SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Post-Effective Amendment No. 16 X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 18 X
WILLIAM PENN INTEREST INCOME FUND FILE NO. 14609
(Exact Name if registrant as specified in charter)
2650 Westview drive, Wyomissing, PA 19610
(Address of principal executive offices)
610.670.1031
(Registrant's telephone number)
Dennis J. Westley, 2650 Westview Drive, Wyomissing, PA 19610
(name and address of agent for service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragaph
(b) of rule 485
CROSS REFERENCE SHEET
N-1A Item No. Location
Part A
Item 1 Cover Page Cover Page
Item 2 Synopsis Prospectus Summary
Item 3 Condensed Financial Information Financial Highlights
Item 4 General Description of Registrant Fund Organization,
Investment
Objectives
Item 5 Management of the Fund Mangement of the
Fund
Item 6 Capital Stock & Other Securities Fund Organization
Item 7 Purchase of Securities Being How to Buy Shares
Offered
Item 8 Redemption or Repurchase How to Redeem Shares
How to Transfer
Shares
Item 9 Pending Legal Proceedings General Information
PART B
Item 10 Cover Page Cover Page
Item 11 Table of Contents Table of Contents
Item 12 General Information and History General Information
Item 13 Investment Objectives & Policies Investment
Objectives
And Policies
Item 14 Management of the Fund Management of the
Fund,
Item 15 Control Persons and Principal
Holders of Securities Not applicable
Item 16 Investment Adivsory and Other Investment Advisor,
Sub-
Services Advisor, Transfer
Agent
Item 17 Brokerage Allocation Portfolio
Transactions
Item 18 Capital Stock & Other Securities General Information
Item 19 Purchase, Redemption and Pricing Additional Purchase
of Securities being Offered and Redemption
Information
Item 20 Tax Status Additional
Information
Concerning taxes
Item 21 Underwriters Distributor
Item 22 Calculation of Performance Data Yield and Total
Return
Calculations
Item 23 Financial Statements Independent Auditors
and
Financial Statements
WILLIAM PENN INTEREST INCOME FUND
Prospectus
The WILLIAM PENN INTEREST INCOME FUND (the "Fund") is
an open-end, diversified management investment company,
organized under Pennsylvania law as a common law trust.
Currently, the Fund consists of five portfolios (the
"Portfolios"), each of which represents a separate
mutual fund with its own distinct investment objective
and policies. The securities offered hereby are shares
of beneficial interest in the Portfolios.
U.S. GOVERNMENT SECURITIES INCOME PORTFOLIO seeks to
provide a high level of current income from investments
in obligations of the U.S. Government and its agencies
and instrumentalities, consistent with the preservation
of capital and the maintenance of liquidity.
QUALITY INCOME PORTFOLIO seeks to provide the highest
level of current income available from investment grade
corporate bonds and other fixed-income securities,
consistent with the preservation of capital and the
maintenance of liquidity. All of the investments in
this Portfolio will be in rated securities, and at
least 70% will have one of the three highest grades
assigned by Standard & Poor's Corporation or Moody's
Investors Services, Inc.
NEW YORK TAX-FREE INCOME PORTFOLIO seeks to provide a
high level of current income exempt from both Federal
income taxes and New York state and city income taxes,
without assuming any undue risk to income or principal.
In pursuing this objective, the Portfolio will invest
principally in investment grade New York state and
municipal obligations with varying terms of maturity.
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO seeks to provide
a high level of current income exempt from both Federal
income taxes and Pennsylvania income and personal
property taxes, without assuming any undue risk to
income or principal. In pursuing this objective, the
Portfolio will invest principally in investment grade
Pennsylvania municipal obligations with varying terms
of maturity.
MONEY MARKET INCOME PORTFOLIO seeks to maximize current
income available from investments in a variety of
specific short-term instruments, consistent with the
preservation of capital and the maintenance of
liquidity. All investments of the Portfolio will have a
maturity of one year or less, and the average maturity
of this Portfolio will be 90 days or less. THIS
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE IS NO ASSURANCE THE PORTFOLIO WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
This Prospectus is designed to set forth concisely the
information that you should know before you invest, and
should be retained for future reference. A "Statement
of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. The Statement is
dated March 15, 1996, and has been incorporated by
reference into this Prospectus. A copy of the Statement
may be obtained, without charge, by writing to the
Fund, or by calling the Shareholder Services
Department.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS ANY COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Fund Expenses
The following tables illustrate all expenses and fees
that a shareholder of the respective Portfolios will
incur and is intended to assist you in understanding
the various costs and expenses that an investor in The
Fund will bear directly or indirectly.
ClassClass
ShareholderMoneyAC
Transaction ExpensesMarketSharesShares
Maximum Sales Charge
Imposed on PurchasersNone4.75%None
Sales Charge Imposed on
Reinvested DividendsNoneNoneNone
Deferred Sales ChargeNoneNone1.0%(1)
Redemption FeeNoneNoneNone
Exchange FeeNoneNoneNone
(1) Only if shares are redeemed within 12 months or
purchase. See "How to Buy Shares."
The following table shows the actual expenses the
respective Portfolios incurred in the last fiscal year,
as a percentage of average net assets. Class C and New
York Tax-Free shares were not publically offered the
entire prior fiscal year but assumptions are made below
as if they had been outstanding the entire year.
Annual Fund Operating Expenses After
Reimbursements/Waivers*
Class A and Class CManagement12b-1OtherTotal Operating
Interest Income PortfoliosFeesFeesExpensesExpenses
U.S. Government Securities A0.65%0.07%0.28%1.00%
U.S. Government Securities C0.65%1.00%0.28%1.93%
Quality Income A0.50%None0.28%0.78%
Quality Income C0.50%1.00%0.28%1.78%
New York Tax-Free Income A0.65%0.20%0.10%0.95%
New York Tax-Free Income C0.65%1.00%0.10%1.75%
Pennsylvania Tax-Free Income A0.57%None0.28%0.85%
Pennsylvania Tax-Free Income C0.57%1.00%0.28%1.85%
Money Market0.34%None0.31%0.65%
Example
The following example illustrates the expenses that a
shareholder would pay on a $1,000 investment after one
year and over a period of three, five and ten years
utilizing the actual expenses from the last fiscal year
and assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period.
Class A and Class C
Interest Income Portfolios1 Year3 Years5 Years10 Years
U.S. Government Securities A$ 57$ 78$ 100$ 164
U.S. Government Securities C 20 61 104 225
Quality Income A 55 71 89 140
Quality Income C 18 56 96 209
New York Tax-Free Income A 57 76new issuenew
issue
New York Tax-Free Income C 18 55new issuenew
issue
Pennsylvania Tax-Free Income A 56 73 92
147
Pennsylvania Tax-Free Income C 19 58 100
217
Money Market 7 21 36 81
This example should not be considered a representation
of past or future expenses. Actual expenses may be
greater or less than those shown.
*Penn Square Management Corporation, the Advisor and
Distributor of the Fund, reimbursed/waived a portion of
the expenses/fees for the Money Market Income, the
Pennsylvania Tax-Free Income, the Quality Income and
the U.S. Government Securities Income Portfolios,
respectively. If there had not been any waiver or
reimbursement, the total operating expenses, as a
percentage of average net assets, of each of the
Portfolios in 1995 would have been 1.14% for the Money
Market, 1.30% for the Pennsylvania Tax-Free, 1.29% for
the Quality Income, and 1.29% for the U.S. Government
Securities.
Financial Highlights
The following information has been audited by Ernst &
Young LLP, independent auditors, whose unqualified
opinion thereon is included in the Fund's Annual Report
to shareholders for the year ended December 31, 1995
and is incorporated by reference into the Statement of
Additional Information. The following information
should be read in conjunction with the other financial
statements and notes thereto included in the Annual
Report. Additional information about the Fund's
performance is contained in the Annual Report which may
be obtained without charge from the Fund.
For a share outstanding throughout the indicated
period.
November 15, 1995 (commencement of operations)
to December 31, 1995
Class C*
U.S.
GovernmentPennsylvania
SecuritiesQualityTax-Free
IncomeIncomeIncome
Net Asset Value: Beginning of period$10.65$10.47$11.22
Investment Operations:
Net investment income0.0660.0820.064
Net realized and unrealized gain (loss) on
investments0.1500.1200.130
Total from Investment
Operations0.2160.2020.194
Distributions:
Dividends from net investment
income(0.066)(0.082)(0.064)
Distributions from net realized gains on
investments-0--0-(0.040)
Total Distributions(0.066)(0.082)(0.104)
Net Asset Value: End of period$10.80$10.59$11.31
Total Return: (excluding sales
charge)n/a(b)n/a(b)n/a(b)
Ratios:
Ratio of expenses to average net
assetsn/a(b)n/a(b)n/a(b)
Ratio of net investment income to average net
assetsn/a(b)n/a(b)n/a(b)
Portfolio turnover rate (a)227.8%239.2%10.0%
Number of shares outstanding at end of period
(000)22415
*Effective November 15, 1995, the Fund commenced
offering Class C shares. All capital shares issued and
outstanding as of November 15, 1995 were classified as
Class A shares.
(a) Portfolio turnover is calculated on the basis of
the Fund as a whole without distinguishing between the
classes of shares issued.
(b) Ratios not meaningful due to short period of
operation of Class C shares.
Financial Highlights
For the years ended December 31, 1995, 1994, 1993,
1992, 1991, 1990, 1989, 1988, and from October 12, 1987
to
December 31, 1987 (Commencement of Operations).
U.S. Government Securities Income Portfolio Class A
For a share outstanding throughout the year.
1995 1994 1993 1992 1991 1990
198919881987
Net Asset Value: Beginning of
year$9.64$10.79$10.50$10.57$10.28$10.25$9.90$10.07$10.0
0
Investment Operations:
Net investment
income0.6600.7460.8600.9070.9490.8540.8350.7940.128
Net realized and unrealized gain (loss)
on
investments1.160(1.150)0.310(0.070)0.2900.0300.540(0.14
0)0.070
Total from Investment
Operations1.820(0.404)1.1700.8371.2390.8841.3750.6540.1
98
Distributions:
Dividends from net investment
income(0.660)(0.746)(0.860)(0.907)(0.949)(0.854)(0.835)
(0.794)(0.128)
Distributions from net realized gains
on investments-0--0-(0.020)-0--0--0-(0.190)(0.030)-0-
Total
Distributions(0.660)(0.746)(0.880)(0.907)(0.949)(0.854)
(1.025)(0.824)(0.128)
Net Asset Value: End of
year$10.80$9.64$10.79$10.50$10.57$10.28$10.25$9.90$10.0
7
Total Return: (excluding sales
charge)19.4%(3.8%)11.4%8.4%12.7%9.0%14.1%6.3%2.0%
Ratios:
Ratio of expenses to average net
assets1.00%1.00%1.00%1.05%0.71%-0--0--0-0.42%
Ratio of net investment income to average
net
assets6.40%7.36%7.84%8.60%10.10%8.22%8.12%7.89%5.57%
Portfolio turnover
rate227.8%122.6%111.9%41.9%84.4%212.3%274.2%22.2%-0-
Number of shares outstanding at end of
period (thousands)4,4174,5534,6513,6062,32323111812826
Quality Income Portfolio Class A
For a share outstanding throughout the year.
1995 1994 1993 1992 1991 1990
1989 1988 1987
Net Asset Value: Beginning of
year$9.52$10.70$10.55$10.55$9.66$9.75$9.83$10.08$10.00
Investment Operations:
Net investment
income.6860.7390.9160.8170.8250.8350.8800.8830.135
Net realized and unrealized gain (loss)
on
investments1.07(1.170)0.410-0-0.890(0.090)0.120(0.211)0
.080
Total from Investment
Operations1.756(0.431)1.3260.8171.7150.7451.0000.6720.2
15
Distributions:
Dividends from net investment
income(0.686)(0.739)(0.916)(0.817)(0.825)(0.835)(0.880)
(0.883)(0.135)
Distributions from net realized gains
on
investments-0-(0.009)(0.260)-0--0--0-(0.200)(0.039)-0-
Total
Distributions(0.686)(0.748)(1.176)(0.817)(0.825)(0.835)
(1.080)(0.922)(0.135)
Net Asset Value: End of
year$10.59$9.52$10.70$10.55$10.55$9.66$9.75$9.83$10.08
Total Return: (excluding sales
charge)19.1%(4.2%)12.9%8.2%19.0%7.9%10.1%6.6%2.2%
Ratios:
Ratio of expenses to average net
assets0.78%0.38%0.45%0.31%0.10%0.05%-0-0.03%0.28%
Ratio of net investment income to average
net assets6.77%7.30%8.32%7.88%8.24%8.84%8.86%8.82%6.45%
Portfolio turnover
rate239.2%163.8%337.6%316.6%189.6%170.1%252.4%142.1%-0-
Number of shares outstanding at end
of period (thousands)2,8012,8372,5351,47233925615412728
Financial Highlights
For the years ended December 31, 1995, 1994, 1993,
1992, 1991, 1990, 1989,1988, and from October 12, 1987
to December 31, 1987 (Commencement of Operations)
Pennsylvania Tax-Free Income Portfolio Class A
For a share outstanding throughout the year.
1995 1994 1993 1992 1991 1990 19891988
1987
Net Asset Value: Beginning of
year$10.31$11.40$10.93$10.71$10.29$10.34$10.16$9.95$10.
00
Investment Operations:
Net investment
income0.6420.6180.6020.6420.6690.6960.7180.7490.117
Net realized and unrealized gain (loss)
on
investments1.040(1.090)0.4700.2200.450(0.010)0.1800.210
(0.050)
Total from Investment
Operations1.682(0.472)1.0720.8621.1190.6860.8980.9590.0
67
Distributions:
Dividends from net investment
income(0.642)(0.618)(0.602)(0.642)(0.669)(0.696)(0.718)
(0.749)(0.117)
Distributions from net realized gains
on investments
(0.040) -0- -0-
- -0-(0.030)(0.040) -0- -0- -0-
Total
Distributions(0.682)(0.618)(0.602)(0.642)(0.699)(0.736)
(0.718)(0.749)(0.117)
Net Asset Value: End of
year$11.31$10.31$11.40$10.93$10.71$10.29$10.34$10.16$9.
95
Total Return: (excluding sales
charge)16.7%(4.2%)10.0%8.3%11.3%7.0%9.1%10.0%0.7%
Ratios:
Ratio of expenses to average net
assets0.85%0.79%0.65%0.50%0.32%0.31%0.20%
- -0-0.26%
Ratio of net investment income to average
net assets5.84%5.71%5.31%5.93%6.33%6.84%6.92%7.40%6.38%
Portfolio turnover rate10.0%15.3%1.0%1.3%22.2%33.3%
-0- -0- -0-
Number of shares outstanding at end
of period (thousands)
10,950 8,921 7,885 5,799 4,184 2,321
1,860 851 37
Money Market Income Portfolio Class A
For a share outstanding throughout the year.
199519941993199219911990198919881987
Net Asset Value: Beginning of
year$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00
Investment Operations:
Net investment
income0.0520.0360.0250.0300.0550.0750.0860.0750.014
Net realized and unrealized gain (loss)
on investments-0--0--0--0--0--0--0--0--0-
Total from Investment
Operations0.0520.0360.0250.0300.0550.0750.0860.0750.014
Distributions:
Dividends from net investment
income(0.052)(0.036)(0.025)(0.030)(0.055)(0.075)(0.086)
(0.075)(0.014)
Distributions from net realized gains
on investments-0--0--0--0--0--0--0--0--0-
Total
Distributions(0.052)(0.036)(0.025)(0.030)(0.055)(0.075)
(0.086)(0.075)(0.014)
Net Asset Value: End of
year$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00
Total Return: (excluding sales
charge)5.32%3.7%2.5%3.1%5.6%7.8%9.0%7.7%1.4%
Ratios:
Ratio of expenses to average net
assets0.65%0.65%0.65%0.65%0.65%0.65%0.60%-0-0.03%
Ratio of net investment income to average
net assets5.19%3.76%2.50%3.06%5.51%7.46%8.59%7.91%6.98%
Portfolio turnover raten/an/an/an/an/an/an/an/an/a
Number of shares outstanding at end
of period
(thousands)12,0419,0155,5696,46910,44712,58711,0766,233
909
Fund Organization
The William Penn Interest Income Fund (the "Fund) is an
open-end, diversified management investment company,
organized as a Pennsyl-vania common law trust pursuant
to a Declaration of Trust (the "Trust) dated April 14,
1987. The Trust provides that the Trustees have the
power to issue an indefinite number of shares of
beneficial interest in the Fund. The Fund is a "series
fund" in that the Trustees have the power to designate
one or more series or portfolios of shares in the Fund.
Investments in the Fund are currently offered in five
separate portfolios (the "Portfolios"). Each Portfolio
of the Fund represents a separate mutual fund with its
own distinct investment objective and policies. The
Trustees may establish additional Portfolios without
shareholder approval, which Portfolios may have
distinctly different investment objectives.
You may invest in one or more of the Portfolios.
Proceeds from the sale of shares of each Portfolio will
be invested in accordance with the Portfolio's
investment objective and policies as outlined elsewhere
in this Prospectus. Each shareholder will be entitled
to the pro rata share of all dividends and
distributions from the investment assets of the
Portfolio or Portfolios in which he/she is invested.
Each of the Portfolios, except the Money Market Income
Portfolio, offers a Class A and a Class C share. Each
class has a different sales charge and expense
structure. See "How to Buy Shares" for a description of
the differences.
Under the terms of the Trust, the Trustees are
permitted to issue an indefinite number of shares of
beneficial interest of the Fund. The Trustees have the
power to designate one or more classes, or portfolios,
of securities and to classify or reclassify any
unissued shares with respect to such portfolios.
The shares of each Portfolio when issued are fully paid
and non-assessable, and have no preference within a
particular Portfolio with respect to conversion,
exchange, dividends, retirement, or other features. The
shares of each Portfolio are entitled to one vote per
share, have pro rata liquidation rights, and do not
have preemptive rights or the power to accumulate
votes. On any matter submitted to the shareholders for
a vote, all shares of the Fund then issued and
outstanding and entitled to vote, irrespective of the
Portfolio, shall be voted in the aggregate and not by
Portfolio, except (i) when required by the Investment
Company Act of 1940, shares shall be voted by
individual Portfolio; and (ii) when the matter does not
affect any interest of a particular Portfolio, then
only shareholders of the affected Portfolio(s) shall be
entitled to vote thereon. As a Pennsylvania common law
trust, the Fund is not required, and does not intend,
to hold annual shareholder meetings. Holders of 30% of
the outstanding shares of the Fund have the right to
call a special meeting for the purpose of removing
Trustees or for other proper purposes.
Investment Objectives and Policies
The investment objective and policies of each Portfolio
are set forth below. Each Portfolio's investment
objective is deemed to be a fundamental policy which
may not be changed without the vote of a majority of
the particular Portfolio's outstanding shares. Except
as otherwise provided, the Fund's investment policies
are not deemed to be fundamental policies and may,
therefore, be changed by the Trustees without a
shareholder vote. The Fund will not change its
investment policies, however, without giving written
notice to shareholders. Of course, no assurance can be
given that any of the Portfolios will achieve its
investment objective.
U.S. GOVERNMENT SECURITIES INCOME PORTFOLIO: The
investment objective is to provide a high level of
current income, consistent with the preservation of
capital and the maintenance of liquidity, from
investments in securities of the U.S. Government, its
agencies and instrumentalities. The Portfolio's
investment policies include investing, under normal
circumstances, at least 65% of the value of its total
assets in the following securities:
(1) U.S. Government securities which include bills,
bonds, and notes issued by the United States Treasury,
backed by the "full faith and credit" of the U.S.
Government.
(2) U.S. Government agency securities issued or
guaranteed by U.S. Government sponsored
instrumentalities and federal agencies. These include
securities issued by the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Federal Home Loan Banks, Federal
Land Banks, Farmers Home Administration, Federal
Financing Bank, Federal Intermediate Credit Bank,
Resolution Trust Corporation, the Tennessee Valley
Authority, and the Export-Import Bank.
(3) Securities listed above which are subject to
repurchase agreements.
The Portfolio may invest in the following kinds of
assets: Futures contracts, options on futures
contracts, and options on fixed-income securities, and
interest rate swaps provided that the securities
underlying such transactions do not exceed 20% of the
portfolio's assets at the time of purchase. The
portfolio will engage in futures and/or options
transactions only for hedging purposes and only if such
transactions are consistent with its investment
objectives and policies.
Because of their relatively riskless nature, U.S.
Government securities generally yield less than other
interest bearing investments, and therefore, the U.S.
Government Securities Income Portfolio is expected to
have a lower yield than the Quality Income Portfolio.
QUALITY INCOME PORTFOLIO: The investment objective is
to provide the highest level of current income
consistent with the preservation of capital from
investment grade bonds and other fixed-income
securities issued by corporations, municipalities, and
the U.S. Government.
Investment grade bonds are generally considered to be
those having one of the four highest grades assigned by
S&P (AAA, AA, A or BBB) or Moody's (Aaa, Aa, A, or
Baa). Pursuant to the investment policies of this
Portfolio, at least 70% of this Portfolio will be
invested in the following kinds of fixed-income
securities:
(1) Debt securities which at the time of purchase are
rated in the top three grades (i.e., A or better) by
either Moody's Investment Service, Inc. ("Moody's") or
Standard & Poor's Corp. ("S&P").
(2) Securities of or guaranteed by the U.S. Government,
its agencies or instrumentalities.
(3) Commercial paper of companies having, at the time
of purchase, an issue of outstanding debt securities
rated A or better by either Moody's or S&P, or
commercial paper rated A-1 or A-2 by S&P, or Prime 1 or
Prime 2 by Moody's.
The remaining 30% of the Portfolio may be invested in
the following kinds of assets:
(1) Debt securities not included in the three highest
grades referred to above.
(2) Convertible securities and preferred stocks.
(3) Foreign bonds and other fixed-income securities
denominated in foreign currencies where, in the opinion
of the Advisor and/or Sub-Advisor, the combination of
current yield, currency value, and appreciation
potential offers attractive expected returns. The value
of such foreign denominated securities may not exceed
15% of the portfolio at the time of purchase.
(4) Futures contracts, options on futures contracts,
and options on fixed-income securities, provided that
the securities underlying such transactions do not
exceed 20% of the portfolio's assets at the time of
purchase. The portfolio will engage in futures and/or
options transactions only for hedging purposes and only
if such transactions are consistent with its investment
objectives and policies.
