November 30, 1997 and for the four-month
period then ended.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
by the Small Cap Growth, International Equity and Core Equity Funds (the
"Funds") in preparation of their financial statements.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
PORTFOLIO VALUATION: 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. Short-term investments having
maturities of 60 days or less are generally valued on the basis of amortized
cost.
<PAGE> 413
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
recorded on the trade date. Realized gains and losses on investments sold are
recorded on the identified cost basis. Interest income is accrued on a daily
basis. Dividends are recorded on the ex-dividend date. Expenses common to all of
the Funds in the Trust are allocated among them.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net
investment income of the Core Equity Fund are declared and paid quarterly;
dividends from the net investment income of the Small Cap Growth and
International Equity Funds are declared and paid annually. With respect to each
Fund, net income for dividend purposes consists of dividends, interest income,
and discount earned (including both original issue and market discount), less
amortization of any market premium and accrued expenses. Any net realized
capital gains will be distributed at least annually.
FEDERAL INCOME TAXES: Each of the Funds is classified as a separate
taxable entity for Federal income tax purposes. Each of the Funds intends to
qualify as a separate "regulated investment company" under the Internal Revenue
Code and make the requisite distributions to its shareholders that will be
sufficient to relieve it from Federal income tax and Federal excise tax.
Therefore, no Federal tax provision is required. To the extent distributions
from net investment income and realized net capital gains exceed amounts
reported in the financial statements, such amounts are reported separately.
FOREIGN CURRENCY TRANSLATION: The books and records of International
Equity Fund are maintained in U.S. dollars as follows: (1) the foreign currency
market value of investment securities and other assets and liabilities stated in
foreign currencies are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales and income are translated at the rates
of exchange prevailing on the respective date of such transactions. The
resulting exchange gains and losses are included in the Statement of
Operations. The fund does not generally isolate the effect of fluctuations in
foreign exchange rates from the effect of fluctuations in the market prices of
investments.
FORWARD FOREIGN CURRENCY CONTRACTS: The International Equity Fund
entered into forward foreign currency contracts as hedges against either
specific transactions or portfolio positions. All commitments are
"marked-to-market" daily at the applicable foreign exchange rate and any
resulting unrealized gains or losses are recorded currently. The funds realize
gains or losses at the time forward contracts are extinguished.
REPURCHASE AGREEMENTS: Repurchase agreements are considered loans under
the Investment Company Act of 1940, as amended. In connection therewith, the
Trust's Custodian receives and holds collateral of not less than 102% of the
repurchase price plus accrued interest. If the value of the collateral falls
below this amount, the Trust will require the seller to deposit additional
collateral by the next business day. If the request for additional collateral is
not met or the seller defaults on its repurchase obligation, the Trust maintains
the right to sell the underlying securities at market value and may claim any
resulting loss against the seller.
<PAGE> 414
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENT ADVISERS, DISTRIBUTION FEE AND OTHER RELATED PARTY TRANSACTIONS
Fees paid by the Trust pursuant to the Advisory Agreements with
National City Bank, and National Asset Management Corporation, (collectively,
the "Adviser" or "Advisers"), wholly-owned subsidiaries of National City
Corporation, are payable monthly based on the annual rate of .75% of each Fund's
average daily net assets. The Advisers may from time to time waive their fees
payable by the Fund. For the period ended November 30, 1997, the Advisers have
earned and waived the following fees:
EARNED WAIVED
------- -------
Small Cap Growth Fund $65,670 $ --
International Equity Fund 210,300 50,784
Core Equity Fund 258,295 64,683
At November 30, 1997, advisory fees accrued and unpaid amounted to:
Small Cap Growth Fund $18,648
International Equity Fund 52,549
Core Equity Fund 63,872
Wellington Management Company, LLP (the "Sub Adviser") serves as the
investment sub-adviser to the Small Cap Growth Fund and is entitled to earn a
fee pursuant to such agreement. No such fees are paid to the Sub-Adviser
directly from the Trust.
