<PAGE>
EMERALD MONEY MARKETS FOR INSTITUTIONS
TREASURY ADVANTAGE INSTITUTIONAL FUND
PRIME ADVANTAGE INSTITUTIONAL FUND
INVESTMENT PORTFOLIOS OFFERED
BY EMERALD FUNDS
P R O S P E C T U S
DECEMBER 1, 1996
EMERALD
FUNDS
<PAGE>
EMERALD FUNDS
Prospectus for Treasury Advantage Institutional and
Prime Advantage Institutional Funds
(Previously called the "Treasury Trust" and "Prime Trust Funds")
This Prospectus relates to the Treasury Advantage Institutional and Prime
Advantage Institutional Funds (the "Funds"), two separate short-term money
market funds that are designed to meet the cash management needs of qualified
institutional investors. Each Fund seeks to provide a high level of current
income, consistent with liquidity, the preservation of capital and a stable net
asset value.
Barnett Capital Advisors, Inc. (the "Adviser") serves as the Funds'
investment adviser. The Funds' shares are sold by Emerald Asset Management, Inc.
without any purchase or redemption charge imposed by the Funds, although Barnett
Bank, N.A. and other institutions may charge their customer accounts for
services provided in connection with investments in the Funds.
This Prospectus describes concisely the information about the Funds that you
should consider before investing. Please read and keep it for future reference.
More information about the Funds is contained in a Statement of Additional
Information dated December 1, 1996 that has been filed with the Securities and
Exchange Commission. The Statement of Additional Information can be obtained
free upon request by calling 1-800-637-3759, and is incorporated by reference
into (considered a part of) the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, BARNETT BANK, N.A. OR ANY OF ITS AFFILIATES, AND ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY OR OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. WHILE EACH FUND ATTEMPTS TO MAINTAIN A NET ASSET VALUE OF $1.00 PER
SHARE, THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO ON A CONTINUOUS
BASIS. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL. IN ADDITION, THE DIVIDENDS PAID BY A FUND WILL GO UP AND
DOWN.
December 1, 1996
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SUMMARY OF EXPENSES AND FINANCIAL INFORMATION
EXPENSES
ANNUAL FUND OPERATING EXPENSES are paid out of a Fund's assets and include
fees for portfolio management, maintenance of shareholder accounts, general fund
administration, accounting and other services.
Below is information regarding the Funds' operating expenses for shares of
the Prime Advantage Institutional and Treasury Advantage Institutional Funds.
Examples based on this information are also provided.
<TABLE>
<CAPTION>
TREASURY PRIME
ADVANTAGE ADVANTAGE
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE REIMBURSEMENTS INSTITUTIONAL INSTITUTIONAL
(as a percentage of average net assets) FUND FUND
----------- -----------
<S> <C> <C>
Advisory Fees................................................. 0.10% 0.10%
12b-1 Fees.................................................... 0.00% 0.00%
All Other Expenses (After Expense Reimbursements)............. 0.10% 0.10%
----------- -----------
Total Fund Operating Expenses (After Expense Reimbursements).. 0.20% 0.20%
----------- -----------
----------- -----------
EXAMPLE: Let's say, hypothetically, that the annual net return on each Fund is 5%, and
that the Funds' operating expenses are as described above. For every $1,000 you
invested in a particular Fund, after the periods shown below, you would have paid this
much in expenses during such periods:
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
Treasury Trust Fund..................... $ 2 $ 6 $ 11 $ 26
Prime Trust Fund........................ $ 2 $ 6 $ 11 $ 26
</TABLE>
- ------------------------
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
This expense information is provided to help you understand the expenses you
would bear indirectly as a shareholder of one of the Funds. The operating
expenses for the Funds have been restated using the current fees and operating
expenses that would have been applicable had they been in effect during the last
fiscal year. Without the voluntary expense reimbursements that are expected to
be in effect during the current fiscal year, "All Other Expenses" of the
Treasury Advantage Institutional Fund and Prime Advantage Institutional Fund
would be .23% and .23%, respectively, and "Total Fund Operating Expenses" would
be .33% and .33%, respectively.
See "Management of Emerald Funds" in this Prospectus and the financial
statements and related notes in the Statement of Additional Information for a
further description of the Funds' operating expenses. You should note that any
fees that are charged by Barnett Bank, N.A., its affiliates or any other
institutions directly to their customer accounts for services related to an
investment in the Funds are in addition to and not reflected in the fees and
expenses described above.
2
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FINANCIAL HIGHLIGHTS
EXCEPT AS NOTED BELOW, THE FOLLOWING FINANCIAL HIGHLIGHTS HAVE BEEN AUDITED
BY PRICE WATERHOUSE LLP, EMERALD FUNDS' INDEPENDENT ACCOUNTANTS, WHOSE
UNQUALIFIED REPORT ON THE FINANCIAL STATEMENTS CONTAINING SUCH INFORMATION FOR
THE FIVE YEARS IN THE PERIOD ENDED NOVEMBER 30, 1995 IS INCORPORATED BY
REFERENCE INTO THE STATEMENT OF ADDITIONAL INFORMATION (WHICH CAN BE OBTAINED
FREE OF CHARGE BY CALLING 800/637-3759). THE FINANCIAL HIGHLIGHTS SHOULD BE READ
ALONG WITH THE FINANCIAL STATEMENTS AND RELATED NOTES. FURTHER INFORMATION ABOUT
EACH FUND'S PERFORMANCE IS CONTAINED IN THE FUNDS' ANNUAL REPORT TO SHAREHOLDERS
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995, WHICH MAY BE OBTAINED WITHOUT
CHARGE FROM THE DISTRIBUTOR. DURING THE PERIODS SHOWN THE FUNDS RECEIVED
SUB-ADVISORY SERVICES FROM COMPANIES THAT WERE NOT AFFILIATED WITH THE ADVISER.
ON DECEMBER 1, 1996, THE ADVISER ASSUMED RESPONSIBILITY FOR THE SERVICES
PREVIOUSLY PROVIDED BY THESE SUB-ADVISERS.
Financial highlights for a Share of the Treasury Advantage Institutional
Fund (previously called the "Treasury Trust Fund") outstanding throughout each
of the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX YEAR ENDED
MONTHS ENDED ----------------------------------------------------------
5/31/96 NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 1995 1994 1993 1992
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $1.0000 $1.0015 $0.9999 $0.9999 $1.0000
-------------- ------------- ------------- ------------- -------------
Income from investment operations:
Net investment income.................... 0.0251 0.0551 0.0367 0.0292 0.0367
Net realized gains (losses) on
securities.............................. (0.0003 ) (0.0006 ) 0.0016 0.0000 (0.0001 )
-------------- ------------- ------------- ------------- -------------
Total income from investment operations.... 0.0248 0.0545 0.0383 0.0292 0.0366
-------------- ------------- ------------- ------------- -------------
Less dividends and distributions:
Dividends from net investment income..... (0.0251 ) (0.0551 ) (0.0367 ) (0.0292 ) (0.0367 )
Distributions from net realized gains on
securities.............................. (0.0001 ) (0.0009 ) (0.0000 ) (0.0000 ) (0.0000 )
-------------- ------------- ------------- ------------- -------------
Total dividends and distributions.......... (0.0252 ) (0.0560 ) (0.0367 ) (0.0292 ) (0.0367 )
-------------- ------------- ------------- ------------- -------------
Net change in net asset value.............. (0.0004 ) (0.0015 ) 0.0016 0.0000 (0.0001 )
-------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............. $0.9996 $1.0000 $1.0015 $0.9999 $0.9999
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
Total return............................... 2.55 %++ 5.74 % 3.73 % 2.96 % 3.74 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s)......... $ 138,134 $ 132,850 $ 126,771 $ 166,410 $ 183,072
Ratio of expenses to average net assets.. 0.38 %+ 0.40 % 0.40 % 0.40 % 0.40 %
Ratio of net investment income to average
net assets.............................. 5.05 %+ 5.54 % 3.61 % 2.92 % 3.72 %
Ratio of expenses to average net
assets**................................ 0.38 %+ 0.45 % 0.44 % 0.42 % 0.40 %
Ratio of net investment income to average
net assets**............................ 5.05 %+ 5.50 % 3.57 % 2.90 % 3.72 %
<CAPTION>
PERIOD ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1991 1990 1989*
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $1.0000 $1.0000 $1.0000
------------- ------------- -------------
Income from investment operations:
Net investment income.................... 0.0598 0.0777 0.0849
Net realized gains (losses) on
securities.............................. 0.0000 0.0000 0.0000
------------- ------------- -------------
Total income from investment operations.... 0.0598 0.0777 0.0849
------------- ------------- -------------
Less dividends and distributions:
Dividends from net investment income..... (0.0598 ) (0.0777 ) (0.0849 )
Distributions from net realized gains on
securities.............................. (0.0000 ) (0.0000 ) (0.0000 )
------------- ------------- -------------
Total dividends and distributions.......... (0.0598 ) (0.0777 ) (0.0849 )
------------- ------------- -------------
Net change in net asset value.............. 0.0000 0.0000 0.0000
------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............. $1.0000 $1.0000 $1.0000
------------- ------------- -------------
------------- ------------- -------------
Total return............................... 6.15 % 8.05 % 8.83 %++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s)......... $ 184,420 $ 215,948 $ 236,411
Ratio of expenses to average net assets.. 0.39 % 0.38 % 0.39 %+
Ratio of net investment income to average
net assets.............................. 6.00 % 7.77 % 8.63 %+
Ratio of expenses to average net
assets**................................ 0.39 % 0.39 % 0.04 %+
Ratio of net investment income to average
net assets**............................ 6.00 % 7.76 % 8.59 %+
</TABLE>
- ----------------------------------
* For the period December 7, 1988 (commencement of operations) through
November 30, 1989.
** During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
+ Annualized.
++ Not Annualized.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Financial highlights for a Share of Prime Advantage Institutional Fund
(previously called the "Prime Trust Fund") outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX YEAR ENDED
MONTHS ENDED ------------------------------------------------------------------------
5/31/96 NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $0.9999 $0.9999 $1.0000 $1.0017 $1.0000 $1.0000
------------ ------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income.................... 0.0258 0.0561 0.0377 0.0304 0.0392 0.0637
Net realized gains (losses) on
securities.............................. 0.0000 0.0000 (0.0038) 0.0005*** 0.0017 0.0000
------------ ------------ ------------ ------------ ------------ ------------
Total income from investment operations.... 0.0258 0.0561 0.0339 0.0309 0.0409 0.0637
------------ ------------ ------------ ------------ ------------ ------------
Less dividends and distributions:
Dividends from net investment income..... (0.0258) (0.0561) (0.0377) (0.0304) (0.0392) (0.0637)
Distributions from net realized gains on
securities.............................. (0.0000) (0.0000) (0.0000) (0.0022) (0.0000) (0.0000)
------------ ------------ ------------ ------------ ------------ ------------
Total dividends and distributions.......... (0.0258) (0.0561) (0.0377) (0.0326) (0.0392) (0.0637)
------------ ------------ ------------ ------------ ------------ ------------
Increase due to voluntary capital
contribution from sub-adviser........... 0.0000 (0.0000) (0.0037) 0.0000 (0.0000) 0.0000
------------ ------------ ------------ ------------ ------------ ------------
Net change in net asset value.............. 0.0000 (0.0000) (0.0001) (0.0017) 0.0017 0.0000
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD............. $0.9999 $0.9999 $0.9999 $1.0000 $1.0017 $1.0000
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Total return............................... 2.61%++ 5.76% 3.83% 3.31% 4.00% 6.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s)......... $145,746 $131,089 $131,758 $111,769 $99,192 $89,777
Ratio of expenses to average net assets.. 0.38%+ 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to average
net assets.............................. 5.21%+ 5.60% 3.80% 3.03% 3.89% 6.34%
Ratio of expenses to average net
assets**................................ 0.38%+ 0.46% 0.44% 0.44% 0.46% 0.46%
Ratio of net investment income to average
net assets**............................ 5.21%+ 5.54% 3.76% 3.00% 3.83% 6.28%
<CAPTION>
PERIOD ENDED
NOVEMBER 30, NOVEMBER 30,
1990 1989*
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $1.0000 $1.0000
------------ ------------
Income from investment operations:
Net investment income.................... 0.0800 0.0888
Net realized gains (losses) on
securities.............................. 0.0000 0.0000
------------ ------------
Total income from investment operations.... 0.0800 0.0888
------------ ------------
Less dividends and distributions:
Dividends from net investment income..... (0.0800) (0.0888)
Distributions from net realized gains on
securities.............................. (0.0000) (0.0000)
------------ ------------
Total dividends and distributions.......... (0.0800) (0.0888)
------------ ------------
Increase due to voluntary capital
contribution from sub-adviser........... 0.0000 0.0000
------------ ------------
Net change in net asset value.............. 0.0000 0.0000
------------ ------------
NET ASSET VALUE, END OF PERIOD............. $1.0000 $1.0000
------------ ------------
------------ ------------
Total return............................... 8.31% 9.25%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s)......... $78,363 $70,298
Ratio of expenses to average net assets.. 0.38% 0.36%+
Ratio of net investment income to average
net assets.............................. 8.00% 8.99%+
Ratio of expenses to average net
assets**................................ 0.47% 0.54%+
Ratio of net investment income to average
net assets**............................ 7.91% 8.81%+
</TABLE>
- ----------------------------------
* For the period December 7, 1988 (commencement of operations) through
November 30, 1989.
** During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
*** Net realized gain per share is the direct result of a decrease in
outstanding shares between November 30, 1992 and the date of the gain
distribution.
+ Annualized.
++ Not Annualized.