(5) Interest rate and/or currency swaps, provided that
the securities underlying such transactions do not
exceed 20% of the portfolio's assets at the time of
purchase.
This Portfolio will not invest in securities rated
below B by S&P or Moody's. For defensive purposes under
certain market conditions, this Portfolio may
temporarily invest in short term money market
instruments eligible for purchase by the Money Market
Income Portfolio.
NEW YORK TAX-FREE INCOME PORTFOLIO: The investment
objective is to provide a high level of current income
exempt from Federal income tax and New York personal
income taxes, consistent with liquidity and stability
of principal. This Portfolio's investment policy will
be to invest principally in investment grade municipal
obligations issued by or on behalf of the state of New
York and its political subdivisions, agencies
authorities, and instrumentalities ("New York Bonds").
At least 75% of the Portfolio's assets will be invested
in New York Bonds rated at the time of purchase within
the four highest grades assigned by Moody's or S&P, or
if not rated, determined by the advisor to be of
comparable quality. This Portfolio will not invest in
securities rated below B by S&P or Moody's.
In accordance with the Portfolio's investment policy,
generally 100%, but at least 80% of the Portfolio's
total assets will be invested in New York Bonds, and no
more than 20% will be invested in taxable securities.
Under certain market conditions, however, the Portfolio
may invest in non-tax-exempt securities for temporary
defensive purposes. Such temporary investments may
include investments in U.S. Government securities or
other high grade investments (two highest categories of
Moody's or S&P). Because the interest on New York Bonds
is exempt from federal income taxation and New York
taxes, the yield is generally lower than that of
portfolios primarily invested in taxable securities.
This Portfolio may also utilize bond (including
Treasury Bills) futures contracts, options on futures
contracts and options. However, the Portfolio will not
enter into futures contracts to the extent that its
outstanding obligations to purchase securities under
these contracts in combination with its outstanding
obligations with respect to options transactions would
exceed 35% of its total assets.
This Portfolio may engage in futures and/or options
transactions only for hedging purposes when it is
consistent with the investment objectives. The
Portfolio will maintain assets sufficient to meet its
obligations under such contracts in a segregated
account with the custodian bank.
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO: The investment
objective is to provide a high level of current income
exempt from Federal income tax and Pennsylvania income
and personal property taxes, consistent with liquidity
and stability of principal. This Portfolio's investment
policy will be to invest principally in investment
grade municipal obligations issued by or on behalf of
the Commonwealth of Pennsylvania and its political
subdivisions, agencies, authorities, and
instrumentalities ("Pennsylvania Bonds"). At least 75%
of the Portfolio's total assets will be invested in
Pennsylvania Bonds rated at the time of purchase within
the four highest grades assigned by Moody's or S&P, or,
if not rated, determined by the advisor to be of
comparable quality. This Portfolio will not invest in
securities rated below B by S&P or Moody's.
This Portfolio will invest in securities to benefit
from the income they generate, not to generate trading
profits. Pursuant to this Portfolio's investment
policy, its investments may not be varied except to:
eliminate unsafe investments and investments not
consistent with the preservation of capital or tax
status of the Portfolio, honor redemption requests,
reinvest earnings, and/or defray normal expenses.
In accordance with the Portfolio's investment policy,
generally 100%, but at least 80% of the Portfolio's
total assets will be invested in Pennsylvania Bonds,
and no more than 20% will be invested in taxable
securities. Under certain market conditions, however,
the Portfolio may invest in non-tax-exempt securities
for temporary defensive purposes. Such temporary
investments may include investments in U.S. Government
securities or other high grade investments (two highest
categories of Moody's or S&P). Because the interest on
Pennsylvania Bonds is exempt from federal income
taxation and Pennsylvania taxes, the yield is generally
lower than that of taxable securities; this Portfolio
is therefore expected to have a lower yield than the
other Portfolios.
This Portfolio may also utilize bond (including
Treasury Bills) futures contracts, options on futures
contracts and options. However, this Portfolio will not
enter into futures contracts to the extent that its
outstanding obligations to purchase securities under
these contracts in combination with its outstanding
obligations with respect to options transactions would
exceed 35% of its total assets.
This Portfolio may engage in futures and/or options
transactions only for hedging purposes when it is
consistent with the investment objective. The Portfolio
will maintain assets sufficient to meet its obligations
under such contracts in a segregated account with the
custodian bank.
MONEY MARKET INCOME PORTFOLIO: The investment objective
is to maximize current income, consistent with the
preservation of capital and maintenance of liquidity,
from investments in specific short-term money market
instruments. The Portfolio's investment policy includes
investing in the following money market instruments:
(1) Negotiable certificates of deposit, Euro-dollar
deposits, bankers' acceptances and time deposits of
U.S. banks and U.S. branches of foreign banks having
total assets in excess of $1 billion.
(2) Commercial paper (including variable amount master
demand notes) rated A-1 by S&P, or P-1 by Moody's, or,
if not rated, issued by a corporation having an
outstanding unsecured debt issue rated AA or better by
S&P, or Aa or better by Moody's. Five percent of the
portfolio may be held in second tier paper, such as A-2
or P-2.
(3) U.S. Government short-term obligations, including
Treasury bills, notes, and bonds that mature within one
year, and short-term securities of federal agencies and
instrumentalities, including the Federal Home Loan
Banks, Federal Land Banks, Government National Mortgage
Association, Federal Intermediate Credit Bank, Federal
Financing Bank, and the Tennessee Valley Authority.
(4) Securities listed above, subject to repurchase
agreements.
This Portfolio will limit its investments to those U.S.
dollar denominated instruments that the advisor, under
the supervision of the Trustees: (a) determines present
minimal credit risk and are of "high quality," as
indicated by high S&P or Moody's ratings or, (b) in the
case of any instrument that is not rated, determines is
of comparable quality. All of the securities in this
Portfolio will mature within one year, and the average
maturity of the Portfolio will be 90 days or less. This
Portfolio is expected to maintain a net asset value of
$1.00 per share for purposes of sales and redemptions,
although there can be no assurance it will be able to
do so.
INVESTMENT LIMITATIONS: There are certain limitations
placed on the Fund's investment advisor to reduce the
Portfolios' exposure to certain risks. These
limitations may not be changed without the approval of
a majority of the shares outstanding of a particular
Portfolio. Some of these limitations are that a
Portfolio may not:
(1) Invest more than 5% of the value of its assets in
the securities of any single issuer (except of the U.S.
Government, its agencies or instrumentalities).
(2) Purchase more than 10% of the voting securities of
any issuer.
(3) Invest more than 5% of its assets in companies with
a continuous operating history (including predecessors)
of less than 3 years.
(4) Invest more than 25% of its assets in any one
industry, with the exceptions of (i) obligations of the
U.S. Government or its agencies or instrumentalities,
and (ii) for all Portfolios except the Money Market
Income Portfolio, certificates of deposit or bankers'
acceptances.
(5) Borrow money, except from a bank and only for
temporary or emergency purposes. Any such borrowings
may not exceed 5% of the lower of the value or cost of
the Portfolio's total assets.
(6) Pledge, mortgage, or otherwise hypothecate its
assets to an extent greater than 5% of the value of its
total assets.
(7) Invest more than 10% of the value of its assets in
illiquid securities, including restricted securities,
and repurchase agreements maturing in more than seven
days.
ADDITIONAL INVESTMENT INFORMATION: For a detailed
discussion of the various securities held in the
portfolios of the Fund, see the Statement of Additional
Information.
Management of the Fund
TRUSTEES
Under the terms of the Trust, the Fund is managed by a
Board of Trustees. There may never be less than three
nor more than ten Trustees. The Trustees exercise all
powers not required by statute or by the Trust to be
exercised by the shareholders.
Each Trustee who is not affiliated with Penn Square
Management Corporation will receive a quarterly fee of
$1,000 for services performed as Trustee to the Fund.
The Trustees are also reimbursed for their
out-of-pocket expenses incurred as Trustees. The
Trustees of the Fund, as a group, own less than one
percent of the Fund's outstanding shares.
ADVISOR AND SUB-ADVISOR
The investment advisor of the Fund is Penn Square
Management Corporation, 2650 Westview Drive,
Wyomissing, Pa. 19610 (mailing address: P.O. Box 1419,
Reading, Pa. 19603), hereafter called the Advisor. The
Advisor, subject to the authority of the Board of
Trustees, is responsible for the overall management of
the Fund. The Advisor provides and pays for office
space, executive and other personnel, and services
required for the daily administration of the Fund. The
Advisor is a wholly owned subsidiary of The William
Penn Company, 9 West 57th Street, New York, New York
10019.
Under the investment advisory agreement, each Portfolio
pays the Advisor a management fee based on a percentage
of the total net assets of the Portfolio. The fees are
calculated montly based on the following annual
percentages:
U.S. Government Securities
Income Portfolio0.65%
Quality Income
Portfolio0.65%
New York Tax-Free
Income Portfolio0.65%
Pennsylvania Tax-Free
Income Portfolio0.65%
Money Market Income
Portfolio0.50%
Miller, Anderson & Sherrerd LLP (the "Sub-Advisor")
serves as an investment advisor for the Portfolios
pursuant to a sub-advisory agreement with the Advisor.
The Sub-Advisor, a wholly owned subsidiary of Morgan
Stanley Group Inc., was organized in 1969 and is
located at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. The Sub-Advisor provides management
services to employee benefit plans, endowment funds,
foundations, and other institutional investors, and
currently manages assets in excess of $30 billion.
Under an agreement entered into with the Advisor, the
Sub-Advisor will provide investment advisory services
for the Portfolios and will be compensated solely by
the Advisor. The Advisor will pay the Sub-Advisor a fee
based on the aggregate net asset value of the
Portfolio, as follows: .375% on the first $50,000,000,
.25% on the next $50,000,000 and .20% over
$100,000,000.
DISTRIBUTOR
Penn Square Management Corporation is the "Distributor"
of the Fund. The Distributor provides selling and sales
services for the Fund. In providing these services, the
Distributor incurs advertising, promotional, and
printing expenses. The Distributor is entitled to be
reimbursed for certain of these expenses pursuant to
the Fund's 12(b)1 Plan discussed below. The Distributor
receives no other compensation for its services as
distributor, except that a sales charge may be paid to
the Distributor.
Rule 12(b)1, which was adopted by the Securities and
Exchange Commission under the Investment Company Act of
1940, permits an investment company directly or
indirectly to pay expenses associated with the
distribution of its shares in accordance with a plan
adopted by the Fund and approved by its shareholders.
Pursuant to this rule, the Fund has entered into a
Distribution Services Agreement (the "Plan") with the
Distributor.
Class A Shares: The Distributor is entitled to be
reimbursed monthly by the Fund for certain of its
expenses incurred in connection with its services as
Distributor at an annual rate not exceeding .50% of the
Fund's net assets. Subject to this percentage
limitation, the Distributor may be reimbursed for its
expenses incurred in connection with (a) advertising
and marketing Fund shares; (b) printing and
distributing the Prospectus; (c) implementing and
operating the Plan; and (d) payments made by the
Distributor for servicing fees to broker/dealers,
financial institutions, or other industry professionals
("Service Organizations") for distribution and/or
shareholder administrative services provided to their
customers who own Fund shares. Pursuant to a Servicing
Agreement with the Distributor, a Service Organization
may receive, on an annual basis, up to .50% of the
average daily net asset value of Fund shares owned by
shareholders with whom the Service Organization has a
servicing relationship. The Services provided by a
Service Organization pursuant to a Servicing Agreement
may include distribution or shareholder administrative
services, including establishing and maintaining
shareholder accounts, sending confirmations of
transactions, forwarding financial reports and other
communications to shareholders, and responding to
shareholder inquiries regarding the Fund.
Class C Shares: The fund has adopted a Distribution
Plan for Class C shares to compensate the Distributor
for its services and costs in distributing Class C
shares. Under the Plan, the Fund pays the Distributor
an annual 12(b)1 Distribution Fee of 0.75% per year on
Class C shares. The Distributor also receives a Service
Fee of 0.25% per year. Both fees are computed on the
average annual net assets of Class C shares, determined
as of the close of each regular business day. The
Distribution Fee allows investors to buy Class C shares
without a front end sales charge while permitting the
Distributor to compensate dealers who sell Class C
shares. The Distribution Fee and Service Fee increase
Class C expenses by 1.00% of average net assets per
year.
The Distributor pays sales commissions of 1.00% of the
purchase price to dealers from its own resources at the
time of the sale. The Distributor retains the
Distribution Fee during the first year shares are
outstanding to recoup the sales commission it pays, the
advances of service fee payments it makes, and its
financing costs. The Distributor plans to pay the
Distribution Fee as an ongoing commission to the dealer
on Class C shares that have been outstanding for a year
or more.
The Distributor receives no other compensation for its
services as distributor, except that the sales charge
will be paid to the Distributor. The Distributor may,
in turn, pay such sales charge to broker/dealers as a
commission for generating sales of Fund shares (see
"How to Buy Shares").
TRANSFER AGENT
Penn Square Management Corporation acts as Transfer
Agent for the Fund. For the services it provides in
these capacities, the Corporation is reimbursed only
for the actual costs incurred in providing such
services. The Corporation will continue to provide
services as Transfer Agent at cost or below cost.
Performance Information
GovernmentPennsylvaniaMoney
SecuritiesQualityTax-FreeMarket
Total Return:**IncomeIncomeIncomeIncome
One Year Ended 12/31/9519.35%19.05%16.69%5.32%
Lipper Comparative Averages17.34%20.07%17.15%5.37%
Five Years Ended 12/31/9556.09%65.71%48.14%21.88%
Lipper Comparative Averages49.51%69.13%51.79%22.36%
One Year Ended 12/31/95***13.68%13.40%11.15%5.32%
Five Years Ended 12/31/95***8.26%9.56%7.13%4.04%
Five Years Ended 12/31/95**9.31%10.63%8.18%4.04%
Lipper Comparative Averages8.38%11.08%8.70%4.12%
Source of return information: Lipper Analytical
Service
** Excludes initial sales charge of 4.75%. Lipper
Comparative Averages do not include a sales charge.
***Adjusted to reflect initial sales charge of 4.75%,
except Money Market Portfolio.
Performance data herein represents past performance.
Investment return and principal value of an investment
will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original
cost.
This report is for the information of shareholders of
William Penn Interest Income Fund. It must not be
distributed to other than such shareholders unless it
has been preceeded by, or is accompanied by, a
Prospectus by which all offerings of the Fund's shares
are made. Class A offering price includes a maximum
sales charge of 4.75%.
Illustration of Assumed Investment: The graphs below
illustrate the results of an assumed investment of
$10,000 made on October 12, 1987 (inception of
Portfolios), with dividends and capital gain
distributions reinvested. The graphs below assume a
4.75% sales charge so that the initial amount invested
is $9,525; Lipper Comparative figures do not include a
sales charge assumption. The results represent past
performance and should not be considered as a
representation of the gain or loss which may be
realized from an investment made in the Portfolios
today.
Yield Information
From time to time the Fund advertises the "yield" and
"effective yield" with respect to its Portfolios. Both
yield figures are based on historical earnings and are
not intended to indicate future performance. The
"yield" for each Portfolio (except for the Money Market
Income Portfolio) is based on a standard thirty day
base period calculation (stated in the advertisement)
which is computed by dividing the Portfolio's net
investment income during the base period by the maximum
offering price on the last day of the base period times
the average number of shares outstanding during the
base period.
The "yield" of the Money Market Income Portfolio refers
to the income generated by an investment in such
Portfolio over a seven day period. This income is then
"annualized," so that the amount of income generated by
the investment during that week is assumed to be
generated each week over a fifty-two week period and is
shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized,
the income earned by an investment in a Portfolio is
assumed to be reinvested. The "effective yield" will be
slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
Risk Factors
In general, each Portfolio of the Fund involves varying
degrees of risk. For the most part, however, the risks
inherent in each Portfolio are primarily a function of
the maturity length of the Portfolio and the quality
characteristics of the underlying securities. The
Quality Income Portfolio and the New York and
Pennsylvania Tax-Free Income Portfolios may invest in
lower grade bonds, i.e., those having an S&P or Moody's
rating of B. See "INVESTMENT OBJECTIVES AND POLICIES."
Such investments do not always have outstanding
investment characteristics and may have speculative
characteristics as well. Non-rated securities will also
be considered for investment by the New York and
Pennsylvania Tax-Free Income Portfolios when the
advisor believes that the financial conditions of the
issuers of such obligations and the protection afforded
by the terms of the obligations themselves limit the
risk to the Portfolio to a degree comparable to that of
rated securities that are consistent with the
Portfolio's objective and policies.
With respect to repurchase agreements and securities
lending, a Portfolio will be relying on the obligation
of the other party to the transaction rather than on
the credit-worthiness of the issuer of the underlying
obligations. The Portfolios will have at least 100%
collateral in both types of transactions, however, and
to minimize risk will only engage in such transactions
with banks and securities dealers deemed to be
qualified by the advisor.
The Portfolios will be affected similarly by market
changes. The investments in which the Fund proposes to
engage will be affected by national and international
trends in business, and by cyclical fluctuations in
capital markets. More specifically, the investments
held by each Portfolio may be affected by general
changes in interest rates. There is generally an
inverse relationship between changes in interest rates
and changes in the prices of interest sensitive
securities. With respect to mortgage-backed securities,
however, such as GNMA certificates, this relationship
may not be consistent because of the effect of
prepayments of the underlying mortgages when mortgage
rates decline. As a result of the various changes in
the market that may affect the value of the investments
in the Portfolios, redemptions by shareholders could
require the sale of a Portfolio's investments at a time
when such a sale otherwise might not be desirable.
Because the New York and Pennsylvania Tax-Free Income
Portfolios concentrate their investments in New York
and Pennsylvania, there are risks that would not be
present if they were diversified nationally. Also,
legislative proposals may be introduced that would
restrict or eliminate the federal, state and local
income tax exemption for interest on the types of
securities to be purchased by this Portfolio. Any such
proposals, if enacted, would reduce the number of
securities that the Portfolio could purchase consistent
with its investment objective.
In recent years, New York State, New York City and
other New York public bodies have encountered financial
difficulties, and New York City is currently
encountering financial difficulties which could have an
adverse effect with respect to the performance of the
Portfolio. Currently, Moody's, Standard & Poor's and
Fitch Investors Service, Inc. rate New York City's
general obligation bonds Baal, A-, and A-,
respectively, and Moody's and Standard & Poor's rate
New York State's general obligation bonds A and A-,
respectively.
Dividends, Capital Gains
Distributions and Taxes
Shareholders will automatically receive all dividends
and capital gain distributions (if any) in additional
shares at net asset value unless the shareholder has
indicated on the Account Registration Form the option
to receive all distributions in cash.
Dividends: Each Portfolio will declare a dividend every
day on which the New York Stock Exchange is open. Each
dividend will be credited to shares of record the
previous business day, providing such shares have been
properly paid for. The total dividends, rounded to the
nearest cent, will be credited to each shareholder's
account and paid to the shareholder on a monthly basis
either through reinvestment in shares of the Fund or
through a cash payment, as elected by the shareholder.
When shares are redeemed, any declared but unpaid
dividends on those shares will be paid with the next
regular dividend payment, not at the time of
redemption.
The amount of each daily dividend may differ from the
actual net investment income earned by the Portfolio
that day. Any undistributed net income will be
distributed by the Fund in subsequent dividends.
Capital Gains: Net realized capital gains in a
Portfolio, if any, will be distributed from that
Portfolio at least annually.
Federal Taxes: The Fund intends to qualify as a
"regulated investment company" under Subchapter M of
the Internal Revenue Code. As such, each Portfolio will
be treated as a separate corporation for federal tax
purposes and will not be liable for federal income
taxes, except to the extent a portion of its net
taxable income, if any, is not distributed.
Within 30 days after the close of each calendar year,
shareholders of each Portfolio will be provided with
full information on IRS Form 1099-DIV or 1099-R
regarding dividends and capital gains distributions for
federal tax purposes, including information as to the
portion of a capital gains distribution qualifying as a
long-term capital gain and such other information as
may be required by law. Distributions of income,
including any net realized short-term capital gains,
from the Money Market Income Portfolio, the U.S.
Government Securities Income Portfolio, and the Quality
Income Portfolio will be taxable as ordinary income,
whether received in cash or additional shares.
Distributions from any of the Portfolios of long-term
capital gains, if any, will be taxable as such, whether
received in cash or additional shares, and regardless
of the shareholder's holding period.
The New York and Pennsylvania Tax-Free Income
Portfolios intend to invest a sufficient portion of
their assets in Pennsylvania and New York Bonds and,
possibly, certain other state and municipal obligations
so that it will qualify to pay "exempt-interest
dividends" to its shareholders. Exempt-interest
dividends distributed to a shareholder are not included
in the shareholder's gross income for federal income
tax purposes. Shareholders who are subject to the
alternative minimum tax, however, may be liable for
such tax to the extent this Portfolio invests in
certain private activity bonds. Distributions of net
investment income derived from securities the interest
on which is not exempt from taxation, whether received
in cash or additional shares, will be taxable to
shareholders as ordinary income.
In general, the exchange of shares of one Portfolio for
shares in another Portfolio will be treated as a
taxable event.
State Taxes: The federal income tax treatment of Fund
distributions and the sale, exchange or redemption of
Fund shares does not necessarily apply for state and
local income tax purposes. Similarly, income on certain
U.S. Government securities, which is ordinarily exempt
from state taxation, may not be so exempt when received
as distributions from the Fund. Distributions from the
New York or Pennsylvania Tax-Free Income Portfolios
that are attributable to interest received on New York
or Pennsylvania Bonds should be excludable from a
shareholder's gross income for his respective state for
individual income tax purposes.
The Fund is organized as a Pennsylvania common law
trust. As such, it will not be liable for any corporate
income or franchise tax in the Commonwealth of
Pennsylvania. Shareholders who are Pennsylvania
residents may be subject to personal property tax on
their shares.
How to Buy Shares
Minimum Investments: The minimum initial investment is
$500 and the minimum repeat purchase is $100. A minimum
initial investment of $250 will be accepted for any
retirement plan. For certain accounts introduced by
professional investment advisors these minimums may be
waived.
Shares may be purchased by the following methods:
By Investment Dealer: Through any broker/dealer, bank
or savings bank which is registered in the state where
the purchase is made and which has a sales agreement
with the William Penn Funds.
By Mail: Make your check payable to the Fund and mail
along with a new account application or reorder form to
the address on the cover.