The Trust maintains a Shareholder Services Plan (the "Services Plan")
with respect to the Retail shares in the Funds. Pursuant to the Services Plan,
the Trust enters into shareholder servicing agreements with certain financial
institutions under which they agree to provide shareholder administrative
services to their customers who beneficially own Retail shares in consideration
for the payment of up to .25% on an annualized basis of the net asset value of
the Retail shares of the Small Cap Growth, International Equity and Core Equity
Funds. For the period ended November 30, 1997, fees paid under the Services Plan
to NatCity Investments, Inc., a wholly-owned subsidiary of National City
Corporation, amounted to:
Small Cap Growth Fund $ 0
International Equity Fund 1
Core Equity Fund 12
National City Bank, serves as the Funds' Custodian. For the period
ended November 30, 1997, National City Bank has earned custodian fees as
follows:
Small Cap Growth Fund $ 1,809
International Equity Fund 60,480
Core Equity Fund 6,807
SEI Investments Distribution Co., a wholly-owned subsidiary of SEI
Investments Company ("SEI" or "Distributor"), serves as the Trust's Distributor.
Each Fund pays a fee to the Distributor for distributing its shares. Under the
Trust's Distribution Agreement and related Distribution Plan adopted pursuant to
Rule 12b-1 under the 1940 Act, the Trust compensates the Distributor for
services provided and expenses assumed in providing advertising, marketing,
prospectus printing and other distribution services up to a maximum of .10% per
annum of the average net assets of each Fund, inclusive of an annual base fee of
$1,250,000, plus incentive fees related to asset growth, which are allocated
among the investment funds with respect to which the Distributor is distributing
shares.
<PAGE> 415
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Each Trustee receives an annual fee of $7,500 plus $2,500 for each
Board meeting attended and reimbursement of out-of-pocket expenses. The Chairman
of the Board receives an additional $2,500 per annum for services in such
capacity. Such fees are paid for services rendered to all of the Funds and are
allocated accordingly. No person who is an officer, director, trustee, or
employee of the Investment Advisers, Distributor, or of any parent or subsidiary
thereof, who serves as an officer, trustee, or employee of the Trust receives
any compensation from the Trust.
Expenses for the period ended November 30, 1997 include legal fees paid
to Drinker Biddle & Reath LLP. A partner of that firm is Secretary of the Trust.
PFPC Inc. ("PFPC") serves as Administrator and Accounting Agent to the
Trust. As compensation for services performed, each Fund pays PFPC an
asset-based fee plus reimbursement of reasonable out-of-pocket expenses. An
officer of PFPC serves as Treasurer to the Trust.
4. PURCHASES AND SALES OF SECURITIES
During the period ended November 30, 1997, purchases and sales of
securities, other than short-term investments or U.S. government obligations,
aggregated:
PURCHASES SALES
- -----------------------------------------------------------------------------
Small Cap Growth Fund $ 30,008,743 $ 1,804,883
International Equity Fund 105,605,807 12,376,558
Core Equity Fund 121,703,940 16,946,221
5. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund had the following open forward currency
contract at November 30, 1997:
<TABLE>
<CAPTION>
SETTLEMENT CONTRACT CONTRACT CURRENT UNREALIZED
CURRENCY DATE AMOUNT RATE RATE GAIN (LOSS)
- -------- ---------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Belgium Francs 12/1/97 $903,836 35.864 36.39002 ($17,728)
</TABLE>
<PAGE> 416
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
6. SHARES OF BENEFICIAL INTEREST
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
of shares and to classify or reclassify any class of shares into one or more
series of shares. Transactions in capital shares are summarized below for the
Funds.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED NOVEMBER 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
1997
- ---- INSTITUTIONAL CLASS RETAIL CLASS
- ----------------------------------------------------------------------------------------------------------------------
SHARES VALUE SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SMALL CAP GROWTH FUND
Shares sold 2,976,326 $ 30,277,816 928 $ 9,787
Shares reinvested -- -- -- --
Shares repurchased (31,504) (336,100) -- --
---------- ------------ ----- --------
Net increase 2,944,822 $ 29,941,716 928 $ 9,787
========== ============ ===== ========
INTERNATIONAL EQUITY FUND
Shares sold 9,696,682 $ 96,109,264 396 $ 3,887
Shares reinvested -- -- -- --
Shares repurchased (49,547) (489,057) -- --
---------- ------------ ----- --------
Net increase 9,647,135 $ 95,620,207 396 $ 3,887
========== ============ ===== ========
CORE EQUITY FUND
Shares sold 10,485,517 $104,848,724 8,174 $80,721
Shares reinvested 22,547 223,668 12 117
Shares repurchased (599) (5,830) -- --
---------- ------------ ----- --------
Net increase 10,507,465 $105,066,562 8,186 $ 80,838
========== ============ ===== ========
</TABLE>
<PAGE> 417
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
7. RESULTS OF PROXY VOTING
A special meeting of the Shareholders of the Funds was held on November 19,
1997. The unaudited results of votes taken among shareholders on the following
proposal are listed below:
Proposal 6.
- -----------
Election of Trustees for all Armada Funds - Institutional and Retail.
<TABLE>
<CAPTION>
SHARES PERCENT SHARES PERCENT OF
VOTED FOR VOTED WITHHELD VOTE WITHHELD
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert D. Neary 2,947,760,879 92.529% 237,992,446 7.471%
Leigh Carter 2,968,618,039 93.184% 217,135,286 6.816%
John F. Durkott 2,969,331,887 93.207% 216,421,437 6.793%
Robert J. Farling 2,968,613,274 93.184% 217,140,051 6.616%
Richard W. Furst 2,969,331,887 93.207% 216,421,437 6.793%
Gerald L. Gherlein 2,969,331,887 93.207% 216,421,437 6.793%
Herbert R. Martens, Jr. 2,969,331,887 93.207% 216,421,437 6.793%
J. William Pullen 2,969,331,887 93.207% 216,421,437 6.793%
</TABLE>
<PAGE> 418
<TABLE>
Portfolio of Investments
International Equity Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
COMMON STOCK--94.3%
AUSTRALIA--3.2%
National Australia Bank-ADR 20,300 $1,353,756
News Limited - ADR 35,200 763,400
Santos, Limited 174,200 721,125
----------
2,838,281
----------
AUSTRIA--0.8%
Mayr Melnhof Karton AG 12,900 722,202
----------
BELGIUM--1.6%
Fortis AG 4,500 895,300
Lernout & Hauspie Speech Products NV -ADR ** 10,300 493,434
----------
1,388,734
----------
BERMUDA--0.9%
Exel Limited -ADR 13,400 824,100
----------
DENMARK--1.0%
Unidanmark 13,300 938,917
----------
FINLAND--1.9%
Cultor Oy 9,750 513,920
Nokia Corp. - ADR 14,000 1,163,750