4
<PAGE>
INVESTMENT PRINCIPLES AND POLICIES
The Adviser uses a range of different investments and investment techniques
in seeking to achieve each Fund's investment objective. The Adviser will use its
best efforts to achieve a Fund's investment objective, although its achievement
cannot be assured.
Each Fund invests only in U.S. dollar-denominated securities that mature in
thirteen months or less (with certain exceptions). The dollar-weighted average
portfolio maturity of each Fund may not exceed ninety days.
Instruments acquired by the Funds will be U.S. Government securities or
other "First Tier Securities" as described below. The term "First Tier
Securities" has a technical definition given by the Securities and Exchange
Commission, but generally refers to securities that, in the Adviser's view,
present minimal credit risks and have the highest short-term debt rating at the
time of purchase by one (if rated by only one) or more Nationally Recognized
Statistical Rating Organizations ("NRSROs"). A description of applicable ratings
is attached to the Statement of Additional Information as Appendix A. Unrated
instruments (including instruments with long-term but no short-term ratings)
will be of comparable quality as determined by the Adviser under guidelines
approved by the Board of Trustees.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of both the Prime Advantage Institutional and the
Treasury Advantage Institutional Funds is to seek to provide a high level of
current income consistent with liquidity, the preservation of capital and a
stable net asset value. The Prime Advantage Institutional Fund pursues its
objective by investing in a broad range of short-term government, bank and
corporate obligations. The Treasury Advantage Institutional Fund seeks to
achieve its objective by investing in obligations that the U.S. Treasury has
issued or to which the U.S. Government has pledged its full faith and credit to
guarantee the payment of principal and interest. You should note, however, that
shares of the Treasury Advantage Institutional Fund are not themselves issued or
guaranteed by the U.S. Treasury or any of its agencies. U.S. Treasury
obligations include Treasury bills, certain Treasury strips, certificates of
indebtedness, notes and bonds, and obligations of other agencies and
instrumentalities that are backed by the full faith and credit of the U.S.
Treasury. It is the Treasury Advantage Institutional Fund's policy that under
normal conditions it will invest 65% or more of its total assets in U.S Treasury
obligations and repurchase agreements for which such obligations serve as
collateral.
In accordance with the current rules of the Securities and Exchange
Commission, the Prime Advantage Institutional Fund intends to limit its
purchases in the securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) to no
more than 5% of its total assets at the time of purchase, with the exception
that up to 25% of its total assets may be invested in the securities of any
single issuer for up to three business days.
PORTFOLIO INSTRUMENTS, PRACTICES AND RELATED RISKS
U.S. GOVERNMENT OBLIGATIONS AND MONEY MARKET INSTRUMENTS. The TREASURY
ADVANTAGE INSTITUTIONAL FUND may invest in U.S. Treasury obligations as
described above. The PRIME ADVANTAGE INSTITUTIONAL FUND may invest in securities
issued or guaranteed by the U.S. Government, as well as in obligations issued or
guaranteed by U.S. Government agencies and instrumentalities or in money
5
<PAGE>
market instruments, including bank obligations and commercial paper. Obligations
of certain agencies and instrumentalities, such as the Government National
Mortgage Association, are supported by the full faith and credit of the U.S.
Treasury; others, like the Export-Import Bank, are supported by the issuer's
right to borrow from the Treasury; others, including the Federal National
Mortgage Association, are backed by the discretionary ability of the U.S.
Government to purchase the entity's obligations; and still others like the
Student Loan Marketing Association are backed solely by the issuer's credit.
U.S. Government obligations also include U.S. Government-backed trusts that hold
obligations of foreign governments and are guaranteed or backed by the full
faith and credit of the United States. There is no assurance that the U.S.
Government will provide support to a U.S. Government-sponsored entity if it is
not required to do so by law. Some of these securities may have a variable or
floating interest rate.
ASSET-BACKED SECURITIES. The PRIME ADVANTAGE INSTITUTIONAL FUND may invest
in asset-backed securities (I.E., securities backed by mortgages, installment
sale contracts, credit card receivables or other assets). The average life of an
asset-backed instrument varies with the maturities of the underlying
instruments, and is likely to be substantially less than the original maturity
of the asset pools underlying the security as the result of scheduled principal
payments and prepayments. This may be particularly true for mortgage-backed
securities. The rate of such prepayments, and hence the life of the security,
will be primarily a function of current market rates and current conditions in
the relevant market. The relationship between prepayments and interest rates may
give some high-yielding asset-backed securities less potential for growth in
value than conventional bonds with comparable maturities. In addition, in
periods of failing interest rates, the rate of prepayment tends to increase.
During such periods, the reinvestment of prepayment proceeds by the Fund will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. Because of these and other reasons, an asset-backed
security's total return may be difficult to predict precisely. To the extent the
Fund purchases asset-backed securities at a premium, prepayments (which often
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of any premiums paid.
Presently there are several types of mortgage-backed securities issued or
guaranteed by U.S. Government agencies, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rata interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-backed securities. Issuers of CMOs
frequently elect to be taxed as a pass-through entity known as a real estate
mortgage investment conduit, or REMICS. CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. Although the relative payment rights of these classes can be structured in
a number of different ways, most often payments of principal are applied to the
CMO classes in the order of their respective stated maturities. CMOs can expose
the Fund to more volatility and interest rate risk than other types of
asset-backed obligations.
MUNICIPAL OBLIGATIONS. The PRIME ADVANTAGE INSTITUTIONAL FUND may also
invest in municipal obligations. These securities may be advantageous for the
Fund when, as a result of prevailing economic, regulatory or other
circumstances, the yield of such securities on a pre-tax basis is comparable to
that of other securities the Fund can purchase. Dividends paid by the Fund that
come from interest on municipal obligations will be taxable to shareholders.
6
<PAGE>
The two main types of municipal obligations are "general obligation"
securities (which are secured by the issuer's full faith credit and taxing
power) and "revenue" securities (which are payable only from revenues received
from the operation of a particular facility or other specific revenue source). A
third type of municipal obligation, normally issued by special purpose public
authorities, is known as a "moral obligation" security because if the issuer
cannot meet its obligations it then draws on a reserve fund, the restoration of
which is not a legal requirement. Private activity bonds (such as bonds issued
by industrial development authorities) are usually revenue securities issued by
or for public authorities to finance a privately operated facility.
Within the principal classifications described above there are a variety of
categories including municipal leases and certificates of participation.
Municipal lease obligations are issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Municipal leases (and participations in such leases) present
the risk that a municipality will not appropriate funds for the lease payments.
The Adviser, under the supervision of the Board of Trustees, will determine the
credit quality of any unrated municipal leases on an on-going basis, including
an assessment of the likelihood that the lease will not be cancelled.
Municipal obligations purchased by the PRIME ADVANTAGE INSTITUTIONAL FUND
may be backed by letters of credit or guarantees issued by domestic or foreign
banks and other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or
guarantees with respect to a municipal obligation held by the Fund could have an
adverse effect on the Fund's portfolio and the value of its shares. As described
below under "Foreign Securities," foreign letters of credit and guarantees
involve certain risks in addition to those of domestic obligations.
CORPORATE OBLIGATIONS. The PRIME ADVANTAGE INSTITUTIONAL FUND may purchase
corporate bonds and cash equivalents that meet the Fund's quality and maturity
limitations. These investments may include obligations issued by Canadian
corporations and Canadian counterparts of U.S. corporations, Eurodollar bonds,
which are U.S. dollar-denominated obligations of foreign issuers, Yankee bonds,
which are U.S. dollar-denominated bonds issued by foreign issuers in the U.S.,
and equipment trust receipts.
Cash equivalents, such as commercial paper and other similar obligations
purchased by the Fund that have an original maturity of 13 months or less, will
either have short-term ratings at the time of purchase in the top category of
one or more NRSROs or be issued by issuers with such ratings. Unrated
instruments of these types purchased by the Fund will be determined to be of
comparable quality.
BANK OBLIGATIONS. The PRIME ADVANTAGE INSTITUTIONAL FUND may purchase
certificates of deposit ("CDs"), bankers' acceptances, notes and time deposits
issued or supported by U.S. or foreign banks and savings institutions that have
total assets of more than $1 billion. The Fund may also invest in CDs and time
deposits of domestic branches of U.S. banks that have total assets of less than
$1 billion if the CDs and time deposits are insured by the FDIC. Investments in
foreign banks and foreign branches of U.S. banks will not make up more than 25%
of the Fund's total assets when the
7
<PAGE>
investment is made. (To the extent permitted by the SEC, bank obligations of
U.S. branches of foreign banks will be considered to be investments in U.S.
domestic banks for purposes of this calculation.) The Fund may also make
interest-bearing savings deposits in amounts not exceeding 5% of its total
assets.
REPURCHASE AGREEMENTS. EACH FUND may buy portfolio securities subject to
the seller's agreement to repurchase them at an agreed upon time and price.
These transactions are known as repurchase agreements. A Fund will enter into
repurchase agreements only with financial institutions deemed to be creditworthy
by the Adviser, pursuant to guidelines established by the Board of Trustees.
During the term of any repurchase agreement, the Adviser will monitor the
creditworthiness of the seller, and the seller must maintain the value of the
securities subject to the agreement in an amount that is greater than the
repurchase price. Default or bankruptcy of the seller would, however, expose a
Fund to possible loss because of adverse market action or delays connected with
the disposition of the underlying obligations. Because of the seller's
repurchase obligations, the securities subject to repurchase agreements do not
have maturity limitations.
VARIABLE AND FLOATING RATE INSTRUMENTS. EACH FUND may purchase variable and
floating rate instruments. In the case of the Treasury Advantage Institutional
Fund these instruments must be issued or fully guaranteed by the U.S. Treasury
but for the Prime Advantage Institutional Fund investments may include variable
amount master demand notes issued by private issuers, which are instruments
under which the indebtedness, as well as the interest rate, varies. If rated,
variable and floating rate instruments must be rated in the highest short-term
rating category by an NRSRO. If unrated, such instruments will need to be
determined to be of comparable quality. Unless guaranteed by the U.S. Government
or one of its agencies or instrumentalities, variable or floating rate
instruments purchased by the Prime Advantage Institutional Fund must permit the
Fund to demand payment of the instrument's principal at least once every
thirteen months. Because of the absence of a market in which to resell a
variable or floating rate instrument, the Fund might have trouble selling an
instrument should the issuer default or during periods when the Fund is not
permitted by agreement to demand payment of the instrument, and for this or
other reasons a loss could occur with respect to the instrument.
STRIPPED SECURITIES. EACH FUND may invest in instruments known as
"stripped" securities. These instruments include U.S. Treasury bonds and notes
and federal agency obligations on which the unmatured interest coupons have been
separated from the underlying obligation. These obligations are usually issued
at a discount to their "face value," and because of the manner in which
principal and interest are returned may exhibit greater price volatility than
more conventional debt securities. The Treasury Advantage Institutional Fund's
investments in these instruments will be limited to "interest only" stripped
securities that have been issued by a federal instrumentality known as the
Resolution Funding Corporation and other stripped securities issued or
guaranteed by the U.S. Treasury, where the principal and interest components are
traded independently under the Separate Trading of Registered Interest and
Principal Securities program ("STRIPS"). Under STRIPS, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently. The Prime Advantage Institutional Fund may
also invest in instruments that have
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been stripped by their holder, typically a custodian bank or investment
brokerage firm, and then resold in a custodian receipt program under names you
may be familiar with such as Treasury Investors Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS").
In addition, the Prime Advantage Institutional Fund may purchase stripped
mortgage-backed securities ("SMBS") issued by the U.S. Government (or a U.S.
Government agency or instrumentality) or by private issuers such as banks and
other institutions. SMBS, in particular, may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal and
interest are returned to investors. If the underlying obligations experience
greater than anticipated prepayments, the Fund may fail to fully recoup its
initial investment. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
are generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped. SMBS issued
by the U.S. Government (or a U.S. Government agency or instrumentality) may be
considered liquid under guidelines established by the Board of Trustees if they
can be disposed of promptly in the ordinary course of business at a value
reasonably close to that used in the calculation of the Fund's per share net
asset value.
Although certain stripped securities may pay interest to their holders
before they mature, federal income tax rules require a Fund each year to
recognize a part of the discount attributable to a security as interest income.
This income must be distributed along with the other income a Fund earns. To the
extent shareholders request that they receive their dividends in cash rather
than reinvesting them, the money necessary to pay those dividends must come from
the assets of a Fund or from other sources such as proceeds from sales of Fund
shares and/or sales of portfolio securities. The cash so used would not be
available to purchase additional income-producing securities, and a Fund's
current income could ultimately be reduced as a result.
BANK INVESTMENT CONTRACTS AND GUARANTEED INVESTMENT CONTRACTS. The PRIME
ADVANTAGE INSTITUTIONAL FUND may invest in bank investment contracts ("BICs")
issued by banks that meet the asset size requirements described above under
"Bank Obligations" and in guaranteed investment contracts ("GICs") issued by
highly rated U.S. insurance companies that have assets of $1 billion or more and
meet the quality and credit standards established by the Adviser pursuant to
guidelines approved by the Board of Trustees. Pursuant to a BIC or GIC, the Fund
would make cash contributions to a deposit account at a bank or insurance
company. These contracts are general obligations of the issuing bank or
insurance company and are paid from the general assets of the issuing entity. In
return for its cash contribution, the Fund would receive interest from the
issuing entity at either a negotiated fixed or floating rate. Because BICs and
GICs are generally not assignable or transferable without the permission of the
bank or insurance company involved, and an active secondary market does not
currently exist for these instruments, they are considered illiquid securities
and are subject to the Fund's limitation on such investments as described below
under "Managing Liquidity."