By Wire: Purchases by wire will be accepted only for
additions to existing accounts. Instruct your bank to
wire funds to:
CoreStates Bank
Philadelphia, PA
ABA #031000011
Credit:
William Penn Funds
a/c #0036438916
(Portfolio name)
(your fund acct. no.)
By Telephone: Payments for telephone orders must be
received within three business days of the order. If
payment is not timely received, the Fund may cancel the
order and redeem shares in the account to compensate
the Fund for any decline in value of the canceled
purchase.
In Person: By visiting our office at 2650 Westview
Drive, Wyomissing, PA.
All purchase orders are executed based on the net asset
value calculated at the close of business on the day
such purchase orders are received. Purchase orders
received after the close of the New York Stock Exchange
will be executed based on the net asset value
calculated on the next business day. The Trustees
reserve the right to reject all orders that are
considered to be not in the best interest of the Fund.
Share certificates will not be issued unless an
investor specifically requests them.
Net Asset Value: The net asset value per share is
calculated by adding the current value of all the
securities in the Fund's portfolio and all other
assets, subtracting the liabilities, and dividing the
remainder by the number of the Fund's outstanding
shares. Securities listed on the New York Stock
Exchange or any other exchange approved by the Trustees
are valued on the basis of the closing sale that day,
or if there is no sale, on the basis of the median of
the closing bid and ask price of that day. All other
securities shall be valued at the median of the closing
bid and ask price of that day. If there is no sale or
closing bid and ask price on the day of calculation, a
portfolio security will be valued at the preceeding
business day's available sale or median of the bid and
ask prices. When market quotations are not readily
available, such securities are valued as determined in
good faith by the Board of Trustees. See the Statement
of Additional Information for an illustration of net
asset value determination.
Class A Shares: The offering price for a Class A share
of beneficial interest of the Fund is the net asset
value per share plus a sales charge as shown in the
following illustration:
Sales Charge
Sales Chargeas a % of
Amount ofas a % ofNet AssetDealers'
PurchaseOffering PriceValueConcession
Less than
$50,0004.75%5.00%4.00%
$50,000 to
less than
$100,0003.50%3.60%3.00%
$100,000 to
less than
$250,0002.75%2.80%2.40%
$250,000 to
less than
$500,0002.25%2.30%2.00%
$500,000 to
less than
$1,000,0001.25%1.30%1.00%
$1,000,000
and over-0-%-0-%-0-%
There is no sales charge on purchases exceeding the
maximum amount stated above, on purchases by certain
employee benefit plans, on purchases made through a
recognized fee based program offered by some
broker/dealers, on purchases by policyholders of
selected insurance companies, on purchases by certain
investment advisors on behalf of their discretionary
accounts, or on purchases by certain other persons as
described in the Statement of Additional Information.
In addition, any person who was invested in Penn Square
Mutual Fund as of November 30, 1988 will not be charged
a sales charge for purchases made in any portfolio of
the William Penn family of funds providing the account
has remained open. Retirement accounts opened prior to
July 19, 1990 will not be subject to a sales charge.
The Fund receives all monies paid equal to the net
asset value per share, and any sales charge will be
allocated to the Fund's distributor. The distributor
may, in turn, pay such amounts to broker/dealers as
commission for sales of Fund shares. The distributor
may also, at its expense, provide additional
promotional incentives to broker/dealers who sell
shares of the Fund. The Fund reserves the right to
modify the sales charge at its discretion. From time to
time the Fund may sponsor sales contests among
registered representatives who sell shares of the Fund.
Class C Shares: Class C shares are sold at net asset
value without an initial sales charge. However, if
Class C shares are redeemed within 12 months of their
purchase, a contingent deferred sales charge of 1.0% is
deducted from redemption proceeds. The contingent
deferred sales charge is paid to the Distributor to
reimburse its expenses in providing distribution
related services to the Fund in connection with the
sale of Class C shares. The contingent deferred sales
charge is assessed on the lesser of the net asset value
of the shares at the time of redemption or purchase,
and does not apply to shares purchased through the
reinvestment of dividends or capital gains.
Waivers of Class C Contingent Deferred Sales Charge:
The Class C contingent deferred sales charge will be
waived if the shareholder requests a redemption for any
of the following reasons (1) distributions to
participants or beneficiaries from Retirement Plans, if
the distributions are made (a) under a Systematic
Withdrawal Plan, or (b) following death or disability
(as defined in the Internal Revenue Code) of the
participant or beneficiary; (2) redemptions from
accounts other than Retirement Plans following death or
disability of the shareholder, accompanied by evidence
of a determination of disability by the Social Security
Administra-tion, and (3) returns of excess
contributions to Retirement Plans.
Class Share Distinction: Once you decide that the Fund
is an appropriate investment for you, deciding which
class of shares is best suited to your needs depends on
a number of factors which you should discuss with your
broker or financial advisor. Because a fund's operating
costs and the affect of the different types of sales
charges and 12(b)1 distribution fees that apply to a
class of shares will affect your investment results
over time, how much you plan to invest and how long you
plan to hold your investment become very important
considerations. If your investment goals and objectives
change over time and you plan to purchase additional
shares, you should reevaluate those factors to see if
you should consider another class of shares. Your
investment advisor will help you determine which class
of shares is best for you.
Generally, an investor who expects to invest less than
$50,000 in any of the William Penn Funds and who
expects to make substantial redemptions after one year
but within six years of investment should consider
purchasing Class C Shares. Class C Shares have no
initial sales charge, and after one year, have no
redemption penalty. Depending on your investment time
horizon, you may also prefer to balance purchases of
A Share investments with C Share investments in order
to spread the cost of investing over time.
If you plan to invest more than $50,000 and your
investment horizon is six years or more, Class C shares
might not be as advantageous as Class A shares. This is
because the annual asset based Distribution Fee on
Class C shares will have a greater impact on your
account over the longer term than the reduced front end
sales charge available for larger purchases of Class A
shares. For example, Class A shares might be more
advantageous than Class C shares for investments of
more than $50,000 expected to be held for 5 years or
more, for investments over $250,000 expected to be held
3 years or more, or investments over $500,000 for which
an investor's time horizon is expected to be longer
than 2 or more years.
Account Registration: Guidelines are printed on the
Application form contained in this Prospectus. In the
case of joint registrations, joint tenancy with rights
of survivorship (JTWROS) is assumed, unless otherwise
indicated.
Right of Accumulation: Reduced sales charges apply to
any purchase of shares in the William Penn family of
funds except the William Penn Money Market Portfolio
(which does not impose a sales charge), where the
aggregate investment, including such purchase, is
$50,000 or more. If, for example, you previously
purchased and still hold shares of any eligible
portfolio or combination thereof, with an aggregate
current market value of $40,000 and subsequently
purchase shares of an eligible portfolio having a
current value of $20,000, the charge applicable to the
subsequent purchase would be reduced to 3.50% of the
offering price. All present holdings of eligible
portfolios may be combined to determine the current
offering price of the aggregate investment in
ascertaining the sales charge applicable to each
subsequent purchase.
To qualify for reduced sales charges, at the time of a
purchase you or your dealer/advisor must notify Penn
Square Management Corporation. This may be accomplished
by checking the appropriate box on a New Account
Application. The reduced charge is subject to
confirmation of your holdings through a check of
appropriate records.
Redemption Proceeds from other Mutual Funds and
Commissioned Investments: No sales charge will apply to
any purchase of shares in the Fund if the amount
invested represents redemption proceeds from another
mutual fund or commissioned investment and the
shareholder previously paid a sales charge for such
other mutual fund or commissioned investment. In order
to qualify for this privilege, (i) William Penn Fund
shares must be purchased within thirty days after the
redemption from the other mutual fund or commissioned
investment, and (ii) documentation of such redemption
satisfactory to Penn Square Management Corporation
shall be required at the time of purchase.
Letter of Intent: A prospective shareholder may qualify
for a reduced sales charge for Class A shares by
signing the non-binding Letter of Intent to invest in
one or more of the William Penn family of funds except
Money Market, over a thirteen month period an amount
that would qualify for a reduced sales charge. The
shareholder or his dealer/advisor must notify Penn
Square Management Corporation when any investment is
being made pursuant to the Letter of Intent. Acceptable
forms of Letters of Intent are available from the
Shareholder Services Department or on a New Account
Application. A Letter of Intent may be backdated 90
days, to the date of purchase.
How to Transfer Shares
Shares of the Fund, where a certificate has been
issued, may be transferred by endorsing the certificate
on the reverse side exactly as the registered name
appears on the face of the certificate. Signatures must
be guaranteed by a commercial bank, savings bank, or
broker/dealer.
Shares of the Fund held in book or statement form may
be transferred by sending a letter to the Fund
requesting transfer. This letter must be signed by the
registered owner(s) and the signature(s) must be
guaranteed.
How to Redeem Shares
Shareholders wishing to redeem certificated shares must
send their redemption request along with the share
certificates directly to the Fund. If shares are held
in book or statement form, a signature guaranteed
letter requesting redemption must be sent directly to
the Fund. The Fund will redeem shares as of the date of
receipt providing the certificates and/or letter
requesting redemption are in proper delivery form.
Alternatively, a telephone authorization form must be
completed in order for uncertificated shares to be
redeemed by telephone. Shares presented for redemption,
either in certificate, letter form or by telephone,
prior to the close of the New York Stock Exchange on
any business day are redeemed at the net asset value
calculated at the close of the exchange that day,
except that some Class C shares may be subject to a
1.0% contingent deferred sales charge. Checks for
redemption proceeds will be mailed within three
business days. However, redemption checks will not be
mailed until all checks in payment for the shares
redeemed have been cleared.
Letters requesting redemptions of book or statement
shares must be properly signed by the registered
owner(s) with signature(s) guaranteed. A certificate
for shares presented for redemption must be endorsed by
the registered owner, with signature guaranteed only if
the redemption proceeds are to be paid to other than
the registered owner. Requests for IRA Transfer,
Qualified Retirement Plan Transfer, or Direct Rollover
require signature guarantee only if the amount involved
exceeds $10,000.00.
A signature guarantee is a widely accepted way to
protect you and the fund by verifying the signature on
your request. A signature guarantee may not be provided
by a notary public. The following institutions should
be able to provide you with a signature guarantee: a
national or state bank, a federal savings and loan
association, a trust company or a member firm of a
national stock exchange.
Shareholders who liquidate accounts may repurchase
shares in the fund at Net Asset Value within 60 days of
redemption if they have previously paid a sales charge.
The shareholder (or agent) must notify the Transfer
Agent of his or her intention to take advantage of the
60 day repurchase option.
The Fund imposes no charges for redemptions of Class A
shares. For Class C shares, redemptions within the
first year of purchase will bear a redemption charge of
1% of net assets. See "Class C Shares" in "How to Buy
Shares" section. However, redemptions may be made
through a broker/dealer and that broker/dealer may
charge a transaction fee.
Shareholder Services
Distribution Reinvestment:
Dividends and/or capital gains distributed by the Fund
may be automatically reinvested in additional shares of
Penn Square Mutual Fund, or in shares of any portfolio
of The William Penn Interest Income Fund or the
Scottish Widows International Fund (see "Flexivest"
below). The cost of shares purchased is calculated on
the date of distribution. There is no sales charge for
the purchase of shares through reinvestment.
Dividends are distributed monthly and capital gains, if
any, are distributed in December. Any changes in
automatic reinvestment plans must be made in writing at
least 10 days before any distribution date. If no
distribution election is made, the Fund will assume
automatic reinvestment. The automatic reinvestment
plans are more fully described in the Statement of
Additional Information.
If you elect to receive dividends and distributions in
cash and the U.S. Postal Service cannot deliver the
checks, or if the checks remain uncashed for twelve
months, the checks will be reinvested into your account
at the then current net asset value.
Systematic Purchase Plan:
Shareholders may establish a Systematic Purchase Plan
(SPP) by checking the appropriate box on a New Account
Application or by calling Shareholder Services for an
appropriate form. This Plan authorizes The William Penn
Funds to debit a Shareholder's designated checking or
savings account at a bank or savings bank on a regular
basis in order to purchase additional Fund shares.
As Custodian of the Fund, CoreStates Bank acts as agent
for these transactions, and funds are sent directly
from the Shareholder's financial institution to
CoreStates Bank for purchase of fund shares. Purchases
are made monthly or quarterly, on the 20th day of the
month or quarter, or the following business day if the
20th is not a business day. The SPP is more fully
described in the Statement of Additional Information.
Systematic Withdrawal Plan:
Shareholders may establish a Systematic Withdrawal Plan
(SWP) by checking the appropriate box on a New Account
Application or by calling Shareholder Services for the
appropriate form. A minimum account balance of $10,000
is required to establish a SWP.
With a SWP, a sufficient number of Fund shares are
redeemed each month or quarter from a Shareholder's
account to provide the Shareholder with a regular
payment. Shares are redeemed on the 10th day of each
month or quarter (on the 15th day for IRA and Keogh
Plans), or the next business day, in order to provide
for the withdrawal payment, and share redemptions are
calculated to the third decimal.
Although income and capital gains distributions will be
reinvested, continued withdrawals in excess of current
income may eventually exhaust principal, particularly
in a period of declining market prices. The Fund
reserves the right to terminate the Plan when
withdrawal payments are indefinitely suspended at the
request of the Plan participant.
Systematic Exchange Plan:
Shareholders may establish a Systematic Exchange Plan
(SEP) by checking the appropriate block on the New
Account Application or by calling Shareholder Services
for the appropriate form. This plan authorizes The
William Penn Funds to exchange a fixed dollar amount
from one portfolio to another on the 5th day of each
month, or the next business day if the 5th is not a
business day. The Shareholder should understand the tax
consequences of such an exchange. The Plan may be
terminated on written instruction at least 10 days
prior to the next scheduled exchange.
Retirement Plans: The Fund offers IRA Plans, including
Simplified Employee Pension Plans (SEP-IRA) and Salary
Reduction Plans (SAR-SEP); Profit Sharing; and Money
Purchase Plans. There is a $250 minimum on initial
purchases for all retirement plans.
Flexivest: Shareholders may elect to have dividends
and/or capital gains automatically invested into
another William Penn portfolio by indicating the
receiving portfolio on a New Account Application. For
existing accounts, shareholders may request the form by
calling Shareholder Services. The Plan may be
terminated on written instruction at least 10 days
prior to the next dividend or capital gain distribution
payable date.
Exchange Privilege: As a shareholder of the William
Penn family of funds, you may exchange shares of any of
the Portfolios of the William Penn Interest Income Fund
including the U.S. Government Securities Income
Portfolio, Quality Income Portfolio, New York Tax-Free
Income Portfolio, Pennsylvania Tax-Free Income
Portfolio, and the Money Market Income Portfolio for
shares of any other portfolio, Penn Square Mutual Fund
or Scottish Widows International Fund without incurring
an exchange fee. A sales charge will not be incurred if
the amount exchanged had previously incurred a sales
charge.
Exchanges involve the redemption of shares, and a tax
liability may be incurred. For more complete
information, including a telephone authorization form
and the Prospectus of Penn Square Mutual Fund or the
Scottish Widows International Fund, call our
Shareholder Services Department.
For purposes of exchanging shares within the William
Penn Funds, all shares issued prior to November 15,
1995 are designated Class A shares to distinguish them
from the new Class C shares. Shares of a particular
class may be exchanged only for shares of the same
class in the other William Penn family of funds. For
example, you may exchange Class C shares of a Fund only
for Class C shares of another Fund and Class A shares
for other Class A shares.
The exchange privilege is only available in states
where the exchange may legally be made.
Automated Clearing House (ACH) Transfers: Shareholders
may have their dividend, capital gain or systematic
withdrawal plan checks transferred directly into their
checking or saving accounts by ACH.
There is no charge for this service. Please call
Shareholder Services if you wish to enroll in this
program. This service may take one month to activate
and a check will be received in the interim.
General Information
Reports: Shareholders receive semi-annual and annual
financial statements and first and third quarter
updates. Annual financial statements are audited by
Ernst & Young LLP, independent auditors, whose
selection is ratified by shareholders.
Litigation: The Fund is not involved in any litigation.
Closed Holidays: Currently, the days on which the New
York Stock Exchange and/or the Fund are closed for
business are: Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and New Year's Day.
Trustees
James E. Jordan, Chairman
Paul J. Lawler, Vice Chairman
Lee D. Arning
Gail M. Harrity
Emmett M. Murphy, CFA
John D. Tenhula, Ph.D.
Ferdinand Thun
Officers
James E. Jordan, President
Dennis J. Westley, CPA, V.P. & Treasurer
Sandra J. Houck, Secretary
Investment Advisor, Distributor and
Transfer Agent
Penn Square Management Corp.
2650 Westview Drive
Wyomissing, PA 19610
Independent Auditors
Ernst & Young LLP
Reading, PA
Counsel
Stevens & Lee
Reading, PA
Custodian
CoreStates Bank
WILLIAM PENN
INTEREST INCOME FUND
2650 Westview Drive
Wyomissing, PA 19610
Statement of Additional Information
March 15, 1996
This Statement of Additional Information should be read
in conjunction with the Prospectus for the William Penn
Interest Income Fund (the "Fund") dated March 15, 1996,
and is incorporated by reference in its entirety into
that Prospectus. Because this Statement of Additional
Information is not itself a Prospectus, no investment
in shares of the Fund should be made solely upon the
information contained herein. Copies of the Prospectus
for the Fund may be obtained by calling the Shareholder
Services Department at the number below. Capitalized
terms used but not defined herein have the same
meanings as in the Prospectus.
Table of Contents
Page
Investment Objectives and Policies 2
Additional Purchase and Redemption Information 4
Management of the Fund 5
Additional Investment Information 8
Yield and Total Return Calculations11
Additional Information Concerning Taxes12
General Information13
Independent Auditors and Financial Statements15
Appendix15
SHAREHOLDER SERVICES:
610-670-1031
800-523-8440
P.O. Box 1419
Reading, Pennsylvania 19603
Investment Objectives and Policies
The investment objectives and policies of each
Portfolio (the "Portfolio") of the William Penn
Interest Income Fund (the "Fund") are distinct and
separate from the other Portfolios. The following
information supplements the description of the
Portfolios' investment objectives and policies
contained in the Prospectus.
PORTFOLIO TRANSACTIONS
Penn Square Management Corporation serves as investment
advisor (the "Advisor") to the Fund. Pursuant to a
sub-advisory agreement, Miller, Anderson & Sherrerd LLP
(the "Sub-Advisor"), subject to the general control of
the Advisor and the Fund's Board of Trustees, is
responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio
securities for the Fund.
The Money Market Income Portfolio does not intend to
seek profits from short-term trading. Its annual
portfolio turnover rates will be relatively high, but
brokerage commissions are normally not paid on money
market instruments so that portfolio turnover is not
expected to have a material effect on the Portfolio's
net income.
The U.S. Government Securities Income Portfolio, the
Quality Income Portfolio, the New York and Pennsylvania
Tax-Free Income Portfolios will generally invest for
the long-term; therefore, the turnover in these
Portfolios will generally not exceed 100% during
periods of relatively stable market and economic
conditions. 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. Nevertheless, portfolio turnover
will not be a limiting factor in making investment
decisions.
All Portfolio transactions are under the control of the
Fund's Sub-Advisor. In selecting brokers and dealers,
it is the Sub-Advisor's policy to obtain the best
overall terms available. Such decisions shall take into
consideration factors deemed to be relevant such as the
breadth of the market and security, the price of the
security, the financial condition and execution
capability of the broker or dealer, and the
reasonableness of the commission, if any, for the
specific transaction. The Sub-Advisor may, subject to
the requirements of applicable law, cause the Fund to
pay a broker/dealer who furnishes brokerage and
research services a higher commission than that which
might be charged by another broker/dealer for effecting
the same transaction. Brokerage and research services
may include (i) advice, furnished either directly or
through publications or writings, as to the value of
securities, or the availability of securities or
purchasers or sellers of securities; (ii) analyses and
reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy or the
performance of accounts; or (iii) effecting securities
transactions or performing related functions (such as
clearance, settlement, and custody). Preference may
also be given to the broker/dealer who has previously
sold Fund shares if the broker/dealers under
consideration are all capable of obtaining the best
execution. The Sub-Advisor will periodically review the
commissions paid by the Fund, if any, to consider
whether the commissions paid over representative
periods of time appear to be reasonable in relation to
the benefits inuring to the Fund. It is possible that
certain of the supplementary research or other services
received will primarily benefit one or more other
investment companies or other accounts for which
investment advice is rendered. Conversely, the Fund may
be the primary beneficiary of research or services
received as a result of Portfolio transactions for such
other accounts or investment companies.
Investment recommendations for each Portfolio are made
independently from those for other Portfolios advised
by the Sub-Advisor that may invest in the same
securities. When purchases or sales of the same
security are made at substantially the same time on
behalf of such other Portfolio, transactions are
averaged as to price, and available investments
allocated as to amount in a manner that the Sub-Advisor
believes to be equitable to each Portfolio. In some
instances, this investment procedure may adversely
affect the price paid or received by a Portfolio or the
size of the position obtained for a Portfolio. To the
extent permitted by law, the Sub-Advisor may aggregate
the securities to be bought or sold for a Portfolio
with those to be bought or sold for other Portfolios in
order to obtain best execution.
OTHER INVESTMENT INFORMATION
In the Appendix to this Statement of Additional
Information are descriptions of the rating symbols used
by Standard & Poor's Corporation and Moody's Investors
Service, Inc. for debt securities in which the
Portfolios may invest. The Prospectus sets forth
certain investment limitations that may not be changed
with respect to a Portfolio without the affirmative
vote of the holders of the majority of the Portfolio's
outstanding shares. Similarly, the following investment
limitations may not be changed with respect to a
Portfolio without such a vote of shareholders. Each
Portfolio may not:
1. Purchase or sell real estate or real estate mortgage
loans, except that a Portfolio may invest in securities
that are secured by real estate or interests therein.
2. Make loans, except that a Portfolio may (a) purchase
or hold debt instruments in accordance with its
investment objective and policies, and (b) lend its
securities to banks, broker/dealers, and other
financial institutions consistent with any applicable
law or regulations.
3. Underwrite the securities of other issuers, except
to the extent that the acquisition and disposition of
certain securities directly from an issuer in
accordance with each Portfolio's investment objective
and policies might be deemed to be underwriting.
4. Purchase securities of companies for the purpose of
exercising control.