----------
1,677,670
----------
FRANCE--7.4%
Alcatel Alsthom - ADR 26,800 663,300
Coflexip-ADR ** 12,000 597,750
Compagnie de Saint Gobain 2,750 373,593
Compagnie Generale de Geophysique SA ** 3,500 379,437
L'Oreal 1,050 401,966
LVMH Moet Hennesey - ADR 8,200 284,437
Pinault - Printemps Redoute SA 950 485,984
Rhone Poulenc Limited, - ADR 17,500 785,313
Societe Generale 4,850 637,521
Suez Lyonnaise des Eaux 8,400 903,533
Total Petroleum of North America -ADR 14,300 751,644
Valeo SA 5,650 373,637
----------
6,638,115
----------
</TABLE>
See Accompanying Notes
<PAGE> 419
<TABLE>
Portfolio of Investments
International Equity Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
GERMANY--7.8%
Allianz AG 3,500 $ 827,461
BASF AG 15,600 551,448
Bayerische Vereinsbank AG 19,350 1,148,606
Buderus AG 1,600 771,956
Mannesmann AG 1,950 905,444
SAP AG 1,950 568,252
Siemens AG 10,750 636,895
Veba AG 17,850 1,057,542
Volkswagen AG 1,000 567,515
----------
7,035,119
----------
HONG KONG--1.9%
Cheung Kong Holdings Limited 101,000 712,069
Citic Pacific Limited 91,000 362,574
Hong Kong & China Gas Co. Limited 194,000 348,836
Hutchison Whampoa Limited 44,000 293,133
----------
1,716,612
----------
IRELAND--1.2%
Bank of Ireland -GDR 47,000 633,883
CBT Group PLC -ADR ** 5,900 417,794
----------
1,051,677
----------
ITALY--2.8%
Istituto Mobiliare Italiano SpA 101,800 1,063,331
Telecom Italia Spa - ADR 23,000 1,428,875
----------
2,492,206
----------
JAPAN--18.0%
Bank of Tokyo -Mitsubishi - ADR 64,900 941,050
Bridgestone Corporation 51,000 1,106,915
Canon Incorporated 36,000 868,795
Daiwa House Industry Co. Limited 43,000 347,032
Ito Yokado Co. Limited 15,000 676,983
Kyocera Corporation 12,000 579,197
Mitsubishi Corporation 88,000 686,762
Mitsubishi Materials Corporation 222,000 500,968
Nippon Electric Corp. 75,000 793,340
Nissin Food Products Co. Limited 19,000 425,779
NTT Data Communications Systems Co. 200 971,596
Promise Co., Ltd. 10,000 552,400
</TABLE>
See Accompanying Notes
<PAGE> 420
<TABLE>
Portfolio of Investments
International Equity Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
JAPAN-CONTINUED
SMC Corp. 10,000 $ 885,406
Sony Corp. 13,000 1,110,284
Sumitomo Metal Industries ** 276,000 562,272
Sumitomo Sitix 39,000 678,394
Takara Smuzo 133,000 561,700
Takeda Chemical Industries 38,000 1,110,597
Tokio Marine & Fire Insurance Company 43,000 407,679
Tokuyama Soda Co. Y50 166,000 578,805
Tokyo Electron, Limited 12,000 459,785
Toshiba Ceramics Co. 47,000 200,705
Toyota Motor Corp. - ADR 14,500 831,031
Yamaha Corporation 22,000 308,560
-----------
16,146,035
-----------
NETHERLANDS--6.5%
Aegon NV - ADR 11,300 960,500
AKZO NV - ADR 4,600 403,650
Ing Groep NV 15,700 638,125
Koninklijke Ahold NV - ADR 24,600 651,900
Royal Dutch Petroleum Co. 21,600 1,138,050
Royal PTT Nederland NV 12,900 517,830
Unilever NV -ADR 26,000 1,509,625
-----------
5,819,680
-----------
NORWAY--1.3%
Norsk Hydro 14,800 762,455
Smedvig 14,600 389,779
-----------
1,152,234
-----------
SPAIN--4.3%
Banco Bilbao Vizcaya -ADR 44,400 1,326,450
Endesa -Sponsored ADR 62,000 1,162,500
Telefonica De Espania -ADR 16,100 1,392,650
-----------
3,881,600
-----------
SWEDEN--3.9%
Ericsson, (L.M.) Telephone Co.-ADR 38,800 1,567,763
Svenska Cellulosa Ab - A 22,900 513,108
Svenska Handelsbanken - A 16,000 563,659
Volvo AB-B 32,500 867,118
-----------
3,511,648
-----------
</TABLE>
See Accompanying Notes