PARTICIPATIONS AND TRUST RECEIPTS. The PRIME ADVANTAGE INSTITUTIONAL FUND
may purchase from domestic financial institutions and trusts created by such
institutions participation interests and trust receipts in high quality debt
securities. A participation interest or receipt gives the Fund an undivided
interest in the security in the proportion that the Fund's participation
interest or receipt bears to the total principal amount of the security. The
Fund intends only to purchase participations
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and trust receipts from an entity or syndicate, and does not intend to serve as
a co-lender in any such activity. As to certain instruments for which the Fund
will be able to demand payment, the Fund intends to exercise its right to do so
only upon a default under the terms of the security, as needed to provide
liquidity, or to maintain or improve the quality of its investment portfolio. It
is possible that a participation interest or trust receipt may be deemed to be
an extension of credit by the Fund to the issuing financial institution rather
than to the obligor of the underlying security and may not be directly entitled
to the protection of any collateral security provided by the obligor. In such
event, the ability of the Fund to obtain repayment could depend on the issuing
financial institution.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. EACH FUND may purchase
securities on a "when-issued" basis and purchase or sell securities on a
"forward commitment" basis. When-issued and forward commitment transactions,
which involve a commitment by a Fund to purchase or sell particular securities
with payment and delivery taking place at a future date (perhaps one or two
months later), permit a Fund to lock-in a price or yield on a security it
intends to purchase or sell, regardless of future changes in interest rates.
These transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place.
When-issued purchases and forward purchase commitments are not expected to
exceed 25% of the value of a Fund's total assets under normal circumstances.
These transactions will not be entered for speculative purposes but only in
furtherance of a Fund's investment objective.
OTHER INVESTMENT COMPANIES. EACH FUND may invest in the securities of other
mutual funds that invest in the particular instruments in which a Fund itself
may invest, subject to the requirements of applicable securities laws. When a
Fund invests in another mutual fund, it pays a pro rata portion of the advisory
and other expenses of that fund as a shareholder of that fund. These expenses
are in addition to the advisory and other expenses a Fund pays in connection
with its own operations.
Securities of other investment companies will be acquired by the Funds
within the limits prescribed by the Investment Company Act of 1940, as amended
(the "1940 Act"). Each Fund currently intends to limit these investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 5% of their value of its total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of other
investment companies as a group; (c) not more than 3% of the outstanding voting
stock of any one investment company will be owned by a Fund; and (d) not more
than 10% of the outstanding voting stock of any one closed-end investment
company will be owned in the aggregate by a Fund, other investment portfolios of
Emerald Funds, or any other investment companies advised by the Adviser.
BORROWINGS. EACH FUND is authorized to make limited borrowings for
temporary purposes and each Fund may enter into reverse repurchase agreements.
Under such an agreement a Fund sells portfolio securities and then buys them
back later at an agreed-upon time and price. When the Fund enters into a reverse
repurchase agreement it will place in a separate custodial account liquid assets
that have a value at least equal to the price a Fund must pay when it buys back
the securities, and the account will be continuously monitored to make sure the
appropriate value is maintained. Reverse repurchase agreements may be used to
meet redemption requests without selling portfolio securities. Reverse
repurchase agreements involve the possible risk that the value of portfolio
securities the Fund relinquishes may decline below the price a Fund must pay
when the transaction closes. Interest paid by a Fund in a reverse repurchase or
other borrowing transaction will reduce a Fund's income.
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SECURITIES LENDING. EACH FUND may lend securities held in its portfolio to
broker-dealers and other institutions as a means of earning additional income.
These loans present risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, securities
loans will be made only to parties the Adviser deems to be of good standing, and
will only be made if the Adviser thinks the possible rewards from such loan
justify the possible risks. A loan will not be made if, as a result, the total
amount of a Fund's outstanding loans exceeds 30% of its total assets. Securities
loans will be fully collateralized.
MANAGING LIQUIDITY. Disposing of illiquid investments may involve
time-consuming negotiations and legal expenses, and it may be difficult or
impossible to dispose of such investments promptly at an acceptable price.
Additionally, the absence of a trading market can make it difficult to value a
security. For these and other reasons a Fund will not knowingly invest more than
10% of its net assets in illiquid securities. Illiquid securities include
repurchase agreements, securities loans and time deposits that do not permit a
Fund to terminate them after seven days notice, GICs, BICs, stripped
mortgage-backed securities issued by private issuers and securities that are not
registered under the securities laws. Certain securities that might otherwise be
considered illiquid, however, such as some issues of commercial paper, variable
amount master demand notes with maturities of nine months or less and securities
for which the Adviser has determined pursuant to guidelines adopted by the Board
of Trustees that a liquid trading market exists (including certain securities
that may be purchased by institutional investors under SEC Rule 144A), are not
subject to this limitation. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.
FOREIGN SECURITIES. There are risks and costs involved in investing in
securities of foreign issuers (including foreign governments) that are in
addition to the usual risks inherent in U.S. investments. Investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction costs as well as the imposition of additional taxes
by foreign governments. In addition, foreign investments may involve risks
associated with less complete financial information about the issuer, less
market liquidity and political instability. Future political and economic
developments, the possible imposition of withholding taxes on interest income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls or the adoption of other governmental
restrictions might adversely affect the payment of principal and interest on
foreign obligations. Additionally, foreign banks and foreign branches of
domestic banks may be subject to less stringent reserve requirements, and to
different accounting, auditing and recordkeeping requirements.
OTHER RISK CONSIDERATIONS. As with an investment in any mutual fund, an
investment in the Funds entails market and economic risks associated with
investments generally. However, there are certain specific risks of which you
should be aware.
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
recognize that in periods of declining interest rates the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and in periods of rising interest rates the market value will tend
to decrease. You should also recognize that in periods of declining interest
rates, the yields of investment portfolios comprised primarily of fixed income
securities will tend to be higher than prevailing market rates and,
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in periods of rising interest rates, yields will tend to be somewhat lower. The
Funds may purchase zero-coupon bonds (i.e., discount debt obligations that do
not make periodic interest payments). Zero-coupon bonds are subject to greater
market fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. Changes in
the financial strength of an issuer or changes in the ratings of any particular
security may also affect the value of these investments.
In addition, the PRIME ADVANTAGE INSTITUTIONAL FUND may purchase custodial
receipts, tender option bonds and certificates of participation in trusts that
hold municipals or other types of obligations. A certificate of participation
gives a Fund an individual, proportionate interest in the obligation, and may
have a variable or fixed rate. Because certificates of participation are
interests in obligations that may be funded through government appropriations,
they are subject to the risk that sufficient appropriations for the timely
payment of principal and interest on the obligations may not be made. The NRSRO
quality rating of an issue of certificates of participation is normally based
upon the rating of the obligations held by the trust and the credit rating of
the issuer of any letter of credit and of any other guarantor providing credit
support to the issue.
Payment on certain obligations held by the Prime Advantage Institutional
Fund may be secured by mortgages or deeds of trust. In the event of a default,
enforcement of a mortgage or deed of trust will be subject to statutory
enforcement procedures and limitations on obtaining deficiency judgments. Should
a foreclosure occur, collection of the proceeds from that foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted municipal obligation.
FUNDAMENTAL LIMITATIONS
The Funds' investment objectives and policies discussed above are not
fundamental limitations and may be changed by the Board of Trustees without
shareholder approval. You will be notified of any material changes, but as a
result, the Funds may have a different investment objective from the one it had
at the time of your investment. However, each Fund also has in place certain
"fundamental limitations" that cannot be changed for a Fund without the approval
of a majority of that Fund's outstanding shares. Some of these fundamental
limitations are summarized below, and all of the Funds' fundamental limitations
are set out in full in the Statement of Additional Information.
1. A Fund may not purchase securities that would cause 25% or more of its
total assets to be invested in issuers conducting their principal business
activities in the same industry, with certain limited exceptions set forth in
the Statement of Additional Information.
2. A Fund may not borrow money except for temporary purposes in amounts up
to one-third of the value of its total assets at the time of such borrowing.
Whenever borrowings exceed 5% of a Fund's total assets, the Fund will not make
any investments.
INVESTING IN EMERALD FUNDS
YOUR MONEY MANAGER
BARNETT CAPITAL ADVISORS, INC. (REFERRED TO AS THE "ADVISER") SERVES AS
INVESTMENT ADVISER TO EACH FUND.
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PURCHASE OF SHARES
Shares of the Funds are sold on a continuous basis by Emerald Asset
Management, Inc. (called the "Distributor"). The Distributor is located at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
Except as noted below, shares of each Fund are sold only to Barnett Bank,
N.A. and its affiliates ("Barnett") acting on their own behalf or on behalf of
their customer accounts (except employee benefit plan accounts) that invest at
least $1 million in a Fund. This minimum investment requirement does not apply
to customer accounts that owned Fund shares on November 30, 1996. In addition,
Fund shares are sold to other institutional investors that invest at least $1
million in a Fund. (These institutions, together with Barnett, are called
"Institutions.") There is no minimum for subsequent purchases.
All share purchases by customers of an Institution are effected through the
customer's account at the Institution through procedures established in
connection with the requirements of the account, and confirmations of share
purchases and redemptions will be sent by the Funds to the particular
Institution involved. Fund shares will normally be held of record by an
Institution for its customers or in the name of a nominee of an Institution.
Beneficial ownership of Fund shares will be recorded by an Institution for its
customers and reflected in the account statements provided to customers. The
exercise of voting rights and the delivery to customers of shareholder
communications from the Funds will be governed by the customers' account
agreements with the Institution.
Shares are sold at the net asset value per share next determined after
receipt of a purchase order from an Institution by the Funds' transfer agent.
Purchases for shares of the Funds will be effected only on days on which both
the New York Stock Exchange (the "Exchange") and the Funds' Custodian are open
for business ("Business Day") and only when federal funds or other funds are
immediately available to the Funds' transfer agent to make the purchase on the
day it receives the purchase order. Additionally, on days when the Exchange
and/or the Funds' Custodian close early due to a partial holiday or otherwise,
the Funds reserve the right to advance the times at which purchase and
redemption orders must be received in order to be processed that Business Day.
Institutions may transmit purchase orders for either Fund by telephoning the
transfer agent c/o the Distributor at 1-800-367-5905 not later than 3:00 p.m.
(Eastern time) on any Business Day. If federal funds are not available with
respect to any such order by the close of business on the day the order is
received by the transfer agent, the order will be cancelled. In addition, any
purchase order received by the transfer agent after 3:00 p.m. (Eastern time)
will not be accepted, and notice thereof will be given to the Institution
placing the order. Any funds received in connection with late orders will be
returned promptly. Institutions are responsible for transmitting purchase orders
promptly to the Funds in accordance with their agreements with their customers,
and delivering the required funds on a timely basis.
Each Fund observes the following holidays: New Year's Day (observed), Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day (observed), Labor Day, Columbus Day, Veterans Day (observed), Thanksgiving
Day and Christmas Day (observed).
Purchase orders must include the investor's tax identification number.
Emerald Funds reserves the right to reject any purchase order or to waive the
minimum initial investment requirement. Payment for orders which are not
received or accepted will be returned after prompt inquiry. Payment for shares
of a Fund may, at the discretion of the Adviser, be made in the form of
securities that are
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permissible investments for that Fund. For further information see "In-Kind
Purchases" in the Statement of Additional Information. The issuance of shares is
recorded in the shareholder records of the Funds, and share certificates are not
issued unless expressly requested in writing. Certificates are not issued for
fractional shares.
Neither Emerald Funds nor its service contractors will be responsible for
any loss or expense for acting upon telephone instructions that are believed to
be genuine. In attempting to confirm that telephone instructions are genuine,
Emerald Funds will use procedures considered reasonable. To the extent Emerald
Funds does not use reasonable procedures to form its belief, it and/or its
service contractors may be responsible for instructions that are fraudulent or
unauthorized.
Institutions may charge their customers certain account fees for automatic
investment and other cash management services provided by them. These fees may
include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income.
Information concerning these minimum account requirements, services and any
charges should be obtained from the particular Institution before a customer
authorizes the purchase of Fund shares, and this Prospectus should be read in
conjunction with any information so obtained.
REDEMPTION OF SHARES
Redemption orders are effected at the net asset value per share next
determined after receipt of the order by Emerald Funds' transfer agent. Shares
held by an Institution on behalf of its customers must be redeemed in accordance
with the instructions and limitations pertaining to the customer accounts. These
procedures will vary according to the type of account and Institution involved,
and customers should consult their account managers in this regard. It is the
responsibility of the Institutions to transmit redemption orders to the Funds'
transfer agent and credit their customers' accounts with the redemption proceeds
on a timely basis.
Institutions may transmit redemption orders by telephoning the transfer
agent c/o the Distributor at 1-800-367-5905. Payment for redemption orders for
either Fund which are received by the transfer agent on a Business Day before
3:00 p.m. (Eastern Time) will normally be wired in federal funds the same day.
Payment for redemption orders which are received between 3:00 p.m. (Eastern
Time) and the close of business or on a non-Business Day will normally be wired
in federal funds on the next Business Day. Emerald Funds reserves the right,
however, to delay the wiring of redemption proceeds for up to seven days after
receipt of a redemption order if, in the judgment of the Adviser, an earlier
payment could adversely affect either Fund. No charge for wiring redemption
payments is imposed by the Funds, although Institutions may charge their
customer accounts for redemption services. Information relating to such
redemption services and charges, if any, is available from the Institutions. If
all of the shares owned by an Institution in a particular Fund are redeemed, any
declared and unpaid dividends on the redeemed shares will be paid within five
days of redemption. See "Dividends and Distributions."
An investor may be required to redeem shares in a Fund if the investor's
shareholdings drop below the required minimum investment amount stated above
under "Purchase of Shares" due to share redemptions and not market fluctuations
and the shareholder does not increase its balance to at least the required
minimum upon 60 days' written notice. If an Institution requires its customers
to
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maintain a minimum balance in their customer accounts, and the balance in an
account falls below that minimum, a customer may also be obligated to redeem
shares in the Funds to the extent necessary to maintain the minimum balance
required.