5. Acquire any investment company or investment company
security, except in accordance with Section 12(d) of
the Investment Company Act of 1940 and, in any event,
each Portfolio may not own (i) more than 3% of the
total outstanding voting stock of an investment
company; (ii) securities of any one investment company
which in the aggregate exceed 5% of the total assets of
the Fund; or (iii) securities of more than one
investment company which in the aggregate exceed more
than 10% of the Fund's total assets.
6. Purchase securities on margin, make short sales of
securities, or maintain a short position.
7. Purchase or sell commodities or commodity contracts.
8. Issue senior securities.
If a percentage restriction is satisfied at the time an
investment is made, the later increase or decrease in
such percentage resulting from a change in asset value
will not constitute a violation of the restriction. In
order to permit the sale of Fund shares in certain
states, the Fund may make commitments more restrictive
than the investment limitations and policies described
above. Should the Fund determine that any such
commitment is no longer in the best interest of the
Fund, it will revoke the commitment by terminating
sales of
Additional Purchase and
Redemption Information
its shares in the states involved.
Information on how to purchase and redeem shares of the
Money Market Income Portfolio, U.S. Government
Securities Income Portfolio, Quality Income Portfolio
and Pennsylvania and New York Tax-Free Income Portfolio
is included in the Prospectus (see "Shareholder
Services"). The issuance of shares is recorded on the
books of the Fund and share certificates are not issued
unless expressly requested in writing. Certificates
will not be issued for the Money Market Income
Portfolio, or for fractional shares.
As described in the Prospectus, the Fund offers two
classes of shares (Class A and Class C). See "How to
Buy Shares" for a discussion on the distinction between
the two.
As described in the Prospectus, shares of each
Portfolio may be purchased directly from the
Distributor or through securities dealers, financial
institutions, and other industry professionals. (Such
institutions and professionals are collectively
referred to as "Service Organizations.") Service
Organizations may impose minimum customer account and
other requirements in addition to those imposed by the
Fund and described in the Prospectus.
To change the bank or account designated to receive
redemption proceeds, a written request must be sent to
the transfer agent, Penn Square Management Corporation,
P.O. Box 1419, Reading, Pennsylvania 19603. Such
requests must be signed by each shareholder, with each
signature guaranteed by a bank, savings bank, or
broker/dealer. Guarantees must be signed by an
authorized signatory and "signature guaranteed" must
appear with the signature. The transfer agent 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.
Investors redeeming by a check drawn on the Money
Market Income Portfolio generally will be subject to
the same rules and regulations that the transfer agent
applies to checking accounts, although election of this
privilege creates only a shareholder-transfer agent
relationship with the transfer agent. Because dividends
accrue daily, checks should not be used to close an
account, as a small balance is likely to result.
New shareholders may complete the Telephone
Authorization Section of a New Account Application
which will enable them to redeem uncertificated shares
or make exchange requests by telephone. Forms are
available from the Shareholder Services Department for
existing shareholders. The instructions should be read
carefully before signing, because they authorize the
Fund to act upon a telephone instruction reasonably
believed to be from the shareholder.
The Distributor will not permit a shareholder to
exchange shares into a Portfolio that is then charging
a sales charge without (i) charging such shareholder
the applicable sales charge or (ii) ascertaining that
the shareholder is exempt from sales charges or (iii)
has previously paid a sales charge on the amount being
exchanged. This is to prevent abuses that might occur
by, for example, shareholders investing in the Money
Market Income Portfolio for a short time and then
exchanging into the Quality Income Portfolio.
Shareholders will receive a "credit" for previous sales
charges paid, and will not be charged a sales charge
with respect to shares being exchanged that resulted
from dividend reinvestment. To find out whether a sales
charge will be imposed on an exchange, contact the
Shareholder Services Department.
No sales charge will be charged to persons who are, and
have been for at least 90 days, trustees, directors,
officers or employees of the Fund or the Advisor, to
certain immediate relatives of such persons, or to any
trust, pension, profit sharing, or other benefit plan
for such persons. In addition, no sales charge will
apply to purchases of Fund shares by certain large
pension plans or "institutional investors" meeting
qualifications established from time to time by the
Trustees. These exemptions from sales charges have been
determined by the Trustees to be in the best interest
of the Fund.
The Fund may suspend the right of redemption or
postpone the date of payment for shares during any
period when (i) trading on a national securities
exchange on which securities in which the Fund has
invested are listed is restricted by applicable rules
and regulations of the Securities and Exchange
Commission; (ii) such an exchange is closed for other
than customary weekend and holiday closings; (iii) the
Securities and Exchange Commission has by order
permitted such suspension; or (iv) an emergency exists
as determined by the Securities and Exchange
Commission.
DETERMINATION OF NET
ASSET VALUE
Information concerning the calculation of the Fund's
net asset value can be found in the Prospectus in the
section entitled "PURCHASE AND REDEMPTION OF SHARES."
Management of the Fund
The names of the Trustees of the Fund and their
principal occupations and affiliations for the past
five years are as follows:
TRUSTEES
Name and Position(s)
with Fund
Principal Occupation During Past 5 Years
James E. Jordan* Chairman and Trustee
Chairman, Board of Trustees of Penn Square Mutual Fund
and Scottish Widows International Fund. President,
Chief Investment Officer and Director of Penn Square
Management Corporation. President of William Penn
Company. Director, Leucadia National Corp., and
Mezzanine Capital & Income Trust PLC, a British
investment trust company.
Lee D. Arning
Trustee
Trustee and Retired executive. Director and Treasurer,
The Lighthouse Inc., Vice Chairman of Burdette Tomlin
Memorial Hospital, Cape May Court House, N.J., Formerly
Vice Chairman, Chief Investment Officer and a Director
of USLIFE Corp. Trustee, Penn Square Mutual Fund and
Scottish Widows International Fund.
Gail M. Harrity
Trustee
Deputy Director for Finance and Administration of the
Solomon R. Guggenheim Museum, 1989 to date. Assistant
Treasurer of the Metropolitan Museum of Art from 1982
to 1989. Trustee, Penn Square Mutual Fund and Scottish
Widows International Fund.
Paul J. Lawler
Vice Chairman and
Trustee
Vice President for Finance of Rensselaer Polytechnic
Institute since 1985. Previously, Director of
Investment Planning and Assistant Vice President for
Finance, and Treasurer of Columbia University
(1976-1985). Trustee, Penn Square Mutual Fund and
Scottish Widows International Fund.
Emmett M. Murphy, CFA*
Trustee
General Partner, Threshold Investment LP, 1996.
Partner, Luther King Capital Management Corp. 1981 to
1995. Previously, Investment Consultant, Rodgers, Casey
& Barksdale (1979-1981). Trustee, Penn Square Mutual
Fund and Scottish Widows International Fund.
John D. Tenhula, PhD.
Trustee
President and Chief Executive Officer of the Balch
Institute since 1991. Previously, Legal Officer, United
Nations High Commissioner for Refugees. Adjunct
Professor, School of International Affairs, Columbia
University from 1979 to date. Trustee, Penn Square
Mutual Fund.
Ferdinand Thun
Trustee
Formerly Director of Planned Giving for Lehigh
University since 1974. Managing Partner of Thun
Partnership since 1986. Trustee, Penn Square Mutual
Fund.
1996 Trustee Compensation
William PennWilliam Penn
Interest IncomeFund
NameFundFamily*
James E. Jordan$ -0-$ -0-
Lee D. Arning4,00012,000
Gail M. Harrity4,00012,000
Paul J. Lawler4,00012,000
Emmett M. Murphy-0--0-
John Tenhula4,000 8,000
Ferdinand Thun4,000 8,000
*The William Penn family of funds consists of the
following: Scottish Widows International Fund, Penn
Square Mutual Fund, and the William Penn Interest
Income Fund.
INVESTMENT ADVISOR AND
SUB-ADVISOR
Penn Square Management Corporation serves as the Fund's
investment advisor (the "Advisor"). The Advisor has
agreed to provide investment advisory services as
described in the Prospectus and set forth in the
advisory agreement between the Fund and the Advisor.
The fees to be paid to the Advisor are set forth in the
Prospectus. If expenses borne by a Portfolio in any
fiscal year exceed the applicable expense limitations
imposed by state securities regulations, the Advisor
has agreed to reimburse a Portfolio for such excess
expenses up to the amount of its advisory fee;
provided, however, that to the extent required by such
state securities regulations, the Advisor has agreed to
effect such reimbursement regardless of the amount of
its advisory fee. Unless otherwise required by law,
such reimbursement would be accrued and paid on the
same basis that the advisory fee is accrued and paid by
a Portfolio.
The advisory agreement provides that the Advisor shall
not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection
with the performance of the advisory agreement, except
a less 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 in the performance of its duties or
from reckless disregard by it of its duties and
obligations thereunder.
Miller, Anderson & Sherrerd LLP (the "Sub-Advisor")
serves as an investment advisor for the Portfolios
pursuant to a sub-advisory agreement with the Advisor.
The Sub-Advisor furnishes advice with respect to what
securities should be purchased on a regular basis. The
Advisor will pay the Sub-Advisor fees as set forth in
the Prospectus.
DISTRIBUTOR
Penn Square Management Corporation acts as distributor
of Fund shares (the "Distributor"). Shares are sold on
a continuous basis by the Distributor as agent and the
Distributor has agreed to use its best efforts to
solicit orders for the sale of Fund shares. Copies of
the Prospectus and other sales literature may be
obtained by contacting the Distributor. (See Prospectus
section entitled "Shareholder Services.") The Fund has
a maximum Class A sales charge of 4.75% for all
Portfolios except the Money Market Income Portfolio, as
set forth in the Prospectus. Such sales charges will be
paid to the Distributor, who may in turn pay such sales
charge to dealers as a commission for generating sales.
DISTRIBUTION OF SHARES
Class A Shares: Pursuant to Rule 12b-1 promulgated
pursuant to the Investment Company Act of 1940 ("1940
Act"), the Fund has adopted a Distribution Plan (the
"Plan") which, together with the related Distribution
Agreement between the Fund and the Distributor (the
"Distribution Agreement"), is described in the
Prospectus. Under the Plan, the Distributor may be
reimbursed for expenses at an annual rate not exceeding
.50% of the respective Portfolio's net assets. Such
expenses may include payment to certain broker/dealers
and financial companies ("Service Organizations") that
provide distribution and administrative services to
their clients such as: (i) processing purchase and
redemption orders with the Distributor; (ii) providing
clients with a service that invests the assets of their
accounts in Portfolio shares pursuant to pre-authorized
instructions; (iii) processing dividend payments from
the Fund on behalf of clients and assisting clients in
changing dividend options, account designations, and
addresses; (iv) arranging for bank wires; (v) providing
subaccounting services with respect to Portfolio
shares; and (vi) providing distribution services and
any other services as the Fund or the Distributor may
reasonably request.
A report of the amounts paid to the Distributor and
Service Organizations, and the purposes for which such
expenditures were incurred, must be made to the Board
of Trustees for its review at least quarterly. In
addition, the Plan provides that it may not be amended
to increase materially the costs that the Portfolio may
bear for distribution pursuant to the Plan without
shareholder approval and that other material amendments
of the Plan must be approved by a majority of the Board
of Trustees, and by a majority of the Trustees who are
neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect
financial interest in the operation of the Plan or in
any related Distribution Agreement (the "Independent
Trustees"), by vote case in person at a meeting called
for the purpose of considering such amendments. (The
1940 Act requires that the incumbent Independent
Trustees be responsible for the selection and
nomination of persons to serve as Independent
Trustees.) The Plan and the related Distribution
Agreement have been approved, and are subject to annual
approval by, a majority of the Independent Trustees, by
vote cast in person at a meeting called for the purpose
of voting on the Plan. The Plan and the Distribution
Agreement are each terminable at any time by vote of a
majority of the Independent Trustees, or by vote of the
holders of a majority of the shares of a Portfolio, and
each will terminate automatically in the event of its
assignment. The Distribution Agreement is also
terminable by the Distributor.
Class C Shares: The Fund has adopted a Distribution
Plan for Class C shares to compensate the Distributor
for its services and costs in distributing Class C
shares. Under the Plan, the Fund pays the Distributor
an annual 12(b)1 Distribution Fee of 0.75% per year on
Class C shares. The Distributor also receives a Service
Fee of 0.25% per year. Both fees are computed on the
average annual net assets of Class C shares, determined
as of the close of each regular business day. The
distribution Fee allows investors to buy Class C shares
without a front end sales charge while permitting the
Distributor to compensate dealers who sell Class C
shares. The Distribution Fee and Service Fee increase
Class C expenses by 1.00% of average net assets per
year.
The Distributor pays sales commissions of 1.00% of the
purchase price to dealers from its own resources at the
time of the sale. The Distributor retains the
Distribution Fee during the first year shares are
outstanding to recoup the sales commission it pays, the
advances of service fee payments it makes, and its
financing costs. The Distributor plans to pay the
Distribution Fee as an ongoing commission to the dealer
on Class C shares that have been outstanding for a year
or more.
Additional Investment Information
U.S. Government Securities: U.S. Government securities
are those which are issued by the U.S. Treasury and
backed by the full faith and credit of the U.S.
Government such as U.S. Treasury bills, U.S. Treasury
notes, and U.S. Treasury bonds. Securities issued by
the various agencies and instrumentalities of the U.S.
Government may or may not be backed by the full faith
and credit of the U.S. Government. Securities not
backed by the full faith and credit of the U.S.
Government may be supported by any of the following:
(i) the right of the issuer to borrow from the U.S.
Treasury; (ii) the discretionary authority of the
Treasury to purchase obligations of the agency; or
(iii) only by the credit of the agency or
instrumentality. For securities not backed by the full
faith and credit of the U.S. Government, the investor
must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim
against the U.S. Government itself in the event the
agency or instrumentality does not meets its
commitments.
Municipal Securities: The two principal classifications
of municipal securities are bonds and notes. Municipal
bonds, which are intended to meet longer term capital
needs, can be classified as either "general obligation"
or "revenue" (or "special tax") bonds. General
obligation bonds 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
tax bonds are payable only from the revenues derived
from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise or
other tax, but not from general tax revenues. The
payment of the principal and interest on industrial
development bonds (a form of revenue bond) is dependent
solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property
so financed as security for such payment.
Zero coupon obligations are purchased at substantial
discounts from their face value which represents
imputed interest if held until maturity.
Municipal notes, which may be either "general
obligation" or "revenue" securities, are intended to
fulfill short-term capital needs and generally have
original maturities not exceeding one year. They
include tax anticipation notes, revenue anticipation
notes, bond anticipation notes, construction loan
notes, and tax-exempt commercial paper. Anticipation
notes are issued in anticipation of the municipality
receiving taxes, bond proceeds, or other revenues;
construction loan notes are issued during the
construction phase of a project.
Mortgage-Backed Securities: Mortgage-backed securities
include pass-through securities, participation
certificates, and collateralized mortgage obligations
that may be issued by GNMA, FNMA, other
quasi-governmental agencies, or private issuers such as
banks. If such a security is purchased at a premium
because its fixed rate of interest exceeds current
levels, the premium is not guaranteed and a decline in
value of the security, especially as a result of
prepayments of the underlying mortgages, may result in
a loss of the premium. As prepayments and scheduled
principal payments on mortgage-backed securities are
received they must be reinvested at then prevailing
rates, which could be lower than the rate on the
original security.
Collateralized Mortgage Obligations: CMOs are
securities which are collateralized by mortgage
pass-through securities. Cash flows from the mortgage
pass-through are allocated to tranches in a
predetermined, specified order. Each tranche has a
"stated maturity"_the latest date by which the tranche
can be completely repaid, assuming no prepayments_and
has an "average life"_the average of the time to
receipt of a principal payment weighted by the size of
the principal payment. The average life is typically
used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at
maturity, as would be the case in a straight debt
instrument.
Credit Analysis: The investment advisor or sub-advisor
will perform its own credit analysis of all securities
to be invested in by the Portfolios, except for U.S.
Government securities, which are presumed to be
riskless. In making its credit analysis, the advisor or
sub-advisor will rely to a significant extent on the
ratings assigned by Moody's and S&P for all rated
securities. While many securities carry identical
investment ratings, there are nevertheless quality
differences among them. Hence, the purpose of credit
analysis is to identify those securities within a
credit rating which represent improving financial
situations and, therefore, represent less risk.
Portfolio Turnover: Only the Money Market Income
Portfolio is expected to have a high portfolio turnover
due to the short maturities of the securities
purchased, although this should not increase costs
because brokerage commissions are not usually charged
on the purchase or sale of money market securities. The
rate of turnover for each of the Portfolios should not
exceed 100%; however, the specific rate will depend
upon market and other conditions, and will not by
itself be a limiting factor if the advisor believes
that Portfolio changes are necessary.
Repurchase Agreements: In order to minimize exposure,
the Fund will only enter into repurchase agreements
with federally insured banks having assets in excess of
$1 billion, and registered securities dealers
acceptable to the Fund's advisor.
Liquid Reserves: Each Portfolio may hold short-term,
interest bearing liquid reserves if the advisor
believes that it is advisable for temporary or
emergency purposes, or to maintain liquidity.
Lending of Securities: Each Portfolio may lend its
investment securities to qualified brokers, dealers,
banks, or other financial institutions for the purpose
of realizing additional income. Loans of securities
will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least
100% of the current market value of the loaned
securities.
Foreign Investments: The Quality Income Portfolio and
the New York and Pennsylvania Tax-Free Income
Portfolios are permitted to invest in foreign
securities, but such securities may not exceed 15% of
the value of the Portfolio's total net assets.
Futures Contracts, Options on Futures Contracts and
Options: Futures contracts provide for the sale by one
party and purchase by another party of a specified
amount of a specific security, at a specified future
time and price. An option is a legal contract that
gives the holder the right to buy or sell a specified
amount of the underlying security at a fixed or
determinable price upon the exercise of the option. A
call option conveys the right to buy and a put option
conveys the right to sell a specified quantity of the
underlying security.
Interest Rate and Currency Swaps: An interest rate swap
is an agreement to exchange the interest income
generated by one fixed-income instrument for the
interest income generated by another fixed-income
instrument. The payment streams are calculated by
reference to a specified index and agreed upon notional
amount. The term "specified index" includes fixed
interest rates and prices, interest rate indices,
fixed-income indices, stock indices and commodity
indices (as well as amounts derived from arithmetic
operation on these indices). For example, a Portfolio
may agree to swap the income stream generated by a
fixed rate instrument which it already owns for the
income stream generated by a variable rate instrument
owned by another party. The currency swaps in which the
Fund's Portfolios may enter will generally involve an
agreement to pay interest streams calculated by
reference to interest income linked to a specified
index in one currency in exchange for a specified index
in another currency. Such swaps may involve initial
and/or final exchanges that correspond to the agreed
upon notional amount.
The Portfolios will usually enter into swaps on a net
basis, i.e., the two payment streams are netted out in
a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving
or paying, as the case may be, only the net amount of
the two payments. A Portfolio's obligations under a
swap agreement will be accrued daily (offset against
any amounts owing to the Portfolio).
Forward Foreign Currency Exchange Contracts: The
Quality Income Portfolio may enter into forward foreign
currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange
rates in the purchase and sale of investment
securities. The Portfolio may not enter into such
contracts for speculative purposes. A forward foreign
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 the contract. These contracts may be bought
or sold to protect the Portfolio to a limited extent
against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Such contracts,
which protect the value of the Portfolio's investment
securities against a decline in the value of a
currency, do not eliminate fluctuations caused by
changes in the local currency prices of the securities,
but rather, they simply establish an exchange rate at a
future date. Although such contracts tend to minimize
the risk of loss due to a decline in the value of the
hedged currency, likewise they tend to limit potential
gain if the value of such currency increases.
When-Issued Securities: The Portfolios, except the
Money Market Portfolio, may purchase securities on a
"when-issued" basis. In buying "when-issued"
securities, a Portfolio commits to buy securities at a
certain price even though the securities may not be
delivered for up to 90 days. No payment or delivery is
made by a Portfolio in a "when-issued" transaction
until the Portfolio receives payment or delivery from
the other party to the transaction. Although a
Portfolio receives no income from the above described
securities prior to delivery, the market value of such
securities is still subject to change. As a
consequence, it is possible that the market price of
the securities at the time of delivery may be higher or
lower than the purchase price.
The seven day yield in the Money Market Income
Portfolio for the period ending December 31, 1995, was
5.19% on an annualized basis, for an effective yield of
5.32%. The annualized yield is computed by accumulating
dividends paid during the seven day base period,
exclusive of capital changes, for a hypothetical
preexisting account in the Money Market Income
Portfolio having a balance of one share at the
beginning of the period. This total base period return
is multiplied by 365/7 to obtain the annualized yield.
The effective yield is calculated similarly but the
calculation assumes that the income earned by an
investment in the Money Market Income Portfolio is
reinvested.
The standardized thirty day yield for the Pennsylvania
Tax-Free Income Portfolio, Quality Income Portfolio,
and U.S. Government Securities Income Portfolio for the
period ended December 31, 1995, was 3.69%, 5.10%, and
5.81%, respectively; the New York Tax-Free Income
Portfolio was not in operation on December 31, 1995.
Interest used in computing these yields is calculated
by determining the yield to maturity of each obligation
based on the market value of the obligation, including
accrued interest as of the last business day of the
month, or the purchase price plus accrued interest for
obligations purchased during the month. The yield to
maturity is divided by 360 and multiplied by the market
value of the obligation to determine interest income
for each day of the subsequent month. The net
investment income determined during the base period is
divided by the maximum offering price per share on the
last day of the thirty day base period times the
average number of shares outstanding during the base
period. The maturity of an instrument with a call
feature is the next call date on which the obligation
reasonably may be expected to be called. The coupon
rate of interest is used in lieu of the yield to
maturity in the case of a tax-exempt obligation issued
without original issue discount and having a current
market discount.
The capital changes excluded from the above
calculations are realized gains and losses from the
sale of securities and unrealized appreciation and
depreciation.
The Portfolios' quoted yields are not indicative of
future yields. The yields will depend upon factors such
as Portfolio maturity, the Portfolio expenses, and the
types of instruments held by a Portfolio.
The average annual return for the Pennsylvania Tax-Free
Income Portfolio, Quality Income Portfolio, and U.S.
Government Securities Income Portfolio for the year
ended December 31, 1995, was 11.15%, 13.40%, and
13.68%; and for the five years ended December 31, 1995
was 8.18%, 10.63%, and 9.31%, respectively. These
returns are based on a standard calculation which is
computed by finding the average annual compounded rates
of return that would equate a hypothetical investment
of $1,000 (subtracting the maximum sales load and
taking into account daily reinvestment) to the ending
redeemable value of the initial investment.