<PAGE> 421
<TABLE>
Portfolio of Investments
International Equity Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
SWITZERLAND--7.8%
Credit Suisse Group 7,900 $ 1,155,335
Nestle SA 800 1,177,255
Novartis AG 1,600 2,556,516
Roche Holding AG 90 805,505
Schweizerische Rueckversicherungs - Gesellschaft 800 1,306,876
------------
7,001,487
------------
UNITED KINGDOM--22.0%
Abbey National Plc 61,100 972,799
BOC Group Plc 37,800 601,830
British American Tobacco Industries Plc - ADR 68,700 1,249,481
British Petroleum Co. Plc Sponsored ADR 15,300 1,269,900
British Steel Plc -ADR 23,700 568,800
Cable & Wireless Plc 66,000 598,241
Carlton Communications Plc 80,600 615,832
General Electric Company Plc 150,000 974,239
Glaxo Wellcome Plc -ADR 30,300 1,384,331
Grand Metropolitan Plc - ADR 31,500 1,173,375
HSBC Holdings Plc -GDR 25,400 612,797
Marks & Spencer Plc 101,700 1,043,490
National Grid Group Plc 191,400 948,068
Pearson Plc 59,800 831,199
Royal & Sun Alliance Insurance Group Plc 147,700 1,326,349
Siebe Plc 56,300 1,021,584
SmithKline Beecham -ADR 34,400 1,707,100
Tesco Plc 139,800 1,127,039
Tomkins Plc -ADR 84,700 1,752,231
-----------
19,778,685
-----------
TOTAL COMMON STOCK 84,615,002
(Cost $89,308,170) -----------
PREFERRED STOCK--0.3%
GERMANY--0.3%
SAP AG 900 277,068
(Cost $269,744) -----------
</TABLE>
See Accompanying Notes
<PAGE> 422
<TABLE>
Portfolio of Investments
International Equity Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
INVESTMENT COMPANIES--1.6%
Schroder Asian Growth Fund (Closed-End) 75,000 $ 618,750
Scudder Latin America Fund 32,595 856,584
-----------
TOTAL INVESTMENT COMPANIES 1,475,334
(Cost $1,678,750) -----------
TEMPORARY INVESTMENT--3.8%
Goldman Sachs Financial Square Premium 3,405,680 3,405,680
(Cost $3,405,680) -----------
TOTAL INVESTMENTS--100.0% $89,773,084
(Cost $94,662,344*) ===========
- -----------
* Also cost for Federal income tax purposes
The gross unrealized appreciation (depreciation)
for federal income tax purposes is as follows:
Gross appreciation $ 2,536,086
Gross depreciation (7,425,346)
------------
($4,889,260)
------------
** Non-income producing
ADR- American Depository Receipt
GDR- Global Depository Receipt
</TABLE>
See Accompanying Notes
<PAGE> 423
Portfolio of Investments
Core Equity Fund
November 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
------ ----------
<S> <C> <C>
COMMON STOCK--98.3%
ADVERTISING--4.2%
Interpublic Group of Co's., Inc. 39,085 $1,873,637
Omnicom Group, Inc. 33,700 2,498,012
----------
4,371,649
----------
BANKING--5.8%
Banc One Corp. 22,900 1,176,487
Chase Manhattan Corp. 12,930 1,404,521
Commerce Bancshares, Inc. 26,116 1,622,432
First Union Corp. 38,000 1,852,500
----------
6,055,940
----------
BUILDING & BUILDING SUPPLIES--1.0%
Sherwin Williams Co. 38,050 1,086,803
----------
BUSINESS SERVICES--5.1%
Automatic Data Processing, Inc. 24,760 1,392,750
Cintas Corp. 40,700 1,589,844
Computer Sciences Corp.** 29,970 2,373,249
----------
5,355,843
----------
CHEMICALS--3.9%
Dow Chemical Co. 15,700 1,550,375
E.I. DuPont de Nemours & Co. 21,150 1,280,897
Eastman Chemical Co. 21,160 1,277,535
----------
4,108,807
----------
CONSUMER STAPLES--2.8%
Procter & Gamble Co. 37,840 2,887,665
----------
DIVERSIFIED--2.5%
General Electric Co. 35,930 2,649,837
----------
ELECTRICAL EQUIPMENT--3.0%
Emerson Electric Co. 31,792 1,748,560
Hubbell, Inc. 31,696 1,440,187