Each Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as are permitted under the Investment Company Act
of 1940. Each Fund may also redeem shares involuntarily or make payment for
redemption in securities or other property if it appears appropriate to do so in
light of the Fund's responsibilities under the Investment Company Act of 1940.
See the Statement of Additional Information ("Additional Purchase and Redemption
Information") for examples of when such redemptions might be appropriate. In
those cases, an investor may incur transaction costs in converting securities to
cash.
It is the responsibility of the Institutions to provide their customers with
statements of account with respect to share transactions made for their
accounts.
DIVIDENDS AND DISTRIBUTIONS
Each Fund's shareholders of record are entitled to dividends and net capital
gains distributions arising from net investment income and net realized gains,
if any, earned only on the investments held by the particular Fund. Each Fund's
net investment income is declared daily as a dividend to the persons who are the
record holders of each Fund's shares at the close of business on the day of
declaration. As a result, shares begin earning dividends on the day a purchase
order is executed and continue to earn dividends through and including the day
before shares are redeemed. Dividends and distributions are automatically
reinvested in shares of the Fund that pay the dividends and distributions,
unless a shareholder specifically elects to receive payments in cash by writing
Emerald Funds, 100 First Avenue, Suite 300, Pittsburgh, PA 15222. An election is
effective for dividends and distributions with payment dates after the date the
Funds' transfer agent receives the election. Cash dividends are paid monthly by
wire transfer within five Business Days after the end of each month or within
five Business Days after the redemption of all of a shareholder's shares of a
particular Fund. Any net short-term or long-term capital gains realized by the
Funds will be distributed to shareholders at least annually, after reduction for
capital loss carryforwards, if any.
EXPLANATION OF SALES PRICE
Net asset value per share is determined on each Business Day (as defined
above) at 3:00 p.m. (Eastern Time) by adding the value of a Fund's investments,
cash and other assets, subtracting the Fund's liabilities, and then dividing the
result by the number of shares in a Fund that are outstanding. All securities of
each Fund are valued at amortized cost. More information about valuation can be
found in the Funds' Statement of Additional Information, which you may request
by calling 800/637-3759.
OTHER SERVICE PROVIDERS
While the investment advice provided to the Funds is essential, Emerald
Funds would not be able to function without the services of a number of other
companies. Some of these companies are listed below. For further information as
to some of the services these companies provide, as well as more information
regarding investment advisory services, see "The Business of the Funds."
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ADMINISTRATOR
BISYS FUND SERVICES LIMITED PARTNERSHIP
("BISYS")
BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., is responsible
for coordinating Emerald Funds' efforts and generally overseeing the operation
of the Funds' business.
DISTRIBUTOR
EMERALD ASSET MANAGEMENT, INC.
Emerald Asset Management, Inc. is a wholly-owned subsidiary of The BISYS
Group, Inc. Mutual funds structured like the Funds sell shares on a continuous
basis. The Funds' shares are sold through the Distributor. Certain officers of
Emerald Funds, namely Messrs. Blundin, Martinez and Tuch, are also officers
and/or directors of the Distributor.
CUSTODIAN
THE BANK OF NEW YORK
The Bank of New York is responsible for holding the investments that the
Funds own.
TRANSFER AGENT
BISYS FUND SERVICES, INC.
BISYS Fund Services, Inc., a wholly-owned subsidiary of The BISYS Group,
Inc., is the transfer agent for shares of the Funds. This means that its job is
to maintain the account records of all shareholders of record in the Funds, as
well as to administer the distribution of any dividends or distributions
declared by the Funds.
THE EMERALD FAMILY OF FUNDS
Emerald Funds was organized as a Massachusetts business trust on March 15,
1988 and is registered with the Securities and Exchange Commission as an
open-end management investment company. The Agreement and Declaration of Trust
authorizes the Board of Trustees to classify and reclassify any unissued shares
into one or more classes of shares. Pursuant to such authority, the Board of
Trustees has authorized the issuance of an unlimited number of shares
representing interests in the respective Funds, which are classified as
diversified companies under the Investment Company Act of 1940. The Board of
Trustees has also authorized the issuance of additional classes of shares
representing interests in other investment portfolios of Emerald Funds.
Information regarding these other portfolios may be obtained by contacting the
Distributor at the address listed on page 13.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Shares of all Emerald
Fund portfolios vote together and not by portfolio, except where otherwise
required by law or permitted by the Board of Trustees. All shareholders of a
particular Fund will vote separately on matters pertaining to the investment
advisory agreement applicable to that Fund and on any change in its fundamental
investment limitations. Shares of the Emerald Funds have noncumulative voting
rights and, accordingly, the holders of more than 50% of Emerald Funds'
outstanding shares (irrespective of class) may elect all of the Trustees. Shares
have
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<PAGE>
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, shares will be fully paid and non-assessable by Emerald Funds.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. If such should occur,
the Trustees then in office will call a shareholders meeting for the election of
Trustees. Except as set forth above, the Trustees shall continue to hold office
and may appoint successor Trustees. The Agreement and Declaration of Trust
provides that meetings of the shareholders of Emerald Funds shall be called by
the Trustees upon the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote. As of September 6, 1996, the Adviser and
its affiliates possessed on behalf of their underlying customer accounts, voting
or investment power with respect to a majority of the outstanding shares of
Emerald Funds. More information about shareholder voting rights can be found in
the Statement of Additional Information under "Description of Shares."
THE BUSINESS OF THE FUNDS
FUND MANAGEMENT
THE BUSINESS AFFAIRS OF EMERALD FUNDS ARE MANAGED UNDER THE GENERAL
SUPERVISION OF THE BOARD OF TRUSTEES.
The following individuals serve as trustees of Emerald Funds:
- Chesterfield H. Smith, Chairman of the Board of Emerald Funds, is a Senior
Partner of the law firm of Holland and Knight.
- John G. Grimsley, President of Emerald Funds, is a Partner of the law firm
of Grimsley, Marker & Iseley, P.A.
- Raynor E. Bowditch is the President of Bowditch Insurance Corporation.
- Mary Doyle is a Professor of Law, University of Miami Law School.
- Albert D. Ernest is the President of Albert Ernest Enterprises.
- Harvey H. Holding is the retired Executive Vice President and Chief
Financial Officer of BellSouth Corp.
Emerald Funds has also employed a number of professionals to provide
investment management and other important services to the Funds. BARNETT CAPITAL
ADVISORS, INC. serves as the Funds' adviser and has its principal offices at
9000 Southside Boulevard, Building 100, Jacksonville, Florida 32256. BISYS Fund
Services Limited Partnership, a wholly-owned subsidiary of The BISYS Group,
Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, serves as the
Funds' administrator. Emerald Asset Management, Inc., also a wholly-owned
subsidiary of The BISYS Group, Inc., located at the same address, is the
registered broker-dealer that sells the Funds' shares. The Funds also have a
custodian, The Bank of New York, located at 90 Washington Street, New York, New
York 10286 and a transfer and dividend paying agent, BISYS Fund Services, Inc.,
located at 100 First Avenue, Suite 300, Pittsburgh, PA 15222.
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ADVISER. The Adviser is a wholly-owned subsidiary of Barnett Bank, N.A.
which, in turn, is a wholly-owned subsidiary of Barnett Banks, Inc., a
registered bank holding company that has offered general banking services since
1877.
The Adviser manages the investment portfolios of the Funds, including
selecting portfolio investments and making purchase and sale orders. For the
services provided and expenses assumed for its advisory services, the Adviser is
entitled to receive a fee from the Funds, calculated daily and payable monthly,
at the annual rate of .10% of each Fund's average daily net assets. For the
fiscal year ended November 30, 1995 the Adviser did not receive any advisory
fees from the Funds, and the Funds' former Sub-Adviser received fees, after
waivers, at the effective annual rates of .13% and .13% of the average daily net
assets of the Prime Advantage Institutional and Treasury Advantage Institutional
Funds, respectively, under the agreements then in effect.
Although expected to be infrequent, the Adviser may consider the amount of
Fund shares sold by broker-dealers and others (including those who may be
connected with Barnett) in allocating orders for purchases and sales of
portfolio securities. This allocation may involve the payment of brokerage
commissions or dealer concessions. The Adviser will not engage in this practice
unless the execution capability of and the amount received by such broker-dealer
or other company is believed to be comparable to what another qualified firm
could offer.
The Adviser may, at its own expense, provide compensation to certain dealers
whose customers purchase significant amounts of shares of a Fund. The amount of
such compensation may be made on a one-time and/or periodic basis, and may be up
to 100% of the annual fees that are earned by the Adviser as investment adviser
to such Fund (after adjustments) and are attributable to shares held by such
customers. Such compensation will not represent an additional expense to the
Funds or their shareholders, since it will be paid from assets of the Adviser or
its affiliates.
ADMINISTRATIVE SERVICES. BISYS Fund Services Limited Partnership (the
"Administrator"), located at 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as the Funds' administrator. The Administrator is an Ohio limited
partnership and is a wholly-owned subsidiary of The BISYS Group, Inc.
The Administrator provides a wide range of such services to Emerald Funds,
including maintaining the Funds' offices, providing statistical and research
data, coordinating the preparation of reports to shareholders, calculating or
providing for the calculation of the net asset values of Fund shares, dividends
and capital gain distributions to shareholders, and performing other
administrative functions necessary for the smooth operation of the Funds.
The Administrator is entitled to an administration fee calculated daily and
payable monthly at the effective annual rate of .0775% of the first $5 billion
of the aggregate net assets of all of the Emerald Funds, .07% of the next $2.5
billion, .065% of the next $2.5 billion and .05% of all assets exceeding $10
billion. In the event the aggregate average daily net assets for all Funds falls
below $3 billion, the fee will be increased to .08% of the aggregate average
daily net assets of all of the Emerald Funds.
FEE WAIVERS AND EXPENSES
Expenses can be reduced by voluntary fee waivers and expense reimbursements
by Barnett and the Funds' other service providers. The amount of the waivers may
be changed at any time at the sole
18
<PAGE>
discretion of the Adviser and the Funds' other service providers. As to any
amounts voluntarily waived or reimbursed, the service providers retain the
ability to be reimbursed by a Fund for such amounts prior to fiscal year end.
Such waivers and reimbursements would increase the return to investors when made
but would decrease the return if a Fund were required to reimburse a service
provider.
TAX IMPLICATIONS
As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a short summary of the important
tax considerations generally affecting the Funds and their shareholders. You
should consult your tax adviser with specific reference to your own tax
situation.
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you.
FEDERAL TAXES. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (called the "Code"), meaning that to
the extent a Fund's earnings are passed on to shareholders as required by the
Code, the Fund itself generally will not be required to pay federal income
taxes.
In order to so qualify, each Fund will pay as dividends at least 90% of its
investment company taxable income. Investment company taxable income includes
taxable interest, dividends, gains attributable to market discount on taxable as
well as tax-exempt securities, and the excess of net short-term capital gain
over net long-term capital loss. To the extent you receive a dividend based on
investment company taxable income, you must treat that dividend as ordinary
income in determining your gross income for tax purposes, whether you received
it in the form of cash or additional shares. Unless you are exempt from federal
income taxes, the dividends you receive from each Fund will be taxable to you.
Any distribution you receive of net long-term capital gain over net
short-term capital loss will be taxed as a long-term capital gain, no matter how
long you have held Fund shares.
Any dividends declared by a Fund in December of a particular year and
payable to shareholder of record on a date during that month will be deemed to
have been paid by the Fund and received by shareholders on December 31 of that
year, so long as the dividends are actually paid in January of the following
year.
STATE AND LOCAL TAXES GENERALLY. Because your state and local taxes may be
different than the federal taxes described above, you should see your tax
adviser regarding these taxes. In particular, dividends paid by the Treasury
Advantage Institutional Fund may be taxable under state or local laws as
dividend income, even though all or part of those dividends come from interest
on obligations that would be free of such taxes if held by you directly.
Except as stated below, shares of the Funds are not expected to qualify for
total exemption from the Florida intangibles tax. Shares of the Treasury
Advantage Institutional Fund may or may not qualify in any calendar year for
this exemption from the Florida intangibles tax. In order to qualify for this
exemption, the Treasury Advantage Institutional Fund may sell non-exempt assets
held in its portfolio (such as repurchase agreements) during the year and
reinvest the proceeds in exempt assets,
19
<PAGE>
or hold cash, prior to December 31. Transaction costs involved in restructuring
the portfolio in this fashion would likely reduce the Fund's investment return
and might exceed any increased investment return the Fund achieved by investing
in non-exempt assets during the year.
MEASURING PERFORMANCE
- - Performance information provides you with a method of measuring and monitoring
your investments. Each Fund may quote performance in advertisements or
shareholder communications.
UNDERSTANDING PERFORMANCE MEASURES:
- - The yields for the Funds are the income generated over a 7-day period (which
period will be identified in the quotation) and then assumed to be generated
over a 52-week period and shown as a percentage of the investment. In
addition, the Funds may quote an "effective" yield that is calculated
similarly, but the income quoted over a 7-day period is assumed to be
reinvested. Net income used in yield calculations may be different than net
income used for accounting purposes.
PERFORMANCE COMPARISONS:
The Funds may compare their yields to those of mutual funds with similar
investment objectives and to bond, stock or other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance.
Total return and yield as reported in national financial publications such
as MONEY, FORBES, BARRON'S, THE WALL STREET JOURNAL and THE NEW YORK TIMES, as
well as in publications of a local or regional nature, may be used for
comparison.