Additional Information Concerning Taxes
The following is a summary of certain additional tax
considerations generally affecting the Fund and its
shareholders which are not described in the Prospectus.
No attempt is made to present a detailed explanation of
the tax The following is a summary of certain
additional tax considerations generally affecting the
Fund and its shareholders which are not described in
the Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Fund
or its shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for
careful tax planning. Investors are urged to consult
with their tax advisors with specific reference to
their own tax situation. Investors are also cautioned
that the discussions here and in the Prospectus are
based on the law and regulations which are in effect on
the respective dates of this Statement of Additional
Information and the Prospectus and that such laws and
regulations may subsequently be changed by legislative
or administrative action.
Interest on indebtedness incurred to purchase or carry
shares in the Fund may be wholly or partially
nondeductible for federal income tax purposes,
depending on an investor's personal tax situation. In
addition, interest on indebtedness incurred to purchase
or carry shares in the Pennsylvania Tax-Free Income
Portfolio will be nondeductible to the extent
attributable to the production of exempt-interest
dividends.
Information as to the tax status of dividends of the
Pennsylvania and New York Tax-Free Income Portfolios
will be provided annually showing, on an average basis,
that portion which is taxable and that portion which is
tax-exempt based on income received during the previous
year. Shareholders who have not been in the
Pennsylvania or New York Tax-Free Income Portfolios for
a full calendar year may have designated as tax-exempt
a percentage of income which is not equivalent to the
actual amount applicable to the period for which they
have held their shares.
Each Portfolio is required by law to withhold 31% of
reportable payments paid to shareholders who have not
certified, on a form supplied by the Portfolio, that
the taxpayer identification number provided is correct
and that the shareholder either is not currently
subject to backup withholding or is exempt from backup
withholding.
Gain or loss realized on the sale, exchange or
redemption of shares in the U.S. Government Securities
Income Portfolio, Money Market Income Portfolio, or the
Quality Income Portfolio (the "Taxable Portfolios") is
subject to the same rules of federal income taxation
that are applicable to equity securities generally,
except that any loss incurred on a taxable disposition
of such shares held for six months or less (other than
through a periodic redemption plan) will be treated as
a long-term capital loss to the extent of any
distributed or allocated undistributed long-term
capital gain during the period the shares were held.
Similarly, any loss on the taxable disposition of
shares in the Pennsylvania or New York Tax-Free Income
Portfolio held for six months or less (other than
through a periodic redemption plan) will be disallowed
to the extent of any exempt interest dividends
received. Applicable Treasury regulations require the
Fund to file an informational return with the Internal
Revenue Service to report each redemption of shares
held by a nonexempt shareholder (except for redemptions
by the Money Market Income Portfolio).
Because substantially all of the net investment income
of the Taxable Portfolios will arise from earned
interest, only a small portion, if any, of the dividend
distributions will be eligible for the 70% dividends
received deduction for corporations. Further, any such
portion which is otherwise eligible for the 70%
dividends received deduction may be reduced or
eliminated as to a particular corporate shareholder
depending on how long the Taxable Portfolios' shares
were held and the extent to which the acquisition of
such shares is deemed financed through indebtedness. In
addition, an amount taken as a dividends received
deduction may result in an upward adjustment in a
corporation's alternative minimum taxable income. An
individual shareholder is no longer entitled to the
$100 dividends received exclusion.
Each Portfolio intends to declare and pay dividends and
capital gains distributions so as to avoid the
imposition of a 4% federal excise tax on undistributed
earnings. To do so, each Portfolio expects to
distribute an amount not less than (i) 98% of its
calendar-year ordinary income, (ii) 98% of its capital
gains net income for the one-year period ending each
October 31 (unless an irrevocable election is made to
use a calendar year), and (iii) 100% of any
undistributed ordinary or capital gain net income from
the applicable prior twelve-month period. Dividends
declared in December with a December record date will
be deemed to have been paid by a Portfolio and received
by its shareholders on the record date, provided that
payment is made before February 1 of the following
year.
The Pennsylvania and New York Tax-Free Income
Portfolios and/or certain of their shareholders may
incur alternative minimum tax ("AMT") liability as a
result of recent legislation. Dividends attributable to
interest on certain "private activity" bonds (issued on
or after August 8, 1986) must now be included in
alternative minimum taxable income ("AMTI") for
purposes of calculating AMT liability. Further,
federally tax-free interest income from all other
obligations will increase the amount of AMTI (by
one-half of the amount of such income) for corporate
AMT purposes. In addition, the "Superfund Act" imposes
a deductible environmental tax of .12% on a
corporation's modified AMTI in excess of $2,000,000.
Exempt-interest dividends paid by the Pennsylvania and
New York Tax-Free Income Portfolios that create AMT
preferences for corporate shareholders will be subject
to such tax.
If, for any taxable year, the Fund does not qualify for
tax treatment afforded regulated investment companies,
all of its taxable income would be subject to federal
taxation at regular corporate rates (without any
deducation for distributions to shareholders), and
interest income earned on state and municipal
obligations by the Pennsylvania and New York Tax-Free
Income Portfolios, although not taxable to the
Portfolio, would be taxable to the shareholders of the
Portfolio when distributed as dividends.
General Information
DESCRIPTION OF SHARES
The Fund is an open-end, diversified, management
investment company organized as a Pennsylvania common
law trust pursuant to a Declaration of Trust dated
April 14, 1987 (the "Trust"). Pursuant to the Trust,
the Board of Trustees is authorized to issue an
indefinite number of shares of beneficial interest and
to classify or reclassify any unissued shares by
setting or changing in any one or more respects, from
time to time before the issuance thereof, their
respective preferences, conversion or other rights,
voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of
redemption. The Trustees' power to classify or
reclassify any unissued shares includes the power to
classify or reclassify classes of shares and to divide
any class into one or more sub-classes. Accordingly,
the Trustees may, without shareholder approval,
authorize the issuance of shares in investment
portfolios in addition to the present Portfolios of the
Fund, each having its own investment objective and
policies.
As of the date of this Statement, the Trustees have
authorized the issuance of shares of beneficial
interest in the Money Market Income Portfolio, U.S.
Government Securities Income Portfolio, Quality Income
Portfolio, New York Tax-Free Income Portfolio and
Pennsylvania Tax-Free Income Portfolio. Each share in a
Portfolio represents an equal proportionate interest in
the Fund with each other Fund share and is entitled to
such dividends and distributions out of the Fund's
income as are declared at the discretion of the
Trustees. In the event of the liquidation or
dissolution of the Fund, shares of the Portfolio are
entitled to receive any assets belonging to the
Portfolio which are available for distribution.
The 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting
securities of an investment company such as the Fund
shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the
outstanding shares of each Portfolio affected by the
matter. A Portfolio is affected by a matter unless it
is clear that the interests of each Portfolio in the
matter are substantially identical or that the matter
does not affect any interest of the Portfolio. The
approval of an investment advisory agreement or any
change in a fundamental investment policy would be
effectively acted upon with respect to the Portfolio
only if approved by a majority of the outstanding
shares of such Portfolio. Conversely, the ratification
of the appointment of independent public auditors, the
approval of principal underwriting contracts, and the
election of trustees may be effectively acted upon by
shareholders of the Fund voting without regard to
class.
The Fund shares have no preemptive rights and only such
conversion or exchange rights as set forth in the
Prospectus or as the Trustees may grant in their
discretion. When issued for payment as described in the
Prospectus, the Fund shares will be fully paid and
non-assessable. For information concerning possible
restrictions upon the transferability of Fund shares
and redemption provisions with respect to such shares,
see "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION."
Shareholders are entitled to one vote for each share
held, will vote in the aggregate and not by Portfolio
except as otherwise required by the 1940 Act or when
the matter to be voted upon affects only the interests
of the shareholders of a particular Portfolio. As a
Pennsylvania common law trust, the Fund is not required
to, and does not intend to, hold annual shareholder
meetings.
In this Statement of Additional Information and the
Prospectus, any reference to a required majority
shareholder vote of the Fund or of a Portfolio means
the lesser of (a) 67% of the shares of the Fund
(irrespective of class) or of the particular Portfolio
represented at a meeting at which the holders of more
than 50% of the outstanding shares of the Fund or
Portfolio are present in person or by proxy, or (b)
more than 50% of the outstanding shares of the Fund
(irrespective of class) or of the Portfolio.
REPORTS
Shareholders will receive unaudited semi-annual reports
and quarterly updates describing the Fund's investment
operation and annual financial statements audited by
independent auditors.
COUNSEL
The law firm of Stevens & Lee serves as counsel to the
Fund and will pass upon the legality of the shares
offered hereby. Stevens & Lee has offices at 607
Washington Street, Reading, Pennsylvania 19601. Stevens
& Lee also serves as counsel to Penn Square Management
Corporation, the distributor and advisor of the William
Penn family of funds registered investment companies
also managed by Penn Square Management Corporation.
Independent Auditors and Financial Statements
Ernst & Young LLP, 875 Berkshire Blvd., Reading,
Pennsylvania, are the Fund's independent auditors
providing audit and tax return preparation services and
assistance and consultation in connection with the
review of various SEC filings. The financial statements
incorporated by reference herein have been so
incorporated, and the financial highlights included in
the Prospectus have been so included, in reliance upon
the report of Ernst & Young LLP given on the authority
of said firm as experts in accounting and auditing.
The financial statements of the Fund and the report of
the independent auditors are included in the Fund's
Annual Report for the period ended December 31, 1995.
The following financial statements appearing in the
Annual Report are incorporated herein by reference:
Statement of Investments, as of
December 31, 1995
Statement of Assets and
Liabilities, as of
December 31, 1995
Statement of Operations, for the
Year Ended December 31, 1995
Statements of Changes in Net
Assets, for the Years Ended
December 31, 1995 and
December 31, 1994
Notes to Financial Statements, as
of December 31, 1995
Appendix
DESCRIPTION OF RATINGS
Bond ratings apply to long-term debt obligations,
generally those with maturities longer than three
years. The following summarizes the highest four
ratings used by Standard & Poor's Corporation for
bonds:
AAA - This is 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 rated AA has a very strong capacity to pay
interest and repay principal and differs from AAA
issues only in small degree.
A - Debt rated A has a strong capacity to pay interest
and repay principal, although it is somewhere more
susceptible to the adverse effects of change in
circumstances and economic conditions than bonds in
higher rated categories.
BBB - Debt rated BBB 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 bonds
in this category than in higher rated categories.
To provide more detailed indications of credit quality,
the "AA" through "B" ratings may be modified by the
addition of a plus or minus sign to show relative
standing within these major categories.
Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal
in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will
likely have some quality and protective
characteristics, these are outweighted by large
uncertainties or major risk exposure to adverse
conditions. The rating C is reserved for income bonds
on which no interest is being paid. Bonds rated D are
in default, and payment of principal and/or interest is
in arrears.
The following summarizes the highest four ratings used
by Moody's Investors Service, Inc. for bonds:
Aaa -Bonds that are rated Aaa are judged to be of the
best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edge." 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 that are rated Aa 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 which are rated A 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 that are rated Baa 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.
Moody's applies numerical modifiers (1, 2 and 3) with
respect to corporate bonds rated Aa and A. The modifier
1 indicates that the bond being rated ranks in the
higher end of its generic rating category; the modifier
2 indicates a midrange ranking; and the modifier 3
indicates that the bond ranks in the lower end of its
generic rating category.
Bonds which are rated Ba are judged to have speculative
elements. Often the protection of interest and
principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds
in this class. Bonds which are rated B generally lack
characteristics of a desirable investment. Assurance of
interest and principal payments or maintenance of other
terms of the contract over any long period of time may
be small.
Standard & Poor's uses the ratings SP-1, SP-2 and SP-3
for short-term note issues (generally due in three
years or less). SP-1 means the issuer has a strong or
very strong capacity to pay principal and interest
(SP-1 + indicates overwhelming safety); SP-2 signifies
satisfactory capacity. Both SP-1 and SP-2 are
considered high quality.
The following are the two highest ratings used by
Moody's for short-term notes (generally due in three
years or less) and variable rate demand obligations:
MIG-1/VMIG-1_Obligations bearing these designations are
of the best quality. There is present strong protection
by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for
refinancing, or both.
MIG-2_Obligations bearing these designations are of
high quality, with ample margins of protection although
not so large as the preceding group.
Commercial paper (obligations with an original maturity
of one year or less) rated A-1 by Standard & Poor's
indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those
issuers determined to possess overwhelming safety
characteristics are denoted A-1 +. Issuers rated A-2
have a slightly smaller degree of safety than those
rated A-1, but their commercial paper is still
considered to be high quality.
The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Issuers rated Prime-1 (or
related supporting institutions) are considered to have
a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a
strong capacity for repayment of short-term
obligations, such that their commercial paper is also
considered to be high quality.
DESCRIPTION OF RATINGS
Bond ratings apply to long-term debt obligations,
generally those with maturities longer than three
years. The following summarizes the highest four
ratings used by Standard & Poor's Corporation for
bonds:
AAA - This is 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 rated AA has a very strong capacity to pay
interest and repay principal and differs from AAA
issues only in small degree.
A - Debt rated A has a strong capacity to pay interest
and repay principal, although it is somewhere more
susceptible to the adverse effects of change in
circumstances and economic conditions than bonds in
higher rated categories.
BBB - Debt rated BBB 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 bonds
in this category than in higher rated categories.
To provide more detailed indications of credit quality,
the "AA" through "B" ratings may be modified by the
addition of a plus or minus sign to show relative
standing within these major categories.
Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal
in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will
likely have some quality and protective
characteristics, these are outweighted by large
uncertainties or major risk exposure to adverse
conditions. The rating C is reserved for income bonds
on which no interest is being paid. Bonds rated D are
in default, and payment of principal and/or interest is
in arrears.
The following summarizes the highest four ratings used
by Moody's Investors Service, Inc. for bonds:
Aaa -Bonds that are rated Aaa are judged to be of the
best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edge." 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 that are rated Aa 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 which are rated A 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 that are rated Baa 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.
Moody's applies numerical modifiers (1, 2 and 3) with
respect to corporate bonds rated Aa and A. The modifier
1 indicates that the bond being rated ranks in the
higher end of its generic rating category; the modifier
2 indicates a midrange ranking; and the modifier 3
indicates that the bond ranks in the lower end of its
generic rating category.
Bonds which are rated Ba are judged to have speculative
elements. Often the protection of interest and
principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds
in this class. Bonds which are rated B generally lack
characteristics of a desirable investment. Assurance of
interest and principal payments or maintenance of other
terms of the contract over any long period of time may
be small.
Standard & Poor's uses the ratings SP-1, SP-2 and SP-3
for short-term note issues (generally due in three
years or less). SP-1 means the issuer has a strong or
very strong capacity to pay principal and interest
(SP-1 + indicates overwhelming safety); SP-2 signifies
satisfactory capacity. Both SP-1 and SP-2 are
considered high quality.
The following are the two highest ratings used by
Moody's for short-term notes (generally due in three
years or less) and variable rate demand obligations:
MIG-1/VMIG-1_Obligations bearing these designations are
of the best quality. There is present strong protection
by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for
refinancing, or both.
MIG-2_Obligations bearing these designations are of
high quality, with ample margins of protection although
not so large as the preceding group.
Commercial paper (obligations with an original maturity
of one year or less) rated A-1 by Standard & Poor's
indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those
issuers determined to possess overwhelming safety
characteristics are denoted A-1 +. Issuers rated A-2
have a slightly smaller degree of safety than those
rated A-1, but their commercial paper is still
considered to be high quality.
The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Issuers rated Prime-1 (or
related supporting institutions) are considered to have
a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a
strong capacity for repayment of short-term
obligations, such that their commercial paper is also
considered to be high quality.
Growth and Income
Penn Square Mutual Fund
International
Scottish Widows International Fund
Stability
Money Market Income Portfolio
Income
Quality Income Portfolio
U.S. Government Securities Income Portfolio
Tax-Free Income
New York Tax-Free Income Portfolio
Pennsylvania Tax-Free Income Portfolio
Trustees
James E. Jordan, Chairman
Paul J. Lawler, CFA, Vice Chairman
Lee D. Arning
Gail M. Harrity
Emmett M. Murphy, CFA
John D. Tenhula, Ph.D.
Ferdinand Thun
Officers
James E. Jordan, President
Dennis J. Westley, CPA, V.P. & Treasurer
Sandra J. Houck, Secretary
PART C
OTHER INFORMATION
Item 24 Financial Statements and Exhibits
(a) Financial Statements
(1) The Prospectus contains the Condensed
Financial Information as of December
31, 1995 under Financial Highlights.
(2) The following financial statements,
each as of December 31, 1995, are
Incorporated by reference into the
Statement of Additional Information
From the Registrant's 1995 Annual
Report:
Statement of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
(b) Exhibits:
(1) Consent of Independent Accountants
(2) All other exhibits are incorporated
By reference to Registrant's
Form N1-A effective October 1, 1987
And registered under File No. 14609
Item 25 Persons Controlled by or Under Control with Registrant
Inapplicable
Item 26 Number of Holders of Securities
As of February 29, 1996, the Registrant's Portfolios
had the following numbers of shareholders of record:
(1) Money Market Income Portfolio-1,100; (2) Quality
Income Portfolio-866; (3) U.S. Government Securities
Income Portfolio-1,842; (4) Pennsylvania Tax-Free
Income Portfolio-2,950; and (5) New York Tax-Free
Income Portfolio-N/A.
Item 27 Indemnification
Indemnification of Registrant's principal Under-
writer against certain losses is provided in Section
11 of the Distribution Agreemnent.
The Declaration of Trust provides for indemnification
of Trustees as set forth in Section 13 thereof.
Registrant will comply with Rule 484 under the
Securities Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under
the Securities Act of 1933 may be permitted to trustees,
officers, and controlling persons of Registrant
pursuant to the foregoing provisions, or otherwise
Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnifi-
cation is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities
(other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling
person of Registrant of expenses incurred or paid by
a director, officer or controlling person of Registrant
in the successful defense of any action, suit or pro-
ceeding) is asserted by such trustee, officer, or
controlling person in connection with the securities
being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the
final adjudication of such issue.
Item 28 Business and Other Connections of Investment Advisor
To Registrant's knowledge, none of the directors or
officers of Penn Square Management Corporation,
except those set forth below, is, or has been at any
time during the past two calendar years, engaged in
any other business, profession, vocation or employ-
ment of a substantial nature. Set forth below are
the names and principal businesses of the directors
and certain of the senior executive officers of Penn
Square Management Corporation who are or have been
engaged in any other business, profession, location
or employment of a substantial nature.
Name Position with
Penn Square Management
Corporation
James E. Jordan President and Director
John W. Jordan, II Director
David W. Zalaznick Director
Mr. James Jordan is an executive with, and Messrs.
John Jordan and David Zalaznick are partners of The
Jordan Company, New York, NY. The Jordan Company is
a private investment banking partnership.
Item 29 Principal Underwriter
(a) Penn Square Management Corporation acts as
distributor for and investment advisor to the
William Penn Interest Income Fund and the
Scottish Widows International Fund.
(b) The Directors and executive officers of Penn Square
Management Corporation are as follows:
Name and Principal Positions and Offices Positions and Offices
Business Address with Penn Square with Registrant
Management Corporation
James E. Jordan President & Director Chairman, President
And Trustee
Dennis J. Westley Sr. V.P. Vice President &
Finance & Administration Treasurer
Sandra J. Houck Secretary Secretary
Kevin J. Mailey Sr. V.P. for Marketing None
John W. Jordan II Director None
David W. Zalaznick Director None
The principal business address for each of the above is 2650
Westview Drive, Wyomissing, PA 19610
(C) Inapplicable
Item 30 Location of Accounts and Records
(1) Penn Square Management Corporation, 2650 Westview
Drive, Wyomissing, PA 19610 (records relating to
Its functions as distributor, transfer agent,
dividend paying agent, investment advisor, and
Registrant's Declaration of Trust).
(2) CoreStates Bank, P. O. Box 7618, Philadelphia,
PA 19101 (records relating to its function as
custodian)
Item 31 Management Services
None
Item 32 Undertakings
The Registrant undertakes to furnish to any person to
whom a prospectus is delivered a copy of Registrant's
latest annual report upon request and without charge.
THE
WILLIAM PENN
FUNDS
INTEREST INCOME FUND
PORTFOLIOS
U.S. Government
Securities Income
Quality Income
Pennsylvania
Tax-Free Income
Money Market Income
December 31, 1995
ANNUAL REPORT
REPORT
SHAREHOLDER SERVICES:
610-670-1031
800-523-8440
P.O. Box 1419
Reading, Pennsylvania 19603
Overnight Mail:
2650 Westview Drive
Wyomissing, PA 19610
Growth and Income
Penn Square Mutual Fund
International
Scottish Widows International Fund
Stability
Money Market Portfolio
Income
Quality Income Portfolio
U.S. Government Securities Portfolio
Tax-Free Income
Pennsylvania Tax-Free Portfolio
William Penn Interest Income Fund
Annual Report 1995
January 10, 1996
Dear Shareholders:
In sharp contrast to 1994, when interest rates rose
continuously and drove down the prices of debt
securities, 1995 saw a series of modest but steady
reductions in interest rates, carefully orchestrated by
the Federal Reserve, which brought about a resurgence
in credit markets and, of course, equity markets as
well. The Federal Reserve's long-proclaimed goal of
2.5% economic growth without inflation appears in
general to have been achieved, and more importantly,
appears sustainable. With this economic backdrop, our
fund managers devised a strategy of creating balanced
portfolios weighted with both short and long-term
securities, but few intermediate-term securities (such
an arrangement is termed a "barbell" in technical
parlance). This strategy had the great merit of
providing the funds with high coupon income while
retaining the greatest possible flexibility to meet
shifts in interest rates.
The strategy worked well. Results are stated below for
the one and five years ended December 31, 1995, as
always on a total rate of return basis, which
incorporates both the interest earned, or yield, of a
fund, as well as any capital appreciation or
depreciation realized during the period, and net of all
expenses.
U.S. Government Securities Income Portfolio:
For the one and five years ended December 31, 1995, the
total rate of return was +19.35% and +56.09%
respectively, as compared with +17.34% and 49.51%
respectively for the Lipper U.S. Government Funds
Average.