----------
3,188,747
----------
</TABLE>
See Accompanying Notes
<PAGE> 424
Portfolio of Investments
Core Equity Fund
November 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
------ -----------
<S> <C> <C>
FINANCIAL SERVICES--2.4%
Federal National Mortgage Association 47,870 $ 2,528,134
-----------
FOODS--3.4%
Conagra, Inc. 61,740 2,218,781
Sara Lee Corp. 25,200 1,332,450
-----------
3,551,231
-----------
HOME FURNISHINGS & HOUSEWARES--1.9%
Newell Co. 49,570 2,023,076
-----------
INSURANCE--9.8%
Aflac, Inc.** 3,620 166,973
American International Group, Inc. 27,330 2,755,206
MBIA, Inc. 16,540 1,039,953
PMI Group, Inc. 41,610 2,704,650
The Chubb Corp. 28,540 2,024,556
Travelers Group, Inc. 32,910 1,661,955
-----------
10,353,293
-----------
MEDICAL & MEDICAL SERVICES--1.2%
United Healthcare Corp. 24,200 1,259,913
-----------
MEDICAL INSTITUTION SUPPLIES--2.2%
Boston Scientific Corp.** 15,910 718,933
Medtronic, Inc. 34,250 1,635,438
-----------
2,354,371
-----------
OFFICE & BUSINESS EQUIPMENT--1.0%
Pitney Bowes, Inc. 12,950 1,088,609
-----------
OIL & GAS--6.6%
Amoco Corp. 15,320 1,378,800
Exxon Corp. 25,890 1,579,290
Mobil Corp. 26,180 1,883,324
Texaco Inc. 36,820 2,080,330
-----------
6,921,744
-----------
PAPER & FOREST PRODUCTS--1.4%
Georgia Pacific Corp. 17,800 1,519,675
-----------
</TABLE>
See Accompanying Notes
<PAGE> 425
Portfolio of Investments
Core Equity Fund
November 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
------ -----------
<S> <C> <C>
PHARMACEUTICAL--12.8%
Abbott Laboratories 40,030 $ 2,601,950
American Home Products Corp. 21,620 1,510,697
Bristol-Myers Squibb Co. 27,420 2,567,197
Johnson & Johnson 4,160 261,820
Merck & Co., Inc. 34,370 3,250,113
Pfizer, Inc. 20,630 1,500,833
Schering Plough Corp. 27,500 1,723,906
-----------
13,416,516
-----------
RAILROADS--1.3%
CSX Corp. 26,520 1,387,328
-----------
RESIDENTIAL CONSTRUCTION--1.2%
Centex Corp. 11,730 743,389
Pulte Corp. 12,960 525,690
-----------
1,269,079
-----------
RETAIL STORES--2.8%
Home Depot, Inc. 30,390 1,699,941
Wal-Mart Stores, Inc. 30,980 1,237,264
-----------
2,937,205
-----------
SPECIALTY CHEMICALS--0.5%
Sigma Aldrich Corp. 26,230 473,779
-----------
STEEL--2.1%
Worthington Industries, Inc. 62,190 2,231,066
-----------
TECHNOLOGY--12.5%
Altera Corp.** 19,780 927,188
Applied Materials, Inc.** 30,090 992,030
Cisco Systems, Inc.** 28,020 2,415,849
Intel Corp. 24,740 1,921,216
Lam Research Corp.** 26,110 797,987
Linear Technology Corp. 21,140 1,359,566
Maxim Integrated Products, Inc.** 16,940 1,170,448
Microsoft Corp.** 15,100 2,136,178
Teradyne, Inc.** 41,920 1,375,500
-----------
13,095,962
-----------
</TABLE>
See Accompanying Notes
<PAGE> 426
Portfolio of Investments
Core Equity Fund
November 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
------ ----------
<S> <C> <C>
TELECOMMUNICATIONS--0.9%
Lucent Technologies, Inc. 11,904 $ 953,808
----------
TOBACCO--2.6%
Philip Morris Co., Inc. 61,820 2,689,170
----------
UTILITIES-ELECTRIC--1.3%
Allegheny Energy Inc. 31,710 961,209
Wisconsin Energy Corp. 16,565 447,255
----------
1,408,464
----------
UTILITIES-TELEPHONE--2.1%
Ameritech Corp. 14,130 1,088,893
BellSouth Corp. 21,220 1,161,795
----------
2,250,688
----------
TOTAL COMMON STOCK 103,418,402
(Cost $103,524,673) -----------
<CAPTION>
Maturity Par (000)
---------------------
<S> <C> <C>
CONVERTIBLE BOND--1.3%
Automatic Data Processing, Inc.