The yield of the Prime Advantage Institutional Fund may be compared to the
Donoghue's Money Fund Average, which monitors the performance of money market
funds. The yield of the Treasury Advantage Institutional Fund may be compared to
the Donoghue's Government Money Fund average. Additionally, each Fund's
performance may be compared to data prepared by Lipper Analytical Service, Inc.
Performance quotations will fluctuate, and you should not consider
quotations to be representative of future performance. You should also remember
that performance is generally a function of the kind and quality of investments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Fees that Barnett and other Institutions may charge directly to
their customers in connection with an investment in the Funds will not be
included in the Funds' yield.
Inquiries regarding the Funds may be directed to the Distributor at the
address stated on page 13.
-------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION RELATING TO THE FUNDS INCORPORATED IN THIS PROSPECTUS BY
REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUNDS OR BY THEIR DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
20
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
-----
<S> <C>
SUMMARY OF EXPENSES AND FINANCIAL INFORMATION...................... 2
Expenses......................................................... 2
Financial Highlights............................................. 3
INVESTMENT PRINCIPLES AND POLICIES................................. 5
Investment Objective and Policies................................ 5
Portfolio Instruments, Practices and Related Risks............... 5
Fundamental Limitations.......................................... 12
INVESTING IN EMERALD FUNDS......................................... 12
Your Money Manager............................................... 12
Purchase of Shares............................................... 13
Redemption of Shares............................................. 14
Dividends and Distributions...................................... 15
Explanation of Sales Price....................................... 15
Other Service Providers.......................................... 15
THE EMERALD FAMILY OF FUNDS........................................ 16
THE BUSINESS OF THE FUNDS.......................................... 17
Fund Management.................................................. 17
Fee Waivers and Expenses......................................... 18
Tax Implications................................................. 19
Measuring Performance............................................ 20
</TABLE>
EMPATA1296P
<PAGE>
EMERALD FUNDS
Statement of Additional Information
for the
*Treasury Advantage Institutional Fund*
*Prime Advantage Institutional Fund*
(Previously called the "Treasury Trust Fund" and
"Prime Trust Fund")
December 1, 1996
TABLE OF CONTENTS
PAGE
EMERALD FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . . . . . . . 1
NET ASSET VALUE AND DIVIDENDS . . . . . . . . . . . . . . . . . . . . . 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. . . . . . . . . . . . . 16
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 17
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . 19
MANAGEMENT OF EMERALD FUNDS . . . . . . . . . . . . . . . . . . . . . . 21
INDEPENDENT ACCOUNTANTS/EXPERTS . . . . . . . . . . . . . . . . . . . . 30
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ADDITIONAL INFORMATION ON YIELD . . . . . . . . . . . . . . . . . . . . 31
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 37
APPENDIX A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
This Statement of Additional Information is meant to be read in
conjunction with Emerald Funds' Prospectus dated December 1, 1996 for the
Treasury Advantage Institutional Fund and Prime Advantage Institutional Fund,
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 either Fund should be made solely upon the information
contained herein. Copies of the Prospectus may be obtained by calling 800-637-
3759. Capitalized terms used but not defined herein have the same meanings as
in the Prospectus.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BARNETT BANK OR ANY OTHER BANK AND ARE NOT ISSUED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. EACH FUND SEEKS TO MAINTAIN A NET ASSET VALUE OF
$1.00 PER SHARE, ALTHOUGH THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO
SO ON A CONTINUOUS BASIS. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. IN ADDITION, THE DIVIDENDS PAID BY A
FUND WILL FLUCTUATE.
<PAGE>
EMERALD FUNDS
Emerald Funds is a Massachusetts business trust which was organized on
March 15, 1988 as an open-end investment company. This Statement of Additional
Information pertains to two diversified portfolios of the Emerald Funds -- the
Treasury Advantage Institutional Fund and the Prime Advantage Institutional Fund
(such portfolios are sometimes called the "Funds"). Emerald Funds also offers
other investment portfolios which are described in separate Prospectuses and
Statements of Additional Information. For information concerning these other
portfolios contact the Distributor at the address or telephone number stated on
the cover page of this Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICIES
As stated in the Prospectus, the investment objective of both the
Treasury Advantage Institutional Fund and the Prime Advantage Institutional Fund
is to seek a high level of current income, in each case consistent with
liquidity, the preservation of capital and a stable net asset value. The
following policies supplement the Funds' respective investment objectives and
policies as set forth in the Prospectus.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, Barnett
Capital Advisors, Inc. (the "Adviser") is responsible for, makes decisions with
respect to, and places orders for all purchases and sales of portfolio
securities for each Fund.
Securities purchased and sold by each Fund are generally traded in the
over-the-counter market on a net basis (I.E, without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
With respect to over-the-counter transactions, the Adviser will normally deal
directly with dealers who make a market in the instruments involved except in
those circumstances where more favorable prices and execution are available
elsewhere.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage
-1-
<PAGE>
in this practice, however, only when the Adviser, in its sole discretion,
believes such practice to be in the Funds' interests.
The Funds do not intend to seek profits from short-term trading.
Because the Funds will invest only in short-term debt instruments, their annual
portfolio turnover rates will be relatively high, but brokerage commissions are
normally not paid on money market instruments, and portfolio turn-over is not
expected to have a material effect on the net investment income of any Fund.
In its Advisory Agreement with respect to the Funds, the Adviser
agrees that it will seek to obtain the best overall terms available in executing
portfolio transactions and selecting brokers or dealers. In assessing the best
overall terms available for any transaction, the Adviser shall consider factors
it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In addition, the Advisory
Agreement authorizes the Adviser to cause any of the Funds to pay a broker-
dealer which furnishes brokerage and research services a higher commission than
that which might be charged by another broker-dealer for effecting the same
transaction, provided that the Adviser determines in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either the
particular transaction or the overall responsibilities of the Adviser to the
Funds. Such brokerage and research services might consist of reports and
statistics of specific companies or industries, general summaries of groups of
stocks or bonds and their comparative earnings and yields, or broad overviews of
the stock, bond and government securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the sub-advisory fees payable to it by the Funds. The Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. 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
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
-2-
<PAGE>
Portfolio securities will not be purchased from or sold to (and
savings deposits will not be made in and repurchase and reverse repurchase
agreements will not be entered into with) the Adviser, the Distributor or an
affiliated person of any of them (as such term is defined in the Investment
Company Act of 1940) acting as principal, except as permitted by the Securities
and Exchange Commission. Further, while such allocation is not expected to
occur frequently, the Adviser is authorized to allocate purchase and sale orders
for portfolio securities to broker/dealers and financial institutions,
including, in the case of agency transactions, broker/dealers and financial
institutions which are affiliated with the Adviser, to take into account the
sale of Fund shares if the Adviser believes that the quality of the execution of
the transaction and the amount of the commission are comparable to what they
would be with other qualified brokerage firms. In addition, the Funds will not
purchase securities during the existence of any underwriting or selling group
relating thereto of which the Adviser or the Distributor, or an affiliated
person of any of them, is a member, except as permitted by the Securities and
Exchange Commission. In certain instances, current regulations of the
Commission would impose volume, dollar and price restrictions on purchases by
the Funds during the existence of such a group or prohibit such purchases
altogether.
Investment decisions for the Funds are made independently from those
for other investment companies and accounts advised or managed by the Adviser.
Such other investment companies and accounts may also invest in the same
securities as the Funds. When a purchase or sale of the same security is made
at substantially the same time on behalf of a Fund and another investment
company or account, the transaction will be averaged as to price and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to the Fund and such other investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained by the Fund. To the
extent permitted by law, the Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Trustees, or the Adviser pursuant to
guidelines established by the Board, will promptly consider such an event in
determining whether the Fund involved should continue to hold the security in
accordance with the interests of the Fund and applicable regulations of the
Securities and Exchange Commission. In addition, it is possible that
unregistered securities purchased by a Fund in reliance upon Rule 144A under the
Securities Act of
-3-
<PAGE>
1933 could have the effect of increasing the level of the Fund's illiquidity
to the extent that qualified institutional buyers become, for a period,
uninterested in purchasing these securities.
ADDITIONAL INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
sub-section which may be changed with respect to a particular Fund only by a
vote of the holders of a majority of such Fund's outstanding shares (as defined
under "Miscellaneous" below).
No Fund may:
1. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the Investment Company Act
of 1940.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Fund's transactions in futures contracts and related options, and (b)
a Fund may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
6. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities and may
enter into futures contracts and related options.
7. Make loans, except that each Fund may purchase and hold debt
instruments and enter into repurchase agreements in
-4-
<PAGE>
accordance with its investment objective and policies and may lend portfolio
securities.
8. Purchase securities of companies for the purpose of exercising
control.
9. Purchase securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or certificates of deposit for any such securities) if, immediately after such
purchase, more than 15% of its total assets would be invested in certificates of
deposit or bankers' acceptances of any one bank, or more than 5% of the value of
the Fund's total assets would be invested in other securities of any one bank or
in the securities of any other issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Fund or Emerald Funds;
except that up to 25% of the value of a Fund's total assets may be invested
without regard to the foregoing limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantor when the value of all securities issued and
guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of the
value of the Fund's total assets.
[Note: In accordance with the current regulations of the Securities
and Exchange Commission, the Prime Advantage Institutional Fund intends to limit
its investments in bankers' acceptances, certificates of deposit and other
securities of any one bank to not more than 5% of the Fund's total assets at the
time of purchase (rather than the 15% limitation set forth above), provided that
the Fund may invest up to 25% of its total assets in the securities of any one
issuer for a period of up to three business days. This practice, which is not a
fundamental policy of the Fund, could be changed only in the event that such
regulations of the Securities and Exchange Commission are amended in the
future.]
10. In addition, as summarized in the Prospectus no Fund may:
Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to (i)
instruments issued or guarantee by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, (ii)
instruments issued by domestic branches of U.S. banks and (iii) repurchase
-5-
<PAGE>
agreements secured by the instruments described in clauses (i) and (ii); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
[Note: In construing Investment Limitation 10 in accordance with SEC policy, to
the extent permitted, U.S. branches of foreign banks will be considered to be
U.S. banks where they are subject to the same regulation as U.S. banks.]
11. Borrow money or issue senior securities, except that each Fund
may borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of the total assets at the time
of such borrowing or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of a Fund's total assets at the time of such borrowing. No
Fund will purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with a Fund's investment
practices described in this Statement of Additional Information or in the
Prospectus are not deemed to be pledged for purposes of this limitation.
Although the foregoing investment limitations would permit the Funds
to invest in options, futures contracts and options on futures contracts, the
Funds do not currently intend to trade in such instruments during the next 12
months. Prior to making any such investments, the Funds would notify their
shareholders and add appropriate descriptions concerning the instruments to the
Prospectus and this Statement of Additional Information.
TYPES OF OBLIGATIONS, INVESTMENT RISKS AND OTHER INVESTMENT INFORMATION
REVERSE REPURCHASE AGREEMENTS
At the time a Fund enters into a reverse repurchase agreement (an
agreement under which a Fund sells portfolio securities and agrees to repurchase
them at an agreed-upon date and price), it will place in a segregated custodial
account liquid assets, such as U.S. Government securities or other liquid high-
grade debt securities having a value equal to or greater than the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve the
risk that the market value of the securities sold by a Fund may decline
-6-
<PAGE>
below the price of the securities it is obligated to repurchase. Reverse
repurchase agreements are considered to be borrowings under the Investment
Company Act of 1940. Each Fund intends to limit its borrowings (including
reverse repurchase agreements), during the next 12 months to not more than 5%
of its net assets.
VARIABLE AND FLOATING RATE INSTRUMENTS
With respect to the variable and floating rate instruments that may be
acquired by the Funds as described in the Prospectus, the Adviser will consider
the earning power, cash flows and other liquidity ratios of the issuers and
guarantors of those instruments and, if the instrument is subject to a demand
feature, will monitor their financial status to meet payment on demand.
In determining average weighted portfolio maturity, an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less, however, will be
deemed to have maturities equal to the period remaining until the next interest
rate adjustment.
Variable and floating rate instruments may carry nominal maturities in
excess of a Fund's maturity limitations if such instruments are U.S. Government
obligations or carry demand features that comply with conditions established by
the Securities and Exchange Commission. These demand features must permit a
Fund to demand payment of the principal of the instrument at least once every
397 days upon not more than 30 days' notice.
REPURCHASE AGREEMENTS
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by either the Funds' custodian or another
independent third party acting as sub-custodian for the Fund involved in the
transaction, or in the federal Reserve Treasury Book-Entry System. Repurchase
agreements are considered to be loans by a Fund under the Investment Company Act
of 1940.
LENDING SECURITIES
When the Treasury Advantage Institutional Fund or the Prime Advantage
Institutional Fund lends its securities, it
-7-
<PAGE>
continues to receive interest on the securities loaned and may simultaneously
earn interest on the investment of the cash loan collateral which will be
invested in readily marketable, high-quality, short-term obligations.
Although voting rights, or rights to consent, attendant to securities on loan
pass to the borrower, such loans will be called so that the securities may be
voted by a Fund if a material event affecting the investment is to occur.
Portfolio loans will be continuously secured by collateral equal at all times
in value to at least the market value of the securities loaned plus accrued
interest. Collateral for such loans may include cash or U.S. Government
obligations or additionally, in the case of the Prime Advantage Institutional
Fund, an irrevocable letter of credit issued by a bank that meets the credit
standards of the Prime Advantage Institutional Fund. Collateral for the
Treasury Advantage Institutional Fund is limited to cash and U.S. Government
obligations. There may be risks of delay in recovering additional collateral
or in recovering the securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially.
OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, the Funds may invest
in securities issued by other investment companies within the limits prescribed
by the Investment Company Act of 1940. Each Fund currently intends to limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 5% of the value of its total assets will be invested in
the securities of any one investment company; (b) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; and (c) not more than 3% of the outstanding
stock of any one investment company will be owned by the Fund or Emerald Funds
as a whole. As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in
addition to the advisory and other expenses that a Fund bears in connection with
its own operations.
U.S. GOVERNMENT OBLIGATIONS
Examples of the types of U.S. Government obligations that may be held
by the Prime Advantage Institutional Fund include, in addition to U.S. Treasury
bonds, notes and bills, the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, General Services Administration, Student Loan Marketing
-8-
<PAGE>
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Resolution Funding Corporation and Maritime Administration. U.S. Government
obligations also include U.S. Government-backed trusts that hold obligations
of foreign governments and are guaranteed or backed by the full faith and
credit of the United States. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as those of the Government
National Mortgage Association, are supported by the full faith and credit of
the U.S. Treasury; others, such as the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if
it is not obligated to do so by law.
ASSET-BACKED SECURITIES
The Prime Advantage Institutional Fund may invest in securities backed
by installment contracts, credit card receivables and other assets. Asset-
backed securities represent interests in pools of assets in which payment of
both interest and principal on the securities are made monthly, thus in effect
passing through (net of fees paid to the issuer or guarantor of the securities)
the monthly payments made by the individual borrowers on the assets that
underlie the asset-backed securities.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed
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<PAGE>
collateral may not, in some cases, be able to support payments on these
securities.
MUNICIPAL OBLIGATIONS
Assets of the Prime Advantage Institutional Fund may be invested in
debt instruments ("municipal obligations") issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political sub-
divisions. These investments may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield of such
securities on a pre-tax basis, is comparable to that of other securities the
Fund may purchase. Municipal obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities.
The two principal classifications of municipal obligations are
"general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the issuer of the facility being financed.
Private activity bonds (e.g., bonds issued by industrial development
authorities) that are issued by or on behalf of public authorities to finance
various privately-operated facilities are included within the term "Municipal
Obligations". Private activity bonds are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Additionally, the
principal and interest on these obligations may or may not be payable from the
general revenues of the users of the facilities involved. The credit quality of
such bonds is usually directly related to the credit standing of such corporate
users. Private activity bonds have been or may be issued to obtain funds to
provide privately operated housing facilities, pollution control facilities,
convention or trade show facilities, mass transit, airport, port or parking
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Such bonds may also be issued on behalf of
privately held or publicly owned corporations in the financing of commercial or
industrial facilities. State and local governments are authorized in most
states to issue private activity bonds for such purposes in order to encourage
corporations to locate within their communities.
-10-
<PAGE>
Municipal obligations may also include "moral obligation" securities,
which are normally issued by special purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or municipality
which created the issuer.
As described in the Prospectus, the Prime Advantage Institutional Fund
may also invest in municipal leases, which may be considered liquid under
guidelines established by Emerald Funds' Board of Trustees. The guidelines will
provide for determination of the liquidity and proper valuation of a municipal
lease obligation based on factors including the following: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer. The
Adviser, under the supervision of Emerald Funds' Board of Trustees, will also
consider the continued marketability of a municipal lease obligation based upon
an analysis of the general credit quality of the municipality issuing the
obligation and the importance to the municipality of the property covered by the
lease.
Municipal obligations may include short-term General Obligation Notes,
Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes,
Tax-Exempt Commercial Paper, Construction Loan Notes and other forms of short-
term tax-exempt loans. Such instruments are issued with a short-term maturity
in anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In addition, the Prime Advantage Institutional Fund may invest
in bonds and other types of tax-exempt instruments provided they have remaining
maturities that meet the Fund's maturity limitations.
As described in the Prospectus, the Prime Advantage Institutional Fund
may purchase securities in the form of custodial receipts. These custodial
receipts are known by a number of names, including "Municipal Receipts,"
"Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-CATS") and
"Municipal Zero-Coupon Receipts."
Certain municipal obligations may be insured at the time of issuance
as to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the municipal obligation at the time of its
original issuance. In the event that the issuer defaults on interest or
principal payment, the insurer of the obligation is required to make payment to
the bondholders upon proper notification. There
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<PAGE>
is, however, no guarantee that the insurer will meet its obligations. In
addition, such insurance will not protect against market fluctuations caused
by changes in interest rates and other factors.
FOREIGN MONEY MARKET INSTRUMENTS. A Fund will invest in obligations
of foreign banks and commercial paper issued by foreign issuers as described
above only when the Adviser deems the instrument to present minimal credit risk.
Such investments may nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. Such risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such instruments, the possible
establishment of exchange controls, the possible seizure or nationalization of
foreign deposits or the adoption of other foreign government restrictions which
might affect adversely the payment of principal and interest of such
instruments. In addition, foreign issuers, including foreign banks and foreign
branches of U.S. banks, may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting and recordkeeping standards
than those applicable to domestic issuers, and securities of foreign issuers may
be less liquid and their prices more volatile than those of comparable domestic
issuers.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
The Funds may purchase securities on a when-issued basis and purchase
or sell securities on a forward commitment basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place beyond the normal settlement date, permit a
Fund to lock-in a price or yield on a security it intends to purchase or sell,
regardless of future changes in interest rates. When-issued and forward
commitment transactions involve the risk, however, that the yield obtained in a
transaction may be less favorable than the yield available in the market when
the securities delivery takes place.
When a Fund agrees to purchase securities on a when-issued or forward
commitment basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund involved may be required
subsequently to place additional assets in the separate account in order that
the value of the account remains equal to the amount of the Fund's commitments.
It may be expected that the market value of a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. Because a Fund will set
aside cash or liquid assets to satisfy its purchase
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<PAGE>
commitments in the manner described, that Fund's liquidity and ability to
manage its portfolio might be affected in the event its forward commitments
to purchase securities ever exceeded 25% of the value of its total assets.
The respective forward purchase commitments of the Treasury Advantage
Institutional Fund and Prime Advantage Institutional Fund are not expected to
exceed 25% of the value of their respective total assets, absent unusual
market conditions or periods of unusual purchase or redemption activity in
shares of a Fund such as at calendar year-end or other times; furthermore, a
forward commitment or commitment to purchase when-issued securities for any
Fund is not expected to exceed 45 days.
The Funds do not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their investment
objectives, and the Funds will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, a Fund may dispose of or renegotiate a commitment
after it is entered into, and may sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. In
these cases the Fund involved may realize a taxable capital gain or loss.
When the Funds engage in when-issued and forward commitment
transactions, they rely on the other party to consummate the trade. Failure of
such party to do so may result in a Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, is taken into account when determining the market value
of a Fund involved in such transactions starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
PARTICIPATION INTERESTS AND TRUST RECEIPTS
The Prime Advantage Institutional Fund may purchase participation
interests and trust receipts as described in its Prospectus. Such participation
interests and trust receipts may have fixed, floating or variable rates of
interest, and will have remaining maturities of thirteen months or less (as
defined by the Securities and Exchange Commission). If a participation interest
or trust receipt is unrated, the Adviser will have determined that the interest
or receipt is of comparable quality to those instruments in which the Prime
Advantage Institutional Fund may invest pursuant to guidelines approved by the
Board of
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<PAGE>
Trustees. For certain participation interests or trust receipts the Prime
Advantage Institutional Fund will have the right to demand payment, on not
more than 30 days' notice, for all or any part of the Fund's participation
interest or trust receipt in the securities involved, plus accrued interest.
GUARANTEED INVESTMENT CONTRACTS
Generally, a guaranteed investment contract ("GIC") allows a purchaser
to buy an annuity with the monies accumulated under the contract; however, the
Prime Advantage Institutional Fund will not purchase any such annuities. GICs
acquired by the Prime Advantage Institutional Fund are general obligations of
the issuing insurance company and not separate accounts. The purchase price
paid for a GIC becomes part of the general assets of the issuer, and the
contract is paid from the general assets of the issuer. The Prime Advantage
Institutional Fund will only purchase GICs from issuers which, at the time of
purchase, are rated "A+" by A.M. Best Company, have assets of $1 billion or more
and meet quality and credit standards established by the investment adviser
pursuant to guidelines approved by the Board of Trustees. Generally, GICs are
not assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in GICs does not currently exist.
Therefore, GICs are considered by the Prime Advantage Institutional Fund to be
illiquid investments, and will be acquired by the Fund subject to its limitation
on illiquid investments.
RATINGS AND ISSUER'S OBLIGATIONS
The ratings of Nationally Recognized Statistical Rating Organizations
("NRSROs") represent their opinions as to the quality of debt securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and debt securities with the same maturity, interest rate
and rating may have different yields while debt securities of the same maturity
and interest rate with different ratings may have the same yield.
The payment of principal and interest on most securities purchased by
the Funds will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of
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<PAGE>
interest on, and principal of, its debt securities may be materially
adversely affected by litigation or other conditions.
NET ASSET VALUE AND DIVIDENDS
Net asset value per share of each Fund is calculated by adding the
value of all portfolio securities and other assets belonging to the particular
Fund, subtracting the Fund's liabilities of the Fund, and dividing the result by
the number of outstanding shares of that Fund. The net asset value per share
for each Fund is calculated separately. Each Fund is charged with the direct
expenses of that Fund, and with a share of the general expenses of Emerald
Funds. Subject to the provisions of the Agreement and Declaration of Trust,
determinations by the Board of Trustees as to the direct and allocable expenses,
and the allocable portion of any general assets, with respect to a particular
Fund are conclusive.
Emerald Funds uses the amortized cost method of valuation to value
each Fund's portfolio securities, pursuant to which an instrument is valued at
its cost initially and thereafter a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price a Fund would receive if it sold the instrument. The market value of
portfolio securities held by a Fund can be expected to vary inversely with
changes in prevailing interest rates.
Each Fund attempts to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value
per share. In this regard, except for securities subject to repurchase
agreements, no Fund will purchase a security deemed to have a remaining maturity
of more than thirteen months within the meaning of the Investment Company Act of
1940 nor maintain a dollar-weighted average maturity which exceeds ninety days.
The Board of Trustees has also established procedures that are intended to
stabilize the net asset value per share of each Fund for purposes of sales and
redemptions at $1.00. These procedures include the determination, at such
intervals as the Trustees deem appropriate, of the extent, if any, to which the
net asset value per share of each Fund calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one-half of one percent, the Board will promptly consider what action, if any,
should be initiated. If the Board believes that the extent of any deviation
from a $1.00 amortized cost price per share may result in material dilution or
other unfair results to new or existing investors, it has agreed to take such
steps as it considers appropriate to eliminate or
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<PAGE>
reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity; shortening the average portfolio maturity; withholding or reducing
dividends; redeeming shares in kind; reducing the number of outstanding
shares without monetary consideration; or utilizing a net asset value per
share determined by using available market quotations.
Should Emerald Funds incur or anticipate any unusual significant
expense or loss which might affect disproportionately the income of a Fund, the
Board of Trustees would, at that time, consider whether to adhere to its present
dividend policies with respect to the Funds, which are described in the
Prospectus, or to revise the policies in order to mitigate, to the extent
possible, the disproportionate effect the expense or loss might have on the
income of a Fund for a particular period.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in Emerald Funds are sold on a continuous basis by Emerald
Asset Management, Inc. As described in the Prospectus, except as noted below,
shares of the Treasury Advantage Institutional Fund and the Prime Advantage
Institutional Fund are sold only to Barnett Bank, N.A. and its affiliates
("Barnett") acting on their own behalf or on behalf of their customer accounts
(except employee benefit plan accounts) that invest at least $1 million in a
Fund. This minimum investment amount does not apply to customer accounts that
owned Fund shares on November 30, 1996. In addition, Fund shares are sold to
institutional investors, other than Barnett, that invest at least $1 million in
a Fund.
Under the Investment Company Act of 1940, Emerald Funds may suspend
the right of redemption or postpone the date of payment for shares of the Funds
during any period when (a) trading on the New York Stock Exchange (the
"Exchange") is restricted by applicable rules and regulations of the Securities
and Exchange Commission; (b) the Exchange is closed for other than customary
weekend and holiday closings; (c) the Securities and Exchange Commission has by
order permitted such suspension; or (d) an emergency exists as determined by the
Securities and Exchange Commission. (Emerald Funds may also suspend or postpone
the recordation of the transfer of its shares upon an occurrence of any of the
foregoing conditions.)
In addition to the situations described in the Prospectus under
"Redemption of Shares," Emerald Funds may redeem shares involuntarily to
reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
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<PAGE>
shareholder which is applicable to Fund shares as provided in the Prospectus
from time to time.
Shares of the Funds are not bank deposits, and are neither insured by,
guaranteed by, obligations of, nor otherwise supported by the U.S. Government,
any governmental agency, the Adviser or any other bank.
DESCRIPTION OF SHARES
Emerald Funds is a Massachusetts business trust. Under Emerald Funds'
Agreement and Declaration of Trust, the beneficial interest in Emerald Funds may
be divided into an unlimited number of full and fractional transferable shares.
The Agreement and Declaration of Trust authorizes the Board of Trustees to
classify or reclassify any unissued shares of Emerald Funds into one or more
additional classes by setting or changing, in any one or more respects, their
respective designations, preferences, conversion or other rights, voting powers,
restrictions, limitations, qualifications and terms and conditions of
redemption. Pursuant to such authority, the Board of Trustees has authorized
the issuance of thirty-three classes of shares. Two of these classes represent
interests in the Treasury Advantage Institutional Fund and the Prime Advantage
Institutional Fund. The remaining classes represent interests in other
investment portfolios of Emerald Funds. The Trustees may similarly classify or
reclassify any particular class of shares into one or more series.