Quality Income Portfolio: For the one and five
years ended December 31, 1995, the total rate of return
was +19.05% and +65.71% respectively, as compared with
+20.07% and +69.13% respectively for the Lipper BBB
Corporate Debt Funds Average.
Pennsylvania Tax-Free Income Portfolio: For the
one and five years ended December 31, 1995, the total
rate of return was +16.69% and +48.14% respectively, as
compared with +17.15% and +51.79% respectively for the
Lipper Pennsylvania Municipal Funds Average.
Money Market Income Portfolio: For the one and
five years ended December 31, 1995, the total rate of
return was +5.32% and +21.88% respectively, as compared
with +5.37% and +22.36% respectively for the Lipper
Money Market Funds Average.
Looking ahead in 1996, we would not be surprised by
modest increases in interest rates. We believe that
there is little slack left in the economy, and that
unemployment is low. Given the substantial decline in
interest rates that we enjoyed in 1995, we cannot
envision much by way of further decline. Accordingly,
our portfolios are positioned somewhat shorter than
market benchmarks.
In closing, we have the sad duty to report the passing
of our beloved friend and Trustee, June Roedel. To all
who came in contact with her, but in particular to
those in our Pennsylvania hometown, June brought her
special combination of grace and intelligence. She
never flinched from often tough involvement on behalf
of others, never tiring or complaining, always willing
to lend a helping hand. Her accomplishments were
enormous, and in an often selfish and greedy world,
June Roedel reminded us all of what caring for others
is really about.
With best regards,
Sincerely yours,
James E. Jordan
Chairman
Portfolio Highlights: December 31, 1995
Portfolio
U.S.
GovernmentPennsylvaniaMoney
SecuritiesQualityTax-FreeMarket
IncomeIncomeIncomeIncome
Total Net
Assets$47,738,443$29,930,817$123,956,614$12,041,397
Class A:
Shares
Outstanding4,417,2182,801,40410,950,36912,041,397
Net Asset Value Per Share$10.80$10.59$11.31$1.00
Maximum Offering Price Per Share$11.34$11.12$11.87$1.00
(Reduced for purchases of $50,000 or more)
Class C:
Shares Outstanding1,93424,15914,669n/a
Net Asset Value & Offering
Price/Share$10.80$10.59$11.31n/a
Average Portfolio Maturity8.3 years10.6 years8.6
years15 days
Average Portfolio Duration*4.7 years4.5 years5.4
years15 days
Total Return:**
One Year Ended 12/31/9519.35%19.05%16.69%5.32%
Lipper Comparative Averages17.34%20.07%17.15%5.37%
Five Years Ended 12/31/9556.09%65.71%48.14%21.88%
Lipper Comparative Averages49.51%69.13%51.79%22.36%
Average Annual Total Return:
One Year Ended 12/31/95***13.68%13.40%11.15%5.32%
Five Years Ended 12/31/95***8.26%9.56%7.13%4.04%
Five Years Ended 12/31/95**9.31%10.63%8.18%4.04%
Lipper Comparative Averages8.38%11.08%8.70%4.12%
Source of return information: Lipper Analytical
Service
* Weighted average time to receipt of total return
objective.
** Excludes initial sales charge of 4.75%.
***Adjusted to reflect initial sales charge of 4.75%,
except Money Market Portfolio.
Performance data herein represents past performance.
Investment return and principal value of an investment
will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original
cost.
This report is for the information of shareholders of
William Penn Interest Income Fund. It must not be
distributed to other than such shareholders unless it
has been preceeded by, or is accompanied by, a
Prospectus by which all offerings of the Fund's shares
are made. Class A offering price includes a maximum
sales charge of 4.75%.
Summary of Investments: December 31, 1995
Portfolio
Average
% of NetStandard & Poor'sCategoryAssetsMarket
ValueRating
U.S. Government Securities Income Portfolio
United States Treasury Obligations25.4%$
12,122,425Treasury
Government National Mortgage
Association23.9%11,427,382Agency
Federal National Mortgage
Association15.6%7,450,025Agency
Federal Home Loan Mortgage Corp.10.1%4,808,486Agency
Resolution Trust Corporation8.6%4,120,156Agency
Other2.4%1,137,361Agency
Total Investments86.0%41,065,835
Short-term Investment40.9%19,519,302AAA
Other assets less liabilities-26.9% (12,846,694)
TOTAL NET ASSETS100.0%$ 47,738,443Agency
Quality Income Portfolio
Mortgage-Backed Securities53.9%$ 17,271,107Agency
Foreign Bonds (Non-Dollar)13.8%4,715,403Treasury
Corporate Bonds14.4%4,640,925BBB
United States Treasury
Obligations11.7%1,455,934Treasury
Foreign Bonds (Yankee)2.8%402,325BB
Total Investments96.6%28,485,694
Short-term Investment29.3%8,423,616AAA
Fwd. Currency Contracts & Financial Futures-14.6%
(4,886,182)
Other assets less liabilities-11.3%
(2,092,311)
TOTAL NET ASSETS100.0%$ 29,930,817AA+
Pennsylvania Tax-Free Income Portfolio
Revenue Bonds30.1%$ 37,334,178AA+
General Obligation Bonds29.5%36,513,276AA+
Zero Coupon Debentures18.2%22,526,342AAA
Total Investments77.8%96,373,796
Short-term Tax-Free Investment21.2%26,268,727AAA
Other assets less liabilities1.0%1,314,091
TOTAL NET ASSETS100.0%$ 123,956,614AA+
Money Market Income Portfolio
Commercial Paper92.0%$ 11,074,157A-1+
Short-term Investment5.4%651,159AAA
Medium Term Note1.7%199,991A
Total Investments99.1%11,925,307
Other assets less liabilities0.9%116,090
TOTAL NET ASSETS100.0%$ 12,041,397AA+
U.S. Government Securities Income
Portfolio Investments: December 31, 1995
Standard
PrincipalMaturityInterestMarket& Poor's
AmountDateRateValueRating
UNITED STATES TREASURY$ 6,825,00019985.125%$
6,801,536Treasury
BONDS and STRIP - 25.4%150,00020047.250%166,875Treasury
2,100,000200411.625%2,973,468Treasury
1,625,00020208.750%2,180,547Treasury
10,700,00012,122,425
GOVERNMENT25,960199613.750%27,156Agency
NATIONAL MORTGAGE24,597199913.500%25,522Agency
ASSOCIATION - 23.9%399,7901997-200110.500%427,642Agency
42,789201116.000%49,263Agency
14,094201114.000%16,158Agency
388,986201215.000%446,884Agency
60,495201214.500%68,253Agency
99,4711996-201312.250%106,119Agency
586,0581999-201412.500%644,034Agency
1,021,8502012-201412.000%1,151,539Agency
162,9802013-201412.750%176,498Agency
1,284201511.250%1,393Agency
455,9332012-201513.000%496,142Agency
79,2642013-201511.750%90,510Agency
119,4082010-201711.000%135,617Agency
2,631,7401997-202011.500%3,010,328Agency
4,050,00020237.000%4,091,310Agency
458,08920246.000%463,015Agency
10,622,90511,427,382
FEDERAL HOME LOAN14,269200012.000%14,716Agency
MORTGAGE CORP. - 10.1%14,778201114.750%16,423Agency
49,742201113.750%54,976Agency
170,963201111.750%191,545Agency
142,225201214.500%157,833Agency
747201214.000%827Agency
32,791201212.500%35,933Agency
9,660201312.750%10,609Agency
39,982201413.500%44,128Agency
64,594201413.250%71,194Agency
85,070201513.000%87,341Agency
15,696201711.000%17,399Agency
4,075,00020247.000%4,105,563Agency
4,715,5254,808,486
FEDERAL28,112199912.000%30,916Agency
NATIONAL MORTGAGE34,446200512.250%37,996Agency
ASSOCIATION - 12.3%$ 7,913201215.000%$
8,877Agency
49,022201214.500%54,878Agency
11,183201414.000%12,494Agency
5,124201413.750%5,719Agency
129,778201412.750%143,823Agency
48,259201412.500%53,394Agency
333,262201513.500%371,553Agency
88,056201513.000%97,747Agency
6,319201511.750%6,925Agency
5,000,00020237.000%5,033,000Agency
5,741,4805,857,323
COLLATERALIZED
MORTGAGE OBLIGATIONS - 5.1%
Donaldson Lufkin Jenrette A1
CMO481,92220037.400%499,416AAA
Morgan Stanley 28-2300,00020189.400%319,761AAA
FNMA Tr#90 85D37,72920199.500%37,915Agency
FNMA Tr#90 118S372,4422020Inv. Floater543,877Agency
FNMA #91 7J PO1,065,00020210.000%730,334Agency
FNMA Tr#92250,0002022Inv. Floater280,574Agency
2,507,0942,411,878
OTHER - 50.1%
CoreStates U.S. Government
Fund19,519,30201/02/965.440%19,519,302AAA
Small Business
Administration395,5312003Various318,185Agency
Resolution Trust Funding
Corp.3,150,00020218.625%4,120,156Agency
3,552,62823,957,643
TOTAL INVESTMENTS - 126.9%60,585,137
Cash and receivables less liabilities - (26.9%)
(12,846,694)
TOTAL NET ASSETS _ 100%$47,738,443
See notes to financial statements.
Standard & Poor's ratings are unaudited.
Quality Income Portfolio
Investments: December 31, 1995
Standard
PrincipalMORTGAGE-BACKEDMaturityInterestMarket& Poor's
AmountSECURITIES - 57.7%DateRateValueRating
$ 250,000Town & Country Funding Corp.08/15/985.850%$
249,075AA2*
171,809YPF Sociedad Anonima Structured
Expo10/26/027.500%173,922BBB
192,768Donaldson Lufkin Jenrette A1
CMO06/18/037.400%199,766AAA
282,576Donaldson Lufkin Jenrette
Mortgage07/15/037.200%295,914AAA
75,000First Union Reit10/01/038.875%71,970BB+
100,000ALPS 94 1 CL A409/15/047.800%104,000AA
198,985ALPS 94 1 CL C209/15/049.350%207,144BBB
225,000American Southwest 1995 C1
A1B11/17/047.400%235,755AAA*
43,045Security Pacific Home Equity
A203/10/068.900%43,956AAA
56,225Resolution Trust Funding
Corp.03/15/078.000%57,226AAA
199,586Nomura Asset Securities08/13/077.100%208,468AAA
138,640JP Morgan 95 C1 A107/25/107.268%144,214AAA
217,167FNMA PL 07625106/01/1512.000%246,213Agency
177,390Scotia Pacific Holding
Company07/20/157.950%180,289BBB
69,604FHLMC GP 27396412/01/1511.500%77,838Agency
110,000Delta Airlines01/02/1610.060%135,946BB+
236,981FHLMC GP 17026011/01/1711.000%262,679Agency
595GNMA PL 26771203/15/1910.500%666Agency
154,918Goldman Sachs Trust IV05/01/1917.795%201,688AAA
250,395FNMA PL 22181205/01/1911.000%280,844Agency
95,000FNMA TR 89 22G05/25/1910.000%107,339Agency
9,025GNMA PL 27805306/15/1910.500%10,088Agency
75,000Dillon Reed Structured
Finance08/15/199.350%51,900BBB
27,254GNMA PL 26108408/15/1910.500%30,461Agency
60,297GNMA PL 28409604/15/2010.500%67,342Agency
5,210GNMA PL 28716908/15/2010.500%5,820Agency
89,185GNMA PL 29333008/15/2010.500%99,605Agency
25,000American Housing Trust CMO09/25/209.515%26,118A
243,197FHLMC GP 55492212/01/2010.500%266,834Agency
63,629GNMA PL 30213201/15/2110.500%71,010Agency
350,000Resolution Trust Funding
Corp.01/15/218.625%457,795Agency
222,329GNMA II PL 893203/20/226.500%226,027Agency
45,000FNMA TR 9203/25/2213.470%50,504Agency
179,231FNMA PC 19057304/01/2210.500%198,698Agency
208,736FNMA PC 30315705/01/2210.000%229,589Agency
197,808GNMA II PL 803808/20/226.000%202,336Agency
187,271GNMA II PL 805910/20/226.500%190,386Agency
182,503Ryland Mortgage CMO01/28/237.450%181,828AAA
400,000GNMA TBA January05/15/237.000%404,080Agency
500,000FNMA TBA January08/15/236.500%493,350Agency
1,250,000FHLMC Gold TBA
January01/15/247.000%1,259,375Agency
274,853GNMA II PL 837302/20/246.000%277,808Agency
493,726GNMA II PL 842005/20/246.000%499,034Agency
370,320GNMA II PL 844306/20/246.500%376,919Agency
121,317GE Capital TR 9407/25/247.000%115,178AAA
200,000GE Capital Mortgage Co.07/25/246.500%183,140AAA
250,000FHLMC Gold TBA
January09/15/247.000%251,875Agency
281,203GNMA II PL 850209/20/246.000%288,037Agency
150,000Capstead Securities IV09/25/247.000%142,320 AAA
2,000,000FHLMC Gold TBA
January11/15/247.000%2,015,000Agency
850,000FNMA TBA January11/15/247.000%855,610Agency
289,467GNMA II PL 861604/20/256.000%292,724Agency
295,339GNMA II PL 862705/20/256.000%298,662Agency
399,439GNMA II PL 871010/20/255.500%400,049Agency
2,125,000FNMA TBA January11/15/257.000%2,139,025Agency
149,768Independent National Mortgage
Corp.11/25/257.500%150,383AAA
150,000Merrill Lynch 1995 C3 A312/26/257.093%151,935AAA
83,856Resolution Trust Funding
Corp.01/25/268.650%86,238AA
116,728Rural Housing Tr 87 2C
CMO04/01/266.830%118,339AAA
316,937Rural Housing Tr 1987
CMO04/01/263.330%313,578AAA
125,201Rural Housing Tr 1987 CMO04/01/266.330%123,874A-
41,367Ryland Mortgage CMO03/29/308.366%42,042A-
130,888Midstates Trust IV04/01/308.330%141,281AAA
Total Mortgage Backed Securities17,271,107
*Moody's bond rating. Standard & Poor's not available.
Quality Income Portfolio
Investments: December 31, 1995 (Continued)
Standard
PrincipalMaturityInterestMarket& Poor's
AmountCORPORATE BONDS - 15.5%DateRateValueRating
$ 225,000Wells Fargo MTN01/28/975.875%$ 225,045A-
225,000Caterpillar Financial MTN06/20/976.150%224,888A
99,000Blue Bell Funding05/01/9911.850%87,615BB-
125,000Comcast Cellular B03/05/000.000%96,563B+
90,000Reliance Group Holdings11/15/009.000%93,150BB+
125,000PT Alateif Freeport
Financial04/15/019.750%138,125BBB-
155,000Firemans Fund Mortgage
Corp.10/15/018.875%171,267BBB+
85,000Westpoint Stevens Inc.12/15/018.750%85,638BB-
190,000Fleming Company12/15/0110.625%189,050BB-
175,000Federated Department Store
Inc.10/15/028.125%176,750BB-
150,000Conseco Inc.02/15/038.125%148,195BB+
100,000Owens Illinois Corp.12/01/0311.000%113,375BB
100,000Tenet Healthcare Corp.12/01/038.625%106,000BB-
186,000Southland Corporation12/15/035.000%156,240BB+
150,000Home Holdings Inc.12/15/038.625%117,000 B-
200,000RJR Nabisco Inc.04/15/048.750%205,573BBB-
150,000Maxus Energy MTN09/01/0410.830%161,397BB-
150,000Comcast Corporation05/15/059.375%157,125B+
135,000Lenfest Communications11/01/058.375%135,675BB+
220,000News America Holdings
Inc.10/15/1210.125%267,577BBB
135,000Digital Equipment11/01/128.625%147,721BB+
150,000FNBC 93A06/01/158.080%165,450A+
100,000Mobile Energy Service01/01/178.665%109,305BBB-
150,000Dillon Reed Structured
Finance08/15/187.430%84,405BBB
100,000Rhone-Poulenc Rorer
Inc.01/05/218.620%114,270BBB+
75,000Tele Communications06/15/229.875%92,945BBB-
150,000Paramount Communications08/01/228.250%155,682BB+
145,000Tele Communications01/15/239.250%158,852BBB-
175,000Time Warner Corporation02/01/239.150%199,554BBB-
75,000AT&T Corporation01/15/258.350%85,820AA
175,000Columbia/HCA Healthcare06/15/257.690%193,688BBB+
75,000ITT Destinations11/15/257.750%76,987BBB
Total Corporate Bonds 4,640,925
Quality Income Portfolio
Investments: December 31, 1995 (Continued)
Standard
PrincipalU.S. TREASURYMaturityInterestMarket& Poor's
AmountOBLIGATIONS - 4.9%DateRateValueRating
$ 1,085,000U.S. Treasury Bond *08/15/208.750%$
1,455,934Treasury
Total U.S. Treasury Obligations1,455,934
FOREIGN BONDS (Non-Dollar) - 15.8%
2,300,000Government of Denmark11/15/009.000%459,552AAA
3,900,000Government of France01/25/019.500%914,125AAA
100,000United Kingdom
Government02/21/019.125%142,556AAA
1,100,000Government of Canada04/01/028.500%880,441AA+
1,200,000Treuhandanstalt (German
Government)10/01/027.750%928,857AAA
775,000Treuhandanstalt (German
Government)01/29/037.125%581,267AAA
3,520,000Government of France04/25/238.500%808,606AAA
Total Foreign Non-Dollar4,715,403
FOREIGN BONDS (Yankee) - 1.3%
250,000United Mexican States12/31/196.250%162,200BB
425,000Argentina Bond03/31/234.250%240,125BB-
Total Foreign Yankee402,325
SHORT-TERM INVESTMENT - 28.1%
8,423,616CoreStates - U.S. Government
Fund01/02/965.440%8,423,616AAA
Total Short-Term Investments8,423,616
TOTAL INVESTMENTS IN SECURITIES - 123.3% 36,909,310
Financial Futures (0%) (6,062)
Foreign Currency Forward Contracts (16.3%)
(4,880,120)
TOTAL INVESTMENTS - 107.0% 32,023,128
Cash and receivables, less liabilities - (7.0%)
(2,092,311)
TOTAL NET ASSETS_100%$29,930,817
* A portion of this security has been segregated by the
custodian to cover margin or segregation
requirements on open future contracts.
Standard & Poor's ratings are unaudited.
See notes to financial statements.
Pennsylvania Tax-Free Income
Portfolio Investments: December 31, 1995
Standard
PrincipalCallMaturityInterestMarket& Poor's
Amount REVENUE BONDS - 30.0% (Insuring
Agent)DateDateRateValueRatomg
$ 500,000Philadelphia School District
(AMBAC)N/A07/01/996.700%$ 540,690AAA
155,000Scranton - Lackawanna Hlth & Welfare
(MBIA)N/A07/01/997.250%168,848AAA
1,000,000Philadelphia Water & Sewer
AuthorityN/A08/01/997.400%1,089,530BBB
1,000,000University of Pittsburgh
(MBIA)N/A04/01/006.400%1,079,180AAA
500,000City of Philadelphia Gas Works
N/A06/15/007.400%554,810BBB
500,000Pennsylvania Industrial Development
AuthN/A01/01/016.800%561,975A-
745,000Cocalico School District
(MBIA)N/A03/01/016.400%815,723AAA
1,000,000Manheim Central School District
(FGIC)N/A03/01/016.400%1,096,870AAA
500,000Schuylkill County Redevelopment
Auth-ETMN/A06/01/016.650%556,525AAA
500,000City of Philadelphia Gas
WorksN/A06/15/017.400%554,810BBB
750,000PA State Higher Education Auth
(MBIA)07/01/0006/15/016.800%825,683AAA
500,000Seneca Valley School District
(MBIA)07/01/9907/01/016.250%533,090AAA
305,000Westmoreland County Municipal Auth
(MBIA)N/A07/01/016.800%341,100AAA
750,000Harrisburg Water Authority
(FGIC)N/A07/15/016.650%836,108AAA
465,000Philadelphia Hospital
AuthorityN/A08/15/016.750%511,626AA*
1,000,000Pittsburgh Water & Sewer Authority
(FGIC)N/A09/01/016.500%1,112,810AAA
500,000Erie Prison (MBIA)N/A11/01/016.450%556,590AAA
500,000Pennsylvania Public School Auth
(MBIA)N/A04/01/026.500%554,525AAA
750,000Pennsylvania Intergovernmental Coop
AuthN/A06/15/026.000%810,270AAA
200,000Delaware River Joint Toll
Authority07/01/9807/01/027.400%219,480A*
175,000Harrisburg Water
Authority07/15/0107/15/026.800%195,552AAA
710,000Hatboro School
District10/01/9909/01/026.650%763,818AA-
1,000,000PA State Turnpike Commission
(MBIA)N/A12/01/025.450%1,048,660A
2,850,000Washington County - West Penn Power
Co.N/A03/01/034.950%2,837,916A
150,000Philadelphia Municipal Authority
(FGIC)04/01/9804/01/037.500%163,809AAA
590,000Allegheny County Sanitary Auth
(FGIC)07/01/9912/01/037.250%646,976AAA
400,000McKean Industrial Development
AuthorityN/A04/01/046.875%417,588BBB
500,000Pennsylvania Convention Center
(FGIC)N/A09/01/046.250%540,215BBB-
225,000Lancaster County - Solid Waste Mgmt
Auth06/15/9812/15/047.750%243,086BBB
850,000PA Intergovernmental Coop Auth
(FGIC)N/A06/15/057.000%998,623AAA
425,000Delaware County Industrial Dev
Authority06/01/9612/01/057.900%448,277A+
500,000Northern Cambria School District
(AMBAC)02/01/0001/15/077.100%551,645AAA
450,000Pennsylvania Housing Finance
Agency10/01/9910/01/077.900%466,974AA
815,000Bucks County Water & Sewer Auth
(FGIC)09/01/9902/01/085.500%859,173AAA*
325,000Allegheny County Hospital Auth
(MBIA)03/01/9803/01/087.600%354,764AAA
1,045,000Philadelphia Hospital
Authority09/01/0207/01/0810.875%1,462,781AAA*
250,000Philadelphia Hospital Authority
(AMBAC)09/01/0008/15/087.750%285,940AAA
3,705,000Allegheny County Hospital Auth
(Escrow)03/01/0207/01/096.625%4,249,857AAA
290,000Pittsburgh Stadium Authority
(Escrow)08/01/0404/01/116.500%315,569AAA
1,000,000West View Municipal Special Oblig.