0.00% 02/20/02 $1,910 1,411,013
(Cost $1,234,103) ---------
</TABLE>
See Accompanying Notes
<PAGE> 427
Portfolio of Investments
Core Equity Fund
November 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
------ ------------
<S> <C> <C>
TEMPORARY INVESTMENT--0.4%
Goldman Financial Square Premium 383,144 $ 383,144
(Cost $383,144) ------------
TOTAL INVESTMENTS--100.0% $105,212,559
============
(Cost $105,141,920*)
* Cost for federal income tax purposes - $105,292,691
The gross unrealized appreciation (depreciation) for federal income tax
purposes is as follows:
Gross appreciation $4,366,096
Gross depreciation (4,446,228)
------------
($80,132)
------------
</TABLE>
** Non-income producing
See Accompanying Notes
<PAGE> 428
<TABLE>
Portfolio of Investments
Small Cap Growth Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
COMMON STOCK--93.7%
ADVERTISING--1.9%
ADVO, Inc. ** 27,000 $ 587,250
----------
BANKS--8.6%
Associated Banc-Corp 15,000 748,125
First Commercial Corporation 12,000 618,000
Mercantile Bankshares Corp. 16,000 544,000
Wilmington Trust Corp. 13,000 758,875
----------
2,669,000
----------
BEVERAGES--1.6%
Beringer Wine Estates ** 15,000 484,687
----------
BUSINESS SERVICES--26.8%
American Management Systems, Inc. ** 42,000 977,812
BGS Systems, Inc. 14,800 493,025
Bisys Group, Inc. ** 20,000 636,250
Cognos Inc. ** 27,000 477,562
Dames & Moore, Inc. 35,000 433,125
DST Systems, Inc. ** 14,000 518,875
G. & K. Services, Inc. 25,000 928,125
Metromail Corp. ** 22,000 393,250
Shared Medical Systems Corp. 17,000 1,088,000
Sterling Software, Inc. ** 20,000 732,500
Synopsys, Inc. ** 16,000 659,000
Systems & Computer Technology Corp. ** 7,400 345,025
Tetra Tech, Inc. ** 25,000 643,750
----------
8,326,299
----------
COMPUTERS--2.1%
Policy Management Systems ** 10,000 646,250
----------
ELECTRICAL EQUIPMENT--8.4%
Dallas Semiconductor Corp. 20,000 977,500
Littelfuse, Inc. ** 20,000 550,000
Silicon Valley Group, Inc. ** 33,000 786,844
UCAR International, Inc. ** 7,000 279,562
----------
2,593,906
----------
</TABLE>
See Accompanying Notes
<PAGE> 429
<TABLE>
Portfolio of Investments
Small Cap Growth Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
ENTERTAINMENT--2.0%
Speedway Motorsports, Inc. ** 28,800 $ 637,200
----------
HOME FURNISHINGS/HOUSEWARES--0.8%
Ethan Allen Interiors, Inc. 6,800 261,800
----------
INSURANCE - LIFE--2.1%
Reinsurance Group of America 15,250 650,984
----------
INSURANCE - PROPERTY AND CASUALTY--2.9%
Frontier Insurance Group, Inc. 37,000 890,313
----------
MACHINERY & HEAVY EQUIPMENT--1.8%
Nordson Corp. 11,000 573,375