Each share in the Treasury Advantage Institutional Fund and the Prime
Advantage Institutional Fund has a par value of $.001, represents an equal
proportionate interest in the particular Fund involved and is entitled to such
dividends and distributions earned on such Fund's assets as are declared in the
discretion of the Board of Trustees.
In the event of a liquidation or dissolution of Emerald Funds or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of Emerald
Funds' respective investment portfolios, of any general assets not belonging to
any particular portfolio which are available for distribution. Shareholders of
a Fund are entitled to participate in the net distributable assets of a
particular Fund involved in liquidation, based on the number of shares of the
Fund that are held by each shareholder.
Shareholders of the Funds, as well as those of any other investment
portfolio now or hereafter offered by Emerald Funds, will vote together in the
aggregate and not separately on
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a Fund-by-Fund basis, except as otherwise required by law or when permitted
by the Board of Trustees. Rule 18f-2 under the Investment Company Act of
1940 provides that any matter required to be submitted to the holders of the
outstanding voting securities of an investment company such as Emerald Funds
shall not be deemed to have been effectively acted upon unless approved by
the holders of a majority of the outstanding shares of each Fund affected by
the matter. A Fund is affected by a matter unless it is clear that the
interests of each Fund in the matter are substantially identical or that the
matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a Fund only
if approved by a majority of the outstanding shares of such Fund. However,
the Rule also provides that the ratification of the appointment of
independent accountants, the approval of principal underwriting contracts and
the election of Trustees may be effectively acted upon by shareholders of
Emerald Funds voting together in the aggregate without regard to particular
investment portfolios. Shares of Emerald Funds have non-cumulative voting
rights and, accordingly, the holders of more than 50% of Emerald Funds'
outstanding shares (irrespective of Fund) may elect all Trustees.
Shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectuses, shares will be fully paid and
nonassessable by Emerald Funds.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. If such should
occur, the Trustees then in office will call a shareholders meeting for the
election of Trustees. Except as set forth above, the Trustees shall continue to
hold office and may appoint successor Trustees. The Agreement and Declaration
of Trust provides that meetings of the shareholders of Emerald Funds shall be
called by the Trustees upon the written request of shareholders owning at least
10% of the outstanding shares entitled to vote.
Emerald Funds' Agreement and Declaration of Trust authorizes the Board
of Trustees, without shareholder approval (unless otherwise required by
applicable law), to: (a) sell and convey the assets belonging to a class of
shares to another management investment company for consideration which may
include securities issued by the purchaser and, in connection therewith, to
cause all outstanding shares of such class to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and
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convert the assets belonging to a class of shares into money and, in
connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (c) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of
shares if the Board of Trustees reasonably determines that such combination
will not have a material adverse effect on the shareholders of any class
participating in such combination and, in connection therewith, to cause all
outstanding shares of any such class to be redeemed or converted into shares
of another class of shares at their net asset value. However, the exercise
of such authority may be subject to certain restrictions under the Investment
Company Act of 1940. The Board of Trustees may authorize the termination of
any class of shares after the assets belonging to such class have been
distributed to its shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussion here and in the Prospectus is not intended as substitute for careful
tax planning. Investors are advised to consult their tax advisers with specific
reference to their own tax situations.
Investment company taxable income earned by the Treasury Advantage
Institutional Fund or the Prime Advantage Institutional Fund will be distributed
by the Funds to their shareholders, and will be taxable to shareholders as
ordinary income whether paid in cash or additional shares. In general,
investment company taxable income will be a Fund's taxable income subject to
certain adjustments and excluding the excess of any net long-term capital gain
for the taxable year over the net short-term capital loss, if any, for such
year.
Similarly, while the Funds do not expect to realize long-term capital
gains, any net realized long-term capital gains will be distributed at least
annually, after reduction for capital loss carryforwards, if any. The Funds
will have no tax liability with respect to such gains and the distributions will
be taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held Fund shares. Such distributions will be designated as a
capital gains dividend in a written notice mailed by Emerald Funds to
shareholders after the close of Emerald Funds' taxable year.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net
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income (excess of capital gains over capital losses). The Funds intend to
make sufficient distributions or deemed distributions of their ordinary
taxable income and any capital gain net income with respect to each calendar
year to avoid liability for this excise tax.
Each Fund is treated as a separate entity for the purpose of
determining the Fund's qualification as a "regulated investment company" under
the Internal Revenue Code. Although each Fund expects to qualify as a
"regulated investment company" and to be relieved of all or substantially all
liability for federal income taxes, depending upon the extent of Emerald Funds'
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, the Funds may be subject to the tax
laws of such states or localities.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which a Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issue), and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
If for any taxable year a Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable as ordinary income to shareholders to
the extent of the Fund's current and accumulated earnings and profits and would
be eligible for the dividends received deduction for corporations.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to back-up
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withholding when required to do so or that they are "exempt recipients."
MANAGEMENT OF EMERALD FUNDS
TRUSTEES AND OFFICERS
The Trustees and officers of Emerald Funds, their addresses, principal
occupations during the past five years and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal
Position with Occupations During Past 5
Name and Address Emerald Funds Years and Other Affiliations
- ----------------- ------------- ------------------------------
<S> <C> <C>
Chesterfield H. Smith* Chairman of Senior Partner of the law
Suite 3000 the Board firm of Holland and Knight;
701 Brickell Avenue of Trustees Director, Greenwich Air
Miami, FL 33101 Services, Inc. (an aircraft
Age 78 and engine repair company); Director,
Citrus and Chemical Bank; Director,
Citrus and Chemical Bancorporation
(bank holding company of Citrus and
Chemical Bank).
Raynor E. Bowditch Trustee President, Bowditch
4811 Beach Blvd. Insurance Corporation (a
Suite 105 general lines independent
Jacksonville, FL 33207 agency); Director, General
Age 62 Truck Equipment and Trailer Sales;
Director, Greater Jacksonville Fair
Association.
Mary Doyle Trustee Professor of Law, University
University of Miami of Miami Law School, 1995
Law School to present; Dean in Residence,
1311 Miller Drive Association of American Law
Coral Gables, FL 33124 Schools, 1994 to date; Dean,
Age 52 University of Miami School of
Law, 1986 to 1994.
Albert D. Ernest* Trustee President, Albert Ernest
1560 Lancaster Terrace Enterprises (personal
Suite 1402 investments), 1991 to date;
Jacksonville, FL 32204 President and Chief Operating
Age 65 Officer, Barnett Banks, Inc., 1988 to
1991; Director, Barnett Banks, Inc.,
1982 to 1991; Director, Florida Rock
Industries, Inc. (mining and
construction materials); Director, FRP
Properties, Inc. (transportation,
hauling and real estate development);
Director, Regency Realty, Inc.;
Director, Stein Mart, Inc. (retail);
and Director, Wickes Lumber Company.
</TABLE>
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<TABLE>
<CAPTION>
Principal
Position with Occupations During Past 5
Name and Address Emerald Funds Years and Other Affiliations
- ----------------- ------------- ------------------------------
<S> <C> <C>
John G. Grimsley* Trustee and Grimsley, Marker & Iseley,
50 N. Laura St. President P.A.; Member of the law firm
Suite 3300 of Mahoney Adams & Criser,
Jacksonville, FL 32202 P.A. from 1966 to 1996.
Age 58
Harvey R. Holding Trustee Retired; Executive Vice
189 Laurel Lane President and Chief Financial
Ponte Vedra Beach, Officer, BellSouth Corp.,
FL 32082 1990 to 1993; Vice Chairman
Age 61 of the Board of BellSouth Corp., 1991
to 1993; Director, Golden Poultry
Company, Inc.
William B. Blundin Executive Executive Vice President,
125 West 55th Street Vice President BISYS Fund Services, Inc.,
New York, NY 10019 March 1995 to present; Vice
Age 57 President of Emerald Asset
Management, Inc., March 1995
to present; Vice Chairman of
the Board of Concord Holding
Corporation and Distributor, July 1993
to March 1995; Director and President
of Concord Holding Corporation and
Distributor, February 1987 to March
1995.
Hugh Fanning Vice President Employee of BISYS Fund
BISYS Fund Services Services, Inc., August 1992
3435 Stelzer Road to present; Director of
Columbus, OH 43219-3035 Marketing, Ketchum
Age 42 Communications, July 1987 to August
1992
J. David Huber Vice President Employee of BISYS Fund
BISYS Fund Services Services, Inc., June 1987 to
3435 Stelzer Road present.
Columbus, OH 43219-30-35
Age 49
Martin R. Dean Treasurer Employee of BISYS Fund
BISYS Fund Services Services, Inc., May 1994
3435 Stelzer Road to present; Senior Manager
Columbus, OH 43219-3035 at KPMG Peat Marwick prior
Age 32 thereto.
Jeffrey A. Dalke Secretary Partner, Drinker Biddle &
Philadelphia National Reath (law firm).
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age 46
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Principal
Position with Occupations During Past 5
Name and Address Emerald Funds Years and Other Affiliations
- ----------------- ------------- ------------------------------
<S> <C> <C>
George Martinez Assistant Senior Vice President and
BISYS Fund Services Secretary Director of Legal and
3435 Stelzer Road Compliance Services, BISYS
Columbus, OH 43218-3035 Fund Services, Inc., March
Age 36 1995 to present; Senior Vice
President, Emerald Asset Management,
Inc., August 1995 to present; Vice
President and Associate General
Counsel, Alliance Capital Management,
June 1989 to March 1995.
William J. Tomko Vice President Employee of BISYS Fund
BISYS Fund Services Services, Inc., April 1987
3435 Stelzer Road to present.
Columbus, OH 43219-3035
Age 36
Robert Tuch Assistant Employee of BISYS Fund
BISYS Fund Services Secretary Services, Inc., June 1991 to
3435 Stelzer Road present; Assistant Secretary,
Columbus, OH 43219-3035 Emerald Asset Management, Inc.,
Age 44 August 1995 to present; Vice President
and Associate General Counsel with
National Securities Research Corp.,
July 1990 to June 1991.
Alaina Metz Assistant Chief Administrator,
BISYS Fund Services Secretary Administrative and
3435 Stelzer Road Regulatory Services, BISYS
Columbus, OH 43219-3035 Fund Services, Inc., June 1995
Age 28 to present; Supervisor, Mutual Fund
Legal Department, Alliance Capital
Management, May 1989 to June 1995.
</TABLE>
- --------------------------
* These Trustees may be deemed to be "interested persons" of Emerald
Funds as defined in the Investment Company Act of 1940.
------------------------------
Each Trustee receives an annual fee of $14,000 plus $1,500 for each
meeting attended and reimbursement of expenses incurred as a Trustee.
Additionally the Chairman and President of the Board of Trustees each receive an
additional annual fee of $3,500 for service in such capacities. Furthermore,
each Trustee who serves on a special committee appointed by the Board or the
Chairman, or who is assigned a special project by the Board or the Chairman,
receives additional compensation in the amount of $1,000 per day for each
meeting attended or $1,000 for each assignment to a special project plus
reimbursement of out-of-
-23-
<PAGE>
pocket expenses. Remuneration for services rendered during Emerald Funds'
fiscal year ended November 30, 1995 and distributed to all Trustees and
officers as a group was $99,750. Drinker Biddle & Reath, of which Mr. Dalke
is a partner, receives legal fees as counsel to Emerald Funds. As of
November 30, 1996, the Trustees and officers of Emerald Funds, as a group,
owned less than 1% of the outstanding shares of each Fund and each of the
other investment portfolios of the Trust.
The following chart provides certain information about the fees
received by the Emerald Fund's trustees for the fiscal year ended November 30,
1995 for their services as members of the Board of Trustees and Committees
thereof.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM
AGGREGATE RETIREMENT ESTIMATED EMERALD
COMPENSATION BENEFITS ANNUAL FUNDS
FROM THE ACCRUED AS BENEFITS AND FUND
NAME OF PERSON EMERALD PART OF FUND UPON COMPLEX PAID
AND POSITION FUNDS EXPENSES RETIREMENT TO DIRECTORS
----------------- ---------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Chesterfield H. $20,750 N/A N/A $20,750
Smith
Chairman of the
Board of Trustees
John G. Grimsley $26,000 N/A N/A $26,000
President and
Trustee
Raynor E. Bowditch $19,000 N/A N/A $19,000
Trustee
Mary Doyle $20,500 N/A N/A $20,500
Trustee
Albert D. Ernest** $13,500 N/A N/A $13,500
Trustee
Harvey R. Holding*** N/A N/A N/A N/A
Trustee
- ---------------------
</TABLE>
* The "Fund Complex" consists solely of Emerald Funds.
** Mr. Ernest was appointed to the Board of Trustees on May 4, 1995.
*** Mr. Holding was elected to the Board of Trustees on May 29, 1996.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, Emerald Funds' Agreement and Declaration of Trust
provides that shareholders shall not be subject to any personal liability in
-24-
<PAGE>
connection with the assets of Emerald Funds for the acts or obligations of
Emerald Funds, and that every note, bond, contract, order or other undertaking
made by Emerald Funds shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Agreement and
Declaration of Trust provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder and not because of his or her acts or omissions or
some other reason. The Agreement and Declaration of Trust also provides that
Emerald Funds shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of Emerald Funds, and shall satisfy
any judgment thereon. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which Emerald
Funds itself would be unable to meet its obligations.
The Agreement and Declaration of Trust further provides that all
persons having any claim against the Trustees or Emerald Funds shall look solely
to the trust property for payment; that no Trustee of Emerald Funds shall be
personally liable for or on account of any contract, debt, tort, claim, damage,
judgment or decree arising out of or connected with the administration or
preservation of the trust property or the conduct of any business of Emerald
Funds; and that no Trustee shall be personally liable to any person for any
action or failure to act except by reason of his or her own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her duties as
Trustee. With the exception stated, the Agreement and Declaration of Trust
provides that a Trustee is entitled to be indemnified against all liabilities
and expenses reasonably incurred by him or her in connection with the defense or
disposition of any proceeding in which he or she may be involved or with which
he or she may be threatened by reason of his or her being or having been a
Trustee, and that the Trustees will indemnify representatives and employees of
Emerald Funds to the same extent that Trustees are entitled to indemnification.