(ETM)07/01/1111/15/149.500%1,501,890AAA
680,000Washington County-Shadyside Hosp.
(AMBAC)12/15/0011/15/147.000%759,295AAA
1,000,000PA State Turnpike Commission
(MBIA)N/A06/01/156.000%1,046,190AAA
1,000,000Harrisburg Water Authority
(FGIC)07/15/0107/15/157.000%1,127,180AAA
1,000,000Pennsylvania Convention Center
(FGIC)08/01/1309/01/166.700%1,187,130AAA
400,000Washington County
(ETM)N/A12/15/187.875%524,017AAA
Total Revenue Bonds37,334,178
*Moody's bond rating. Standard & Poor's rating not
available.
Pennsylvania Tax-Free Income
Portfolio Investments: December 31, 1995 (Continued)
Standard
PrincipalGENERAL OBLIGATION BONDS - 29.5%
CallMaturityInterestMarket& Poor's
Amount(Insuring Agent)DateDateRateValueRating
$ 500,000Pennsylvania State University
(ETM)N/A07/01/996.300%$ 535,577AA-
500,000Allegheny County
(MBIA)N/A04/01/006.800%548,505AAA
500,000Allentown School District
(AMBAC)N/A11/01/016.500%554,055AAA
500,000State of
Pennsylvania11/01/9911/01/016.875%554,175AAA
1,035,000Chester
County08/01/0112/15/016.400%1,137,600AA*
500,000Pennsylvania State University-Ser
1993AN/A03/01/024.700%503,965AA-
1,170,000City of Bethlehem
(AMBAC)04/15/0106/01/026.150%1,276,587AAA
1,000,000Schuylkill County
(FGIC)N/A06/01/026.750%1,128,540AAA
250,000Pennsylvania State
University08/01/9907/01/026.750%275,160A1*
1,505,000Pennsylvania State University-Ser
1992AN/A08/15/025.200%1,569,971AA-
500,000City of Bethlehem
(AMBAC)N/A09/01/026.750%555,165AAA
1,105,000Cornell School
DistrictN/A09/01/026.000%1,192,936A
460,000Pennsylvania State University-Ser
1993AN/A03/01/034.800%464,140AA-
800,000City of PhiladelphiaN/A05/15/035.125%826,744AAA
1,000,000PA Certificates of Participation
(AMBAC)N/A07/01/035.000%1,026,420AAA
1,300,000Philadelphia School District
(MBIA)N/A07/01/035.200%1,350,700AAA
1,860,000City of Philadelphia
(FGIC)N/A11/15/035.400%1,959,808AAA
300,000City of Philadelphia
(FGIC)N/A11/15/046.250%335,031AAA
1,200,000Ringgold School District
(MBIA)08/01/9608/01/067.200%1,224,612AAA
2,175,000chartiers Valley School District
(Escrow)N/A03/01/076.150%2,354,003AAA
1,250,000North Penn School District
(Escrow)11/01/0603/01/076.200%1,361,450AAA*
1,575,000State of
PennsylvaniaN/A07/01/076.000%1,714,419AA-
1,000,000Westmoreland County Special Oblig.
(ETM)N/A07/01/072.000%723,390AAA
2,245,000Shaler School District
(ETM)12/01/0304/15/086.250%2,431,425AAA
500,000Allegheny County
(MBIA)04/01/0004/01/097.300%550,980AAA
1,000,000Westmoreland County Special Oblig.
(ETM)02/01/0207/01/109.125%1,284,600AAA
2,000,000Grandview SaversN/A07/03/123.970%2,000,000AAA
1,700,000Pennsylvania State Univ
(Prerefunded)07/01/0107/01/167.000%1,941,689A*
905,000Philadelphia Municipal
Auth-Prerefunded04/01/0004/01/187.800%1,027,275AAA
95,000Philadelphia Municipal
Auth-Prerefunded04/01/9804/01/187.800%104,354AAA
2,000,000York City SaversN/A07/01/214.150%2,000,000AAA
2,000,000Pennsylvania Housing Finance Auth
SaverN/A10/01/234.125%2,000,000AA
Total General Obligation Bonds36,513,276
*Moody's bond rating. Standard & Poor's rating not
available.
Pennsylvania Tax-Free Income
Portfolio Investments: December 31, 1995 (Continued)
Standard
PrincipalZERO COUPON
DEBENTURESCallMaturityInterestMarket& Poor's
AmountAND OTHER - 18.2%DateDateRateValueRating
$1,000,000City of Philadelphia Gas
WorksN/A01/01/014.490%$ 800,700AAA
800,000Mill Creek Township School Dist.
(FGIC)N/A08/15/024.650%589,896AAA
400,000North Hills School
DistrictN/A07/15/044.860%265,380AAA
490,000Penn Hills (AMBAC)N/A06/01/065.100%289,899AAA
650,000Philadelphia Water & Sewer Auth
(MBIA)N/A10/01/065.080%378,957AAA
500,000Penn Hills (AMBAC)N/A12/01/065.100%288,460AAA
560,000Penn Hills (AMBAC)N/A06/01/075.180%312,250AAA
1,000,000Reading School District
(MBIA)N/A07/15/075.140%556,610AAA
500,000Reading School District
(MBIA)N/A07/15/085.240%261,320AAA
1,000,000Philadelphia Water & Sewer Auth
(MBIA)N/A10/01/085.280%514,400AAA
100,000Canon School DistrictN/A03/01/105.480%46,478AAA
1,115,000Reading School District
(MBIA)N/A03/01/105.480%518,230AAA
1,465,000Penn Hills (AMBAC)N/A12/01/105.480%653,844AAA
445,000Montour School
DistrictN/A01/01/115.530%196,276AAA
500,000Northampton County - City of
EastonN/A12/01/115.530%209,780AAA
2,500,000Westmoreland County Special Oblig.
(ETM)N/A08/15/125.580%1,001,175AAA
1,080,000Northeastern York County School
DistrictN/A09/01/125.580%431,449AAA
685,000Aliquippa School
DistrictN/A06/01/135.790%253,409A
2,650,000Penn Hills (AMBAC)N/A06/01/136.330%894,773NR
945,000Penn Hills (AMBAC)N/A12/01/136.330%309,289NR
585,000Aliquippa School
DistrictN/A06/01/145.740%206,248A
495,000Shenandoah Valley School
DistrictN/A08/01/145.800%171,013A
1,220,000Steel Valley School
DistrictN/A11/01/145.790%416,264A
1,260,000Butler School
DistrictN/A12/01/145.630%440,660AAA
555,000Shenandoah Valley School
DistrictN/A08/01/155.780%181,779A
750,000Valley View School District
(FGIC)N/A11/15/155.630%248,745AAA
590,000Shenandoah Valley School
DistrictN/A08/01/165.840%180,357A
750,000Valley View School District
(FGIC)N/A11/15/165.680%232,928AAA
3,800,000Exeter School District
(FGIC)N/A05/15/175.680%1,147,600AAA
1,500,000Valley View School District
(FGIC)N/A11/15/175.680%440,490AAA
150,000Center Township Sewer Auth Ser A
(MBIA)N/A04/15/185.680%43,032AAA
3,800,000Exeter School District
(FGIC)N/A05/15/185.680%1,085,090AAA
500,000Montour School
DistrictN/A07/01/185.680%145,780AAA
2,210,000Elizabeth School District
(MBIA)N/A09/01/185.660%623,485AAA
920,000Dauphin (MBIA)N/A10/01/185.680%257,204AAA
1,500,000Valley View School District
(FGIC)N/A11/15/185.680%416,490AAA
3,800,000Exeter School District
(FGIC)N/A05/15/195.680%1,025,962AAA
700,000Northampton County - City of
EastonN/A06/01/195.580%283,514AAA
2,210,000Elizabeth School District
(MBIA)N/A09/01/195.660%589,628AAA
1,500,000Valley View School District
(FGIC)N/A11/15/195.680%393,810AAA
2,210,000Elizabeth School District
(MBIA)N/A09/01/205.660%557,627AAA
3,000,000Berks CountyN/A11/15/205.680%744,720AAA
2,210,000Elizabeth School District
(MBIA)N/A09/01/215.680%524,720AAA
1,010,000Mars School District
(FGIC)N/A09/01/215.700%238,613AAA
2,210,000Elizabeth School District
(MBIA)N/A09/01/225.680%496,145AAA
435,000Mars School District
(FGIC)N/A09/01/225.700%97,153AAA
2,210,000Elizabeth School District
(MBIA)N/A09/01/235.680%469,117AAA
2,210,000Mars School District
(FGIC)N/A09/01/235.700%466,597AAA
2,170,000Elizabeth School District
(MBIA)N/A09/01/245.680%435,541AAA
2,210,000Mars School District
(FGIC)N/A09/01/245.700%441,116AAA
2,210,000Mars School District
(FGIC)N/A09/01/255.700%417,005AAA
1,880,000Mars School District
(FGIC)N/A09/01/265.700%335,334AAA
Total Zero Coupon Debentures22,526,342
SHORT-TERM INVESTMENT _ 21.2%
26,268,727CoreStates Short-Term Tax Exempt
Fund01/02/964.470%26,268,727AAA
Total Short-Term Investment26,268,727
TOTAL INVESTMENTS - 98.9%122,642,523
Cash and receivables, less liabilities - 1.1%1,314,091
TOTAL NET ASSETS_100%$123,956,614
Standard & Poor's ratings are unaudited.
Money Market Income Portfolio
Investments: December 31, 1995
Standard
PrincipalMaturityInterestMarket& Poor's
AmountCOMMERCIAL PAPER - 92.0%DateRateValueRating
$ 300,000du Pont (E.I.) de Nemours01/03/965.74%$
299,856A-1+
300,000Philip Morris01/03/965.92%299,852A-1+
300,000Barclays US Funding01/04/965.78%299,807A-1+
300,000Raytheon01/04/965.74%299,809A-1+
300,000Ameritech Capital
Funding01/05/965.80%299,758A-1+
300,000CIT Group Holdings01/05/965.73%299,761A-1
300,000Colgate Palmolive Company01/05/965.76%299,808
A-1
300,000Hewlett Packard01/05/965.73%299,761A-1
300,000Cargill01/08/965.73%299,618A-1+
300,000Daimier Benz N A01/08/965.75%299,617A-1+
300,000HJ Heinz01/08/965.75%299,617A-1+
300,000Commercial Credit01/09/965.84%299,562 A-1
300,000Household Finance01/09/965.77%299,567A-1
300,000Motorola Credit01/10/965.75%299,521A-1+
300,000Prudential Funding
Corporation01/10/965.78%299,518A-1+
300,000Abbott Laboratories01/11/965.63%299,484A-1+
300,000Pitney Bowes01/11/965.72%299,476A-1+
300,000Coca Cola01/12/965.70%299,430A-1+
300,000Pepsico,
Inc.01/12/965.75%299,425A-1300,000Southern California
Edison01/12/965.72%299,428A-1
300,000General Electric Credit
Corp.01/16/965.75%299,233A-1+
300,000Associates Corporation of N
A01/17/965.75%299,185A-1+
300,000Monsanto Company01/18/965.73%299,141A-1
300,000American General Capital
Services01/19/965.74%299,091A-1+
300,000PHH Corp.01/19/965.65%299,105A-1
300,000Beneficial01/22/965.76%298,944A-1
300,000Gannett01/23/965.80%298,888A-1+
300,000AI Credit Corporation01/24/965.62%298,876A-1+
300,000Bellsouth
Telecommunications01/24/965.73%298,854A-1+
300,000Chevron Oil Finance
Company01/24/965.75%298,850A-1+
300,000Weyerhaeuser Mortgage01/24/965.60%298,880A-1
300,000Siemens Corporation01/25/965.72%298,808A-1+
300,000US West01/25/965.75%298,802A-1+
300,000AON01/26/965.77%298,750A-1+
300,000Metlife Funding01/26/965.74%298,756A-1+
300,000Minnesota Mining &
Manufacturing01/26/965.75%298,754A-1+
300,000Pacific Gas & Electric01/30/965.75%298,559A-1
Total Commercial Paper11,074,157
OTHER - 7.0%
651,159CoreStates - U.S. Gov't
Fund01/02/965.44%651,159AAA
200,000World Savings & Loan MTN03/15/966.31%199,991A
Total Other851,150
TOTAL INVESTMENTS - 99.0%11,925,307
Cash and receivables, less liabilities - 1.0%116,090
TOTAL NET ASSETS_100%$12,041,397
See notes to financial statements.
Standard & Poor's ratings are unaudited.
Statements of Assets and Liabilities:
December 31, 1995
Portfolio
U.S.
GovernmentPennsylvaniaMoney
SecuritiesQualityTax-FreeMarket
IncomeIncomeIncomeIncome
Assets
Investments at
cost$58,450,353$30,999,137$116,212,582$11,925,307
Investments at market
value$60,585,137$36,909,310$122,642,523$11,925,307
Cash111,291
Accrued interest443,180456,7981,340,6515,908
Receivable for fund shares sold19,20047,45431,769
Receivable for securities sold5,107,9585,400,142
Total Assets66,155,47542,813,704124,014,94312,042,506
Liabilities
Investments purchased18,248,3287,895,141
Accrued expenses168,704101,56458,3291,109
Variation margin - futures contracts6,062
Forward foreign currency
exchange contracts held4,880,120
Total Liabilities18,417,03212,882,88758,3291,109
Net Assets$47,738,443$29,930,817$123,956,614$12,041,397
Class A:
Shares
Outstanding4,417,2182,801,40410,950,36912,041,397
Net Asset Value Per Share$10.80$10.59$11.31$1.00
Offering Price Per Share$11.34$11.12$11.87$1.00
Class C:
Shares Outstanding1,93424,15914,669n/a
Net Asset Value & Offering Price
Per Share$10.80$10.59$11.31n/a
Net Assets Consists Of:
Capital paid-in
Class A$46,244,492$29,847,060$117,340,365$12,041,397
Class C20,888254,257165,215n/a
46,265,38030,101,317117,505,58012,041,397
Undistributed net realized gain (loss)
from investments (661,721)
(1,169,481)21,093
Net unrealized (depreciation) on:
Investments2,134,7841,030,0536,429,941
Forward foreign currency exchange
contracts (31,072)
$47,738,443$29,930,817$123,956,614$12,041,397
See notes to financial statements.
Statements of Operations:
Year ended December 31, 1995
Portfolio
U.S.
GovernmentPennsylvaniaMoney
SecuritiesQualityTax-FreeMarket
IncomeIncomeIncomeIncome
Investment Income
Interest$3,477,529$2,168,255$ 7,426,264$ 571,685
Expenses
Advisor fees306,749187,316723,03149,097
Custodian fees29,16417,75668,3516,271
Distribution and service fees154,80094,264365,78432,303
Class A16,4958,02441,934n/a
Class C26148152n/a
Filing fees3,6853,53413,5132,032
Insurance and miscellaneous2,6001,7495,410720
Legal and auditing6,0293,67813,8671,241
Postage and mailing10,8386,63425,8792,318
Printing2,0531,2454,7601,568
Transfer agent fees68,54241,830162,51814,421
Trustees fees7,1544,37816,9691,499
608,135370,5561,442,168111,470
Less: fees waived and expenses reimbursed (137,399)
(147,178) (498,656) (47,803)
Net Expenses470,736223,378943,51263,667
Net Investment Income3,006,7931,944,8776,482,752508,018
Realized and Unrealized Gain on Investments
Net realized gain from:
investment transactions1,727,026232,702525,193-0-
future contracts92,75657,281
Net unrealized appreciation/
(depreciation) of:
futures contracts (54,375)
investments3,505,3702,845,8859,575,094
Net Gain on Investments5,325,1523,081,49310,100,287-0-
Net Increase in Net Assets
Resulting From
Operations$8,331,945$5,026,370$16,583,039$ 508,018
Statements of Changes in Net Assets:
U.S. Government SecuritiesQuality
Income PortfolioIncome Portfolio
Year ended Year
ended
12/31/9512/31/9412/31/9512/31/94
Operations
Net investment income$ 3,006,793$ 3,479,863$
1,944,877$ 2,070,195
Net realized gain (loss)1,819,782
(2,401,002)289,983 (1,444,902)
Net unrealized appreciation
(depreciation) 3,505,370 (3,024,508)2,791,510
(1,864,079)
Net increase (decrease) in net assets
resulting from operations8,331,945
(1,945,647)5,026,370 (1,238,786)
Distribution to Shareholders
Dividends from net investment income
(3,005,426) (3,480,149) (1,965,581)
(2,068,881)
Distributions from net realized gain
from investment transactions-0 (1,230)-0-
(24,074)
Total distributions to shareholders
(3,005,426) (3,481,379) (1,965,581)
(2,092,955)
Capital Share Transactions
Class A:
Shares sold4,371,4965,560,1743,549,9616,984,866
Reinvested
dividends1,720,2541,913,7081,322,0971,381,647
Shares redeemed
(7,581,167) (8,354,215) (5,254,514)
(5,147,771)
Net increase (decrease) from Class A
(1,489,417) (880,333)
(382,456)3,218,742
Class C:
Shares sold20,500-0-253,329-0-
Reinvested dividends125928
Shares redeemed-0--0-
Net increase from Class C20,625-0-254,257-0-
Increase (decrease) in net assets3,857,727
(6,307,359)2,932,590 (112,999)
Net Assets
Beginning of
year43,880,71650,188,07526,998,22727,111,226
End of year$47,738,443$43,880,716$29,930,817$26,998,227
Fund Share Transactions
Class A:
Shares sold429,339542,358350,479685,158
Reinvested dividends166,074189,745130,142137,829
Shares redeemed
(731,101) (830,219) (516,398)
(520,724)
Net share increase (decrease)
(135,688) (98,116)
(35,777)302,263
Class C:
Shares sold1,922-0-24,071-0-
Reinvested dividends1288
Shares redeemed-0--0-
Net shares increase (decrease)1,934-0-24,159-0-
See notes to financial statements.
Statements of Changes in Net Assets:
Pennsylvania Tax-FreeMoney Market
Income PortfolioIncome Portfolio
Year ended
Year ended
12/319512/31/9412/31/9512/31/94
Operations
Net investment income$6,482,752$ 5,223,593$
508,018$ 263,273
Net realized gain (loss) 525,193
(110,926)-0- -0-
Net unrealized appreciation
(depreciation) 9,575,094 (9,156,188)-0-
- -0-
Net increase (decrease) in net assets
resulting from operations16,583,039
(4,043,521)508,018263,273
Distribution to Shareholders
Dividends from net investment income
(6,482,752) (5,223,593) (508,018)
(263,273)
Distributions from net realized gain
from investment transactions(435,201) -0--0-
-0-
Total distributions to shareholders
(6,917,953) (5,223,593) (508,018)
(263,273)
Capital Share Transactions
Class A:
Shares sold30,485,67219,252,25517,131,28511,571,854
Reinvested dividends3,613,0312,704,726461,395235,322
Shares redeemed
(11,926,396) (10,632,780) (14,566,048)
(8,361,294)
Net increase from Class A22,172,307 11,324,201
3,026,6323,445,882
Class C:
Shares sold164,683-0-n/an/a
Reinvested dividends532
Shares redeemed-0-
Net increase from Class C165,215 -0-n/an/a
Increase in net
assets32,002,6082,057,0873,026,6323,445,882
Net Assets
Beginning of year91,954,00689,896,9199,014,7655,568,883
End of year$123,956,614$ 91,954,006$ 12,041,397$
9,014,765
Fund Share Transactions
Class A:
Shares sold2,787,1181,777,72717,131,28511,571,854
Reinvested dividends327,181251,949461,395235,322
Shares redeemed
(1,085,168) (993,111) (14,566,048)
(8,361,294)
Net share increase2,029,131
1,036,5653,026,6323,445,882
Class C:
Shares sold14,622-0-n/an/a
Reinvested dividends47
Shares redeemed-0-
Net share increase14,669-0-n/an/a
See notes to financial statements.
Financial Highlights:
For the years ended December 31, 1995, 1994, 1993,
1992, 1991, 1990, 1989, 1988, and from October 12, 1987
to
December 31, 1987 (Commencement of Operations).
U.S. Government Securities Income Portfolio Class A
For a share outstanding throughout the year.
1995 1994 1993 1992 1991 1990
198919881987
Net Asset Value: Beginning of
year$9.64$10.79$10.50$10.57$10.28$10.25$9.90$10.07$10.0
0
Investment Operations:
Net investment
income0.6600.7460.8600.9070.9490.8540.8350.7940.128
Net realized and unrealized gain (loss)
on
investments1.160(1.150)0.310(0.070)0.2900.0300.540(0.14
0)0.070
Total from Investment
Operations1.820(0.404)1.1700.8371.2390.8841.3750.6540.1
98
Distributions:
Dividends from net investment
income(0.660)(0.746)(0.860)(0.907)(0.949)(0.854)(0.835)
(0.794)(0.128)
Distributions from net realized gains
on investments-0--0-(0.020)-0--0--0-(0.190)(0.030)-0-
Total
Distributions(0.660)(0.746)(0.880)(0.907)(0.949)(0.854)
(1.025)(0.824)(0.128)
Net Asset Value: End of
year$10.80$9.64$10.79$10.50$10.57$10.28$10.25$9.90$10.0
7
Total Return: (excluding sales
charge)19.4%(3.8%)11.4%8.4%12.7%9.0%14.1%6.3%2.0%
Ratios:
Ratio of expenses to average net
assets1.00%1.00%1.00%1.05%0.71%-0--0--0-0.42%
Ratio of net investment income to average
net
assets6.40%7.36%7.84%8.60%10.10%8.22%8.12%7.89%5.57%
Portfolio turnover
rate227.8%122.6%111.9%41.9%84.4%212.3%274.2%22.2%-0-
Number of shares outstanding at end of
period (thousands)4,4174,5534,6513,6062,32323111812826
Quality Income Portfolio Class A
For a share outstanding throughout the year.