----------
MACHINERY (ELECTRIC)--4.2%
Donaldson, Inc. 11,000 528,000
Ionics, Inc. ** 21,000 774,375
----------
1,302,375
----------
MACHINERY & MANUFACTURING--1.6%
Paxar Corp. ** 33,750 506,250
----------
MEDICAL & MEDICAL SERVICES--5.9%
Covance, Inc . ** 41,000 743,125
Datascope Corp. ** 15,000 380,625
Life Technologies, Inc. 23,000 694,313
-----------
1,818,063
-----------
MEDICAL INSTITUTION SUPPLIES--0.9%
Biomet, Inc. ** 11,700 278,972
-----------
OIL & GAS--0.8%
Barrett Resources Corp. ** 9,000 266,625
-----------
PHARMACEUTICAL--1.5%
Genzyme Corp. ** 17,000 456,344
-----------
PHOTO-EQUIPMENT & SUPPLIES--1.7%
X-Rite Inc. 28,000 539,000
-----------
</TABLE>
See Accompanying Notes
<PAGE> 430
<TABLE>
Portfolio of Investments
Small Cap Growth Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
---------- -----------
<S> <C> <C>
RESIDENTIAL CONSTRUCTION--2.8%
U.S. Rentals, Inc. ** 33,500 $ 860,531
-----------
RETAIL STORES--5.9%
Arbor Drugs, Inc. 26,000 702,813
Barnes & Noble, Inc. ** 18,000 556,875
OfficeMax, Inc. ** 40,000 562,500
-----------
1,822,188
-----------
SPECIALTY CHEMICALS--4.6%
Bush Boake Allen, Inc. ** 18,200 511,875
Minerals Technologies, Inc. 21,000 918,750
-----------
1,430,625
-----------
TELECOMMUNICATIONS--1.1%
Andrew Corp. ** 13,000 344,094
-----------
TRANSPORTATION--2.0%
Air Express International Corp. 21,000 608,344
-----------
TRUCKING--1.7%
Werner Enterprises, Inc. 24,000 519,000
-----------
-----------
TOTAL COMMON STOCK 29,073,475
-----------
(Cost $28,322,063)
Maturity Par (000)
--------------------------------------
REPURCHASE AGREEMENT--6.3%
J P Morgan & Co. Inc.:
5.67%..........................12/01/97 $1,945 1,945,000
(Agreement dated 11/28/97 to be repurchased at ----------
$1,945,919 on 12/01/97, collateralized by $1,525,000
U.S.Treasury Notes, 11.875% due 11/15/03. The
market value of the collateral is $1,976,305.)
(Cost $1,945,000)
</TABLE>
See Accompanying Notes
<PAGE> 431
<TABLE>
Portfolio of Investments
Small Cap Growth Fund
November 30, 1997
(Unaudited)
Number of
Shares Value
------------------------
<S> <C> <C>
TEMPORARY INVESTMENT--0.0%
Goldman Sachs Financial Square Premium 789 $789
(Cost $789) -----------
TOTAL INVESTMENTS--100.0% $31,019,264
(Cost $30,267,852*) ===========
* Also cost for Federal income tax purposes
The gross unrealized appreciation (depreciation) for
Federal income tax purposes is as follows:
Gross appreciation ............... $1,998,407
Gross depreciation ............... (1,246,995)
----------
$751,412
----------
** Non-income producing
</TABLE>
See Accompanying Notes