1995 1994 1993 1992 1991 1990
1989 1988 1987
Net Asset Value: Beginning of
year$9.52$10.70$10.55$10.55$9.66$9.75$9.83$10.08$10.00
Investment Operations:
Net investment
income.6860.7390.9160.8170.8250.8350.8800.8830.135
Net realized and unrealized gain (loss)
on
investments1.07(1.170)0.410-0-0.890(0.090)0.120(0.211)0
.080
Total from Investment
Operations1.756(0.431)1.3260.8171.7150.7451.0000.6720.2
15
Distributions:
Dividends from net investment
income(0.686)(0.739)(0.916)(0.817)(0.825)(0.835)(0.880)
(0.883)(0.135)
Distributions from net realized gains
on
investments--0-(0.009)(0.260)-0--0--0-(0.200)(0.039)-0-
Total
Distributions(0.686)(0.748)(1.176)(0.817)(0.825)(0.835)
(1.080)(0.922)(0.135)
Net Asset Value: End of
year$10.59$9.52$10.70$10.55$10.55$9.66$9.75$9.83$10.08
Total Return: (excluding sales
charge)19.1%(4.2%)12.9%8.2%19.0%7.9%10.1%6.6%2.2%
Ratios:
Ratio of expenses to average net
assets0.78%0.38%0.45%0.31%0.10%0.05%-0-0.03%0.28%
Ratio of net investment income to average
net assets6.77%7.30%8.32%7.88%8.24%8.84%8.86%8.82%6.45%
Portfolio turnover
rate239.2%163.8%337.6%316.6%189.6%170.1%252.4%142.1%-0-
Number of shares outstanding at end
of period (thousands)2,8012,8372,5351,47233925615412728
See notes to financial statements.
Financial Highlights:
For the years ended December 31, 1995, 1994, 1993,
1992, 1991, 1990, 1989,1988, and from October 12, 1987
to December 31, 1987 (Commencement of Operations)
Pennsylvania Tax-Free Income Portfolio Class A
For a share outstanding throughout the year.
1995 1994 1993 1992 1991 1990 19891988
1987
Net Asset Value: Beginning of
year$10.31$11.40$10.93$10.71$10.29$10.34$10.16$9.95$10.
00
Investment Operations:
Net investment
income0.6420.6180.6020.6420.6690.6960.7180.7490.117
Net realized and unrealized gain (loss)
on
investments1.050(1.090)0.4700.2200.450(0.010)0.1800.210
(0.050)
Total from Investment
Operations1.692(0.472)1.0720.8621.1190.6860.8980.9590.0
67
Distributions:
Dividends from net investment
income(0.642)(0.618)(0.602)(0.642)(0.669)(0.696)(0.718)
(0.749)(0.117)
Distributions from net realized gains
on investments
(0.050) -0- -0-
- -0-(0.030)(0.040) -0- -0- -0-
Total
Distributions(0.692)(0.618)(0.602)(0.642)(0.699)(0.736)
(0.718)(0.749)(0.117)
Net Asset Value: End of
year$11.31$10.31$11.40$10.93$10.71$10.29$10.34$10.16$9.
95
Total Return: (excluding sales
charge)16.7%(4.2%)10.0%8.3%11.3%7.0%9.1%10.0%0.7%
Ratios:
Ratio of expenses to average net
assets0.85%0.79%0.65%0.50%0.32%0.31%0.20%
- -0-0.26%
Ratio of net investment income to average
net assets5.84%5.71%5.31%5.93%6.33%6.84%6.92%7.40%6.38%
Portfolio turnover rate10.0%15.3%1.0%1.3%22.2%33.3%
-0- -0- -0-
Number of shares outstanding at end
of period (thousands)
10,950 8,921 7,885 5,799 4,184 2,321
1,860 851 37
Money Market Income Portfolio Class A
For a share outstanding throughout the year.
199519941993199219911990198919881987
Net Asset Value: Beginning of
year$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00
Investment Operations:
Net investment
income0.0520.0360.0250.0300.0550.0750.0860.0750.014
Net realized and unrealized gain/(loss)
on investments-0--0--0--0--0--0--0--0--0-
Total from Investment
Operations0.0520.0360.0250.0300.0550.0750.0860.0750.014
Distributions:
Dividends from net investment
income(0.052)(0.036)(0.025)(0.030)(0.055)(0.075)(0.086)
(0.075)(0.014)
Distributions from net realized gains
on investments-0--0--0--0--0--0--0--0--0-
Total
Distributions(0.052)(0.036)(0.025)(0.030)(0.055)(0.075)
(0.086)(0.075)(0.014)
Net Asset Value: End of
year$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00$1.00
Total Return: (excluding sales
charge)5.32%3.7%2.5%3.1%5.6%7.8%9.0%7.7%1.4%
Ratios:
Ratio of expenses to average net
assets0.65%0.65%0.65%0.65%0.65%0.65%0.60%-0-0.03%
Ratio of net investment income to average
net assets5.19%3.76%2.50%3.06%5.51%7.46%8.59%7.91%6.98%
Portfolio turnover raten/an/an/an/an/an/an/an/an/a
Number of shares outstanding at end
of period
(thousands)12,0419,0155,5696,46910,44712,58711,0766,233
909
See notes to financial statements.
Financial Highlights:
November 15, 1995 (commencement of operations) to
December 31, 1995
For a share outstanding throughout the period.
Class C*
U.S.
GovernmentPennsylvania
SecuritiesQualityTax-Free
IncomeIncomeIncome
Net Asset Value: Beginning of period$10.65$10.47$11.22
Investment Operations:
Net investment income0.0660.0820.064
Net realized and unrealized gain (loss) on
investments0.1500.1200.140
Total from Investment
Operations0.2160.2020.204
Distributions:
Dividends from net investment
income(0.066)(0.082)(0.064)
Distributions from net realized gains on
investments-0--0-(0.050)
Total Distributions(0.066)(0.082)(0.114)
Net Asset Value: End of period$10.80$10.59$11.31
Total Return: (excluding sales
charge)n/a(b)n/a(b)n/a(b)
Ratios:
Ratio of expenses to average net
assetsn/a(b)n/a(b)n/a(b)
Ratio of net investment income to average net
assetsn/a(b)n/a(b)n/a(b)
Portfolio turnover rate (a)227.8%239.2%10.0%
Number of shares outstanding at end of period
(000)22415
*Effective November 15, 1995, the Fund commenced
offering Class C shares. All capital shares
issued and outstanding as of November 15, 1995 were
classified as Class A shares.
(a) Portfolio turnover is calculated on the basis of
the Fund as a whole without distinguishing
between the classes of shares issued.
(b) Ratios not meaningful due to short period of
operation of Class C shares.
See notes to financial statements.
Notes to Financial Statements:
Note A_General
The William Penn Interest Income Fund (the "Fund") is
registered under the Investment Company Act of 1940 as
a diversified open-end management investment company
and operates as a series company currently offering
four portfolios with distinct investment objectives and
policies. The U.S. Government Securities Income
Portfolio seeks to provide a high level of current
income from investments in obligations of the U.S.
Government and its agencies and instrumentalities,
consistent with the preservation of capital and the
maintenance of liquidity. The Quality Income Portfolio
seeks to provide the highest level of current income
available from investment grade corporate bonds and
other fixed-income securities, consistent with the
preservation of capital and the maintenance of
liquidity. The Pennsylvania Tax-Free Income Portfolio
seeks to provide a high level of current income exempt
from both Federal income taxes and Pennsylvania income
and personal property taxes, without assuming any undue
risk to income or principal. The Money Market Income
Portfolio seeks to maximize current income available
from investments in a variety of specific short-term
instruments, consistent with the preservation of
capital and the maintenance of liquidity.
Note B_Significant Accounting Policies
Portfolio Valuation: In the Money Market Portfolio, the
assets are valued at amortized cost, which approximates
market value. Bonds and other fixed income securities
are valued on the basis of prices provided by a pricing
service or the sub-advisor when such prices are
believed to reflect the fair market value for such
securities. The prices provided by a pricing service
are determined without regard to bid or last sale
prices but take into account institutional size trading
in similar groups of securities and any developments
related to specific securities. Certain mortgage-backed
securities, which are priced by the pricing service,
are discounted to reflect a liquidation value based on
the relative size of the pool using procedures reviewed
by the Board of Directors. Short-term instruments (with
remaining maturities of sixty days or less) are valued
at amortized cost, which approximates market value.
Securities Transactions and Investment Income:
Securities transactions are recorded on a trade date
basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis
for both financial reporting and federal income tax
purposes. Interest income is recorded on the accrual
basis for both financial reporting and federal income
tax purposes. In computing investment income, premiums
are amortized over the life of the security, unless
said premium is in excess of any call price, in which
case the excess is amortized to the earliest call date.
Discounts are accreted over the life of the security.
Forward foreign currency exchange contracts are
obligations 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 the contract.
Contracts are recorded at market value. Realized gains
and losses arising from such transactions are included
in net realized gain (loss) from investment
transactions. Risks associated with such contracts
include movement in the value of such currency relative
to the U.S. dollar and the ability of the counterparty
to perform. Futures contracts are marked to market
daily and the variation margin is recorded as an
unrealized gain or loss. When a contract is closed, a
realized gain or loss is recorded equal to the
difference between the opening and closing value of the
contract. Generally, open forward and futures contracts
are marked to market for federal income tax purposes at
fiscal year-end. Foreign denominated assets and forward
currency contracts may involve risks not typically
associated with domestic transactions, including:
unanticipated movements in exchange rates, the degree
of government supervision and regulation of security
markets, and the possibility of political or economic
instability. The use of futures contracts may involve
other risks such as the possibility of an illiquid
market or imperfect correlation between the value of
the contracts and the underlying securities.
Transactions with Shareholders: Transactions of fund
shares are recorded on the trade date. Each portfolio
declares a daily dividend from investment income, which
is paid monthly.
Federal Income Taxes: It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to
distribute substantially all of its net investment
income and all realized net gain from investment
transactions to its shareholders. Accordingly, no
provision has been made for federal income taxes and
the Fund will not be subject to a federal excise tax.
Each portfolio is treated as a separate entity for
determining such qualification.
Other: The fund accounts separately for the assets,
liabilities and operations of each portfolio. Expenses
directly attributable to each portfolio are charged to
that portfolio's operations; expenses that are
applicable to all portfolios are allocated based on
average net asset value.
Note C_Investment Advisory Fee and Other Transactions
With Affiliates
The Investment Advisory Agreement with Penn Square
Management Corporation provides that each Portfolio
pays the Advisor a monthly fee based on a percent of
the total net assets of the portfolio at the following
annual percentages:
Pennsylvania Tax-Free Income Portfolio.65%
Money Market Income Portfolio.50%
Quality Income Portfolio.65%
U.S. Government Securities Income Portfolio.65%
The Distribution Services Agreement with Penn Square
Management Corporation provides that the Distributor is
entitled to be reimbursed monthly by the Fund for
certain of its expenses incurred in connection with its
services as Distributor at an annual rate not exceeding
.50% of the respective Portfolio's net assets.
Penn Square Management Corporation is also the Transfer
and Dividend Disbursing Agent for the Fund and provides
these services at cost.
The Declaration of the Trust provides that each Trustee
of the Fund who is not affiliated with Penn Square
Management Corporation shall receive a quarterly fee of
$1,000 and reimbursement for their out-of-pocket
expenses incurred as Trustee.
The Advisor may, at its discretion, reimburse the
respective portfolios for expenses incurred. For the
year ended December 31, 1995, the Advisor
reimbursed/waived the Fund, in aggregate, for expenses
of $831,036. If there had not been any waiver or
reimbursement, the total operating expenses and
percentage of average net assets of each of the
Portfolios in 1995 would have been 1.14% for the Money
Market Income, 1.30% for the Pennsylvania Tax-Free
Income, 1.29% for the Quality Income, and 1.29% for the
U.S. Government Security Income.
For the year ended December 31, 1995, Penn Square
Management Corporation received an aggregate of
approximately $16,000 and $159,000 in Commission and
Underwriting fees, respectively, for sales of shares in
the Pennsylvania Tax-Free Income, Quality Income and
U.S. Government Securities Income portfolios. The Money
Market Income portfolio imposes no sales charge and
therefore no fees are collected from transactions in
this portfolio.
Notes to Financial Statements: (continued)
Note D_Securities Transactions
The following summarizes the securities transactions by
the Fund, other than short-term securities, for the
year ended December 31, 1995:
Cost ofProceeds
PortfolioPurchasesfrom Sales
Pennsylvania Tax-Free Income$ 9,919,618$14,992,687
Quality Income62,624,10470,766,614
U.S. Government Securities Income89,259,84696,204,524
At December 31, 1995, unrealized appreciation
(depreciation) for each portfolio was as follows:
GrossGross Net
PortfolioAppreciation(Depreciation) Appreciation
Pennsylvania Tax-Free
Income$6,795,963$(366,022)$6,429,941
Quality Income 1,213,707 (183,654)1,030,053
U.S. Government Securities Income 2,261,968
(127,184)2,134,784
At December 31, 1995, the cost of investments owned was
the same for financial reporting and federal income tax
purposes.
Note E_Commitments
As of December 31, 1995, the Quality Income Portfolio
had entered into the following forward foreign currency
exchange contracts:
SettlementNet Unrealized
Contracts to DeliverIn Exchange ForDateAppreciation
(Depreciation)
U.S. $848,995Canada Dollar1,170,0003/14/96U.S. $
(10,370)
U.S. $604,101Mark (German)850,0001/24/96U.S. $10,716
U.S. $981,647Mark (German)1,380,0001/19/96U.S. $18,269
U.S. $322,466Mark (German)455,0002/6/96U.S. $4,831
U.S. $92,644French Franc465,0001/12/96U.S. $
(2030)
U.S. $ 1,159,304French Franc5,760,0003/4/96U.S. $
(13,432)
U.S. $521,436French Franc2,615,0003/6/96U.S. $
(10,978)
U.S. $8,041French Franc40,0003/7/96U.S. $
(103)
U.S. $32,545French Franc160,0003/12/96U.S. $
(31)
U.S. $149,356ECU115,0001/11/96U.S. $2,490
U.S. $160,355Danish Krone885,0001/11/96U.S. $1,409
U.S. $4,880,890U.S. $771
Note F_Shareholder Proxy
A special meeting of shareholders of the Fund was held
on October 30, 1996 at which time the shareholders
approved a new sub-advisory agreement between Penn
Square Management Corporation and Miller, Anderson &
Sherrerd LLP ("MAS"), effective upon the acquisition of
all of the outstanding partnership interest of MAS by
Morgan Stanley Asset Management Holdings, Inc. The
tabulation by Portfolio was as follows:
ForAgainstAbstain
Pennsylvania Tax-Free5,901,591123,618484,713
Quality Income1,882,2284,72131,275
Money Market5,029,30796,041491,682
U.S. Government2,084,37671,359130,628
Report of Independent Auditors:
Trustees and Shareholders
William Penn Interest Income Fund
We have audited the accompanying statements of assets
and liabilities, including the schedules of
investments, of the William Penn Interest Income Fund
(comprising, respectively, Pennsylvania Tax-Free
Income, Money Market Income, Quality Income and U.S.
Government Securities Income Portfolios) as of December
31, 1995, and the related statements of operations for
the year then ended and statements of changes in net
assets for each of the two years in the period then
ended, and the financial highlights for each of the
eight years in the period ended December 31, 1995 and
for the period from commencement of operations of the
Fund (October 12, 1987) to December 31, 1987. These
financial statements and financial highlights are the
responsibility of the Fund's management. Our
responsibility is to express an opinion on these
financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and
financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of
securities owned as of December 31, 1995, by
correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used
and significant estimates made by management, as well
as evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all
material respects, the financial position of each of
the respective portfolios constituting the William Penn
Interest Income Fund as of December 31, 1995, the
results of their operations for the year then ended and
changes in their net assets for each of the two years
in the period then ended and the financial highlights
for each of the eight years in the period ended
December 31, 1995 and for the period from commencement
of operations of the Fund (October 12, 1987) to
December 31, 1987, in conformity with generally
accepted accounting principles.
Reading, Pennsylvania
January 19, 1996
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993 and
the investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this amendment to this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York, on the 13th day of February, 1996.
PENN SQUARE MUTUAL FUND
By: [sig]
James E. Jordan, President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to this registration has been signed below by the following
persons in the capacities and on the date indicated. Each of the
persons whose signature appears below hereby authorizes James E.
Jordan, President of the Registrant, to execute in the name of each
person and to file all amendments to this Registration Statement as
the Registrant deems appropriate and appoints such person as his
attorney-in-fact to sign on his behalf individually and in each
capacity stated below and to file all amendments and post-effective
amendments to this Registration Statement.
SIGNATURE TITLE DATE
[sig]
James E. Jordan President, February 13, 1996
principal
executive
officer and
Trustee
[sig]
Dennis J. Westley V.President February 13, 1996
and Treasurer
[sig]
Lee D. Arning Trustee February 13, 1996
[sig]
Gail M. Harrity Trustee February 13, 1996
[sig]
Paul J. Lawler Trustee February 13, 1996
[sig]
Emmett M. Murphy Trustee February 13, 1996
John D. Tenhula Trustee February 13, 1996
[sig]
Ferdinand Thun Trustee February 13, 1996
Consent of Independent Accountants
We consent to the references to our firm under the captions
"Independant Auditors" and "Auditors" and to the use of our
report dated January 19, 1996, in the Post-Effective
Amendment No. 18 to the Registration Statement (Form N-1A No. 14609)
and related Prospectus and Statement of Additional Information of the
William Penn Interest Income Fund dated March 15, 1996.
ERNST & YOUNG
Reading, Pennsylvania
March 15, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
12/31/95 NSAR and is qualified in its entirety by reference to such
NSAR.
</LEGEND>
<CIK> 0000814436
<NAME> WILLIAM PENN INTEREST INCOME FUND
<SERIES>
<NUMBER> 1
<NAME> US GOVERNMENT SECURITES PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 58450353
<INVESTMENTS-AT-VALUE> 60585137
<RECEIVABLES> 5570338
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 66155475
<PAYABLE-FOR-SECURITIES> 18248328
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 168704
<TOTAL-LIABILITIES> 18417032
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 46265380
<SHARES-COMMON-STOCK> 4419152
<SHARES-COMMON-PRIOR> 4552906
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 661721
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2134784
<NET-ASSETS> 47738443
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3477529
<OTHER-INCOME> 0
<EXPENSES-NET> 470736
<NET-INVESTMENT-INCOME> 3006793
<REALIZED-GAINS-CURRENT> 1819782
<APPREC-INCREASE-CURRENT> 3505370
<NET-CHANGE-FROM-OPS> 8331945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3005426
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 431261
<NUMBER-OF-SHARES-REDEEMED> 731101
<SHARES-REINVESTED> 166082
<NET-CHANGE-IN-ASSETS> 3857727
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2481457
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 307584
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 627420
<AVERAGE-NET-ASSETS> 47009000
<PER-SHARE-NAV-BEGIN> 9.64
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> 1.16
<PER-SHARE-DIVIDEND> 0.66
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.80
<EXPENSE-RATIO> 0.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
12/31/95 NSAR and is qualified in its entirety by reference to such
NSAR.
</LEGEND>
<CIK> 0000814436
<NAME> WILLIAM PENN INTEREST INCOME FUND
<SERIES>
<NUMBER> 2
<NAME> QUALITY INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 30999137
<INVESTMENTS-AT-VALUE> 36909310
<RECEIVABLES> 5904394
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42813704
<PAYABLE-FOR-SECURITIES> 7895141
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4987746
<TOTAL-LIABILITIES> 12882887
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30101317
<SHARES-COMMON-STOCK> 2825563
<SHARES-COMMON-PRIOR> 2837181
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1169481
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 998981
<NET-ASSETS> 29930817
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2168255
<OTHER-INCOME> 0
<EXPENSES-NET> 223378
<NET-INVESTMENT-INCOME> 1944877
<REALIZED-GAINS-CURRENT> 289983
<APPREC-INCREASE-CURRENT> 2791510
<NET-CHANGE-FROM-OPS> 5026370
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1965581
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 374550
<NUMBER-OF-SHARES-REDEEMED> 516398
<SHARES-REINVESTED> 130230
<NET-CHANGE-IN-ASSETS> 2932590
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1412365
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 184225
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 378355
<AVERAGE-NET-ASSETS> 28733000
<PER-SHARE-NAV-BEGIN> 9.52
<PER-SHARE-NII> 0.686
<PER-SHARE-GAIN-APPREC> 1.07
<PER-SHARE-DIVIDEND> 0.686
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> 0.008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
12/31/95 NSAR and is qualified in its entirety by reference to such
NSAR.
</LEGEND>
<CIK> 0000814436
<NAME> WILLIAM PENN INTEREST INCOME FUND
<SERIES>
<NUMBER> 3
<NAME> PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 116212582
<INVESTMENTS-AT-VALUE> 122642523
<RECEIVABLES> 1372420
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 124014943
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58329
<TOTAL-LIABILITIES> 58329
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117505580
<SHARES-COMMON-STOCK> 10965038
<SHARES-COMMON-PRIOR> 8921238
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21093
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6429941
<NET-ASSETS> 123956614
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7426264
<OTHER-INCOME> 0
<EXPENSES-NET> 943512
<NET-INVESTMENT-INCOME> 6482752
<REALIZED-GAINS-CURRENT> 525193
<APPREC-INCREASE-CURRENT> 9575094
<NET-CHANGE-FROM-OPS> 16583039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6482752
<DISTRIBUTIONS-OF-GAINS> 435201
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2801740
<NUMBER-OF-SHARES-REDEEMED> 1085168
<SHARES-REINVESTED> 327228
<NET-CHANGE-IN-ASSETS> 32002608
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 68899
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 594337
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1213293
<AVERAGE-NET-ASSETS> 111028000
<PER-SHARE-NAV-BEGIN> 10.31
<PER-SHARE-NII> 0.642
<PER-SHARE-GAIN-APPREC> 1.05
<PER-SHARE-DIVIDEND> 0.642
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 0.008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
12/31/95 NSAR and is qualified in its entirety by reference to such
NSAR.
</LEGEND>
<CIK> 0000814436
<NAME> WILLIAM PENN INTEREST INCOME FUND
<SERIES>
<NUMBER> 4
<NAME> MONEY MARKET INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 11925307
<INVESTMENTS-AT-VALUE> 11925307
<RECEIVABLES> 5908
<ASSETS-OTHER> 111291
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12042506
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1109
<TOTAL-LIABILITIES> 1109
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12041397
<SHARES-COMMON-STOCK> 12041397
<SHARES-COMMON-PRIOR> 9014765
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 12041397
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 571685
<OTHER-INCOME> 0
<EXPENSES-NET> 63667
<NET-INVESTMENT-INCOME> 508018
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 508018
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 508018
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17131285
<NUMBER-OF-SHARES-REDEEMED> 14566048
<SHARES-REINVESTED> 461395
<NET-CHANGE-IN-ASSETS> 3026632
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 34953
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 83998
<AVERAGE-NET-ASSETS> 8844000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.052
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.052
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.006
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