ADVISORY SERVICES
Barnett Capital Advisors, Inc. (the "Adviser") assumed, as of June 29,
1996, the responsibilities of Barnett Banks Trust Company, N.A. ("BBTC") as
investment adviser to each Fund. As of December 1, 1996, the Adviser assumed
sole advisory responsibility for the Funds under a new agreement, and Rodney
Square Management Corporation ("Rodney Square"), a wholly-owned subsidiary of
Wilmington Trust Company, which served as the Funds' former sub-investment
adviser, ceased to provide sub-investment advisory services to the Funds.
In its Investment Advisory Agreement, the Adviser has agreed to
provide the services described in the Prospectus and to
-25-
<PAGE>
pay all expenses it incurs in connection with its advisory activities, other
than the cost of securities and other investments, including brokerage
commissions and other transaction costs, if any, purchased or sold for each
Fund.
For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement, Emerald Funds has agreed to pay the Adviser fees,
computed daily and paid monthly, at the annual rate of .10% of the average net
assets of each Fund. The fees payable to the Adviser are not subject to
reduction as the value of each Fund's net assets increases. From time to time,
however, the Adviser may waive fees or reimburse the Funds for expenses
voluntarily. See "Management of Emerald Funds - Distribution and Administration
Services" below for further information regarding the waiver of fees and
reimbursement of expenses by the Adviser with respect to the Funds. For the
fiscal years ended November 30, 1995, 1994 and 1993 Rodney Square was entitled
to receive sub-advisory fees from the Funds at the contractual annual rate of
.15% of the average net assets of each Fund. During these three fiscal years
Rodney Square received (net of waivers and reimbursements) sub-advisory fees
totalling $212,078, $ 194,762 and $244,422, respectively, for the Treasury
Advantage Institutional Fund and $173,413, $162,403 and $166,258, respectively,
for the Prime Advantage Institutional Fund. For the fiscal year ended
November 30, 1995, Rodney Square reimbursed sub-advisory fees totalling $32,074
for the Prime Advantage Institutional Fund and $32,055 for the Treasury
Advantage Institutional Fund. For the fiscal years ended November 30, 1994 and
1993 Rodney Square waived sub-advisory fees totalling $28,256 and $17,525 for
the Treasury Advantage Institutional Fund and $25,863 and $23,338 for the Prime
Advantage Institutional Fund.
Under the Investment Advisory Agreement, the Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by Emerald
Funds in connection with the performance of the Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or negligence on the part of the Adviser in the performance of its duties
or from its reckless disregard of its duties and obligations under the
Agreement.
The Glass-Steagall Act, among other things, prohibits banks from
engaging to any extent in the business of underwriting securities, although
national and state-chartered banks generally are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in INVESTMENT COMPANY INSTITUTE V. CAMP that
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to
-26-
<PAGE>
the effect that the Glass-Steagall Act and such decision forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment
company continuously engaged in the issuance of its shares, but do not
prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent and custodian to such an investment company. In
1981, the United States Supreme Court held in BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM V. INVESTMENT COMPANY INSTITUTE that the Board did not
exceed its authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
The Adviser believes, with respect to its activities as required by
the Investment Advisory Agreement and as contemplated by the Prospectus and this
Statement of Additional Information, that, if the question were properly
presented, a court should hold that the Adviser may perform such activities
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. It should be noted, however, that there have been no cases
deciding whether banks may perform services comparable to those performed by the
Adviser and that future changes in either federal or state statutes and
regulations relating to the permissible activities of banks and trust companies
and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent the Adviser from continuing to perform such services
for the Funds. If the Adviser were prohibited from continuing to perform
advisory services for the Funds, it is expected that the Board of Trustees would
recommend that the Funds enter into another agreement or would consider the
possible termination of the Funds. Any new advisory agreement would be subject
to shareholder approval.
On the other hand, as described herein, Emerald Funds is currently
distributed by Emerald Asset Management, Inc., and BISYS Fund Services Limited
Partnership provides the Funds with administrative services. If current
restrictions under the Glass-Steagall Act preventing a bank from sponsoring,
organizing, controlling or distributing shares of an investment company were
relaxed, the Funds expect that the Adviser would consider the possibility of
offering to perform some or all of the services now provided by BISYS Fund
Services Limited Partnership and Emerald Asset Management, Inc. From time to
time, legislation modifying such restrictions has been introduced in Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of an
investment company. The
-27-
<PAGE>
Funds therefore expect that if this or similar legislation were enacted, the
Adviser's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform additional services now
provided by BISYS Fund Services Limited Partnership and Emerald Asset
Management, Inc. In this regard it may be noted that the Adviser has entered
into an agreement whereunder the Adviser (or an affiliate) may acquire
Emerald Asset Management, Inc. under specified conditions. It is not
possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which the Adviser or such a non-bank
affiliate might offer to provide services for consideration by the Board of
Trustees.
DISTRIBUTION AND ADMINISTRATION SERVICES
Emerald Funds has entered into a distribution agreement with Emerald
Asset Management, Inc. (the "Distributor") under which the Distributor, as
agent, sells shares of each Fund on a continuous basis. The Distributor has
agreed to use its best efforts to solicit orders for the sale of shares,
although it is not obliged to sell any particular amount of shares. The
Distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Funds (excluding preparation and printing
expenses necessary for the continued registration of the Funds' shares) and of
printing and distributing all sales literature. No compensation is payable by
the Funds to the Distributor for its distribution services.
BISYS Fund Services Limited Partnership (the "Administrator"), a
wholly-owned subsidiary of The BISYS Group, Inc., serves as administrator to
each Fund. In the administration agreement, the Administrator has agreed to
provide administrative services as described in the Prospectus. The
Administrator has also agreed to pay all expenses incurred by it in connection
with its activities under its agreement except certain out-of-pocket expenses
relating to its fund accounting responsibilities and as otherwise described in
this Statement of Additional Information and the Prospectus.
Emerald Funds has agreed to pay the Administrator fees for its
services as Administrator, computed daily and paid monthly, at the effective
annual rate of .0775% of the first $5 billion of the aggregate net assets of all
portfolios of Emerald Funds, .07% of the next $2.5 billion, .065% of the next
$2.5 billion and .05% of all assets exceeding $10 billion. In the event the
aggregate average daily net assets for all Funds falls below $3 billion, the fee
will be increased to .08% of the aggregate average daily net assets. From time
to time, the Administrator may waive fees or reimburse the Fund for expenses
voluntarily.
-28-
<PAGE>
For the fiscal years ended November 30, 1995, 1994 and 1993, Concord
Holding Corporation, Emerald Funds' prior administrator which was acquired by
The BISYS Group, Inc. in 1995, received (net of waivers and reimbursements)
administration fees totalling $212,078, $194,762 and $244,422, respectively,
for the Treasury Advantage Institutional Fund and $173,413, $162,403 and
$166,258, respectively, for the Prime Advantage Institutional Fund. For the
fiscal year ended November 30, 1995, the prior administrator reimbursed
administration fees totalling $32,074 for the Prime Advantage Institutional Fund
and $32,055 for the Treasury Advantage Institutional Fund. For the fiscal years
ended November 30, 1994 and 1993, the prior administrator waived administration
fees totalling $28,256 and $17,525 respectively, for the Treasury Advantage
Institutional Fund and $25,863 and $23,338, respectively, for the Prime
Advantage Institutional Fund.
In addition, if the total expenses borne by either Fund in any fiscal
year exceed the expense limitations imposed by applicable state securities
regulations, Emerald Funds may deduct from the payments to be made with respect
to such Fund to the Adviser and the Administrator, respectively, or the Adviser
and the Administrator will bear, a portion of the amount of such excess to the
extent required by such regulations in proportion to the fees otherwise payable
to them for such year. The Adviser's obligation with respect to any Fund,
however, is limited to the amount of its fees from such Fund. Such amounts, if
any, will be estimated and accrued daily and paid on a monthly basis. As of the
date of this Statement of Additional Information, to the knowledge of Emerald
Funds, there were no state expense limitations applicable to either Fund.
The administration agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
Emerald Funds in connection with the performance of the administration
agreement, except a loss resulting from willful misfeasance, bad faith or
negligence in the performance of its duties or from the reckless disregard by it
of its obligations and duties thereunder.
CUSTODIAN AND TRANSFER AGENT
Emerald Funds has appointed The Bank of New York, 90 Washington
Street, New York, New York 10286 as custodian for the Funds. BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035 provides transfer
agency and dividend disbursing services for the Funds.
-29-
<PAGE>
OPERATING EXPENSES
Operating expenses borne by the Funds include taxes; interest; fees
and expenses of Trustees and officers who are not also officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser, the Administrator or any of their affiliates; Securities and Exchange
Commission fees; state securities fees; advisory fees; administration fees;
charges of the custodian and of the transfer and dividend disbursing agent;
certain insurance premiums; outside auditing and legal expenses; costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders; costs of shareholder reports and meetings; and any
extraordinary expenses. The Funds also pay any brokerage fees, commissions and
other transaction charges (if any) incurred in connection with the purchase and
sale of its portfolio securities.
INDEPENDENT ACCOUNTANTS/EXPERTS
Price Waterhouse LLP, independent accountants, 1177 Avenue of the
Americas, New York, New York 10036, serve as independent accountants for Emerald
Funds. The financial statements dated November 30, 1995 which are incorporated
by reference into this Statement of Additional Information have been included in
reliance on the report of Price Waterhouse LLP given on the authority of said
firm as experts in auditing and accounting.
COUNSEL
Drinker Biddle & Reath, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107, are counsel to Emerald Funds
and will pass upon the legality of the shares offered by the Prospectus.
ADDITIONAL INFORMATION ON YIELD
The "yields" and "effective yields" of each Fund are calculated
according to formulas prescribed by the Securities and Exchange Commission. The
standardized seven-day yield for each Fund is computed separately by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in the particular Fund involved having a balance of one
share at the beginning of the period, dividing the net change in account value
by the value of the account at the beginning of the base period to obtain the
base period return, and multiplying the base period return by (365/7). The net
change in the value of an account in a Fund includes the value of
-30-
<PAGE>
additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares,
net of all fees, other than nonrecurring account or sales charges, that are
charged to all shareholder accounts in proportion to the length of the base
period and the Fund's average account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The effective annualized yield for each Fund is computed by
compounding a particular Fund's unannualized base period return (calculated
as above) by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. The fees which
may be imposed by banks or other financial intermediaries on their customers
for cash management services are not reflected in Emerald Funds' calculations
of yields for the Funds.
The current yield for each of the Funds may be obtained by calling the
Distributor at 800-637-3759. For the seven-day period ending May 31, 1996, the
annualized yields (after fee waivers) of the Treasury Advantage Institutional
Fund and Prime Advantage Institutional Fund were 4.92% and 5.06%, respectively,
and the effective yields (after fee waivers) of such Funds were 5.05% and 4.92%,
respectively.
From time to time, the Funds may include general comparative
information, such as statistical data regarding inflation, securities indices or
the features or performance of alternative investments, in advertisements, sales
literature and reports to shareholders. The Funds may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any Fund.
In addition, in such communications, the Adviser may offer opinions on
current economic conditions.
MISCELLANEOUS
As used in this Statement of Additional Information and in the
Prospectuses a "majority of the outstanding shares" of a Fund means, with
respect to the approval of an investment advisory agreement or a change in a
fundamental policy, the lesser of (1) 67% of the shares of the particular Fund
represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of such Fund.
-31-
<PAGE>
As of November 15, 1996, the Adviser and its affiliated banks owned
of record substantially all of the outstanding shares of the Treasury
Advantage Institutional Fund and Prime Advantage Institutional Fund on behalf
of their customer accounts. The Adviser and such affiliated banks were also
the beneficial owners of the following percentages of shares that were also
the beneficial owners of the following percentages of shares that were
outstanding on such date because the Adviser possessed voting or investment
discretion with respect to such shares: Treasury Advantage Institutional Fund
- - Institutional Shares (99.61%), Prime Advantage Institutional Fund -
Institutional Shares (99.69%), Treasury Fund - Institutional Shares (47.05%),
Treasury Fund - Service Shares (77.70%), Prime Fund - Institutional Shares
(60.98%), Prime Fund - Service Shares (92.99%), Tax-Exempt Fund -
Institutional Shares (95.08%), Tax-Exempt Fund - Service Shares (18.51%),
Equity Fund - Institutional Shares (99.73%), Equity Value Fund - Institutional
Shares (100%); Small Capitalization Fund - Institutional Shares (99.84%),
Balanced Fund - Institutional Shares (99.84%), U.S. Government Securities Fund
- - Institutional Shares (98.57%), Managed Bond Fund - Institutional Shares
(99.67%), International Equity Fund - Institutional Shares (100%); Short-Term
Fixed Income Fund - Institutional Shares (100%); and Florida Tax-Exempt Fund -
Institutional Shares (95.21%).
As of November 15, 1996, the name, address and percentage of the
outstanding shares held by other investors who may have owned of record or
beneficially 5% or more of the outstanding shares of a particular class of a
Fund of the Trust were as follows:
-32-
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name of Class of of
Fund Shares Name and Address Ownership
- ------- -------- ---------------- ----------
<S> <C> <C> <C>
Equity Fund Retail National Financial Services 56.33%
Corporation for the
Exclusive Benefit of Our
Customers
P.O. Box 3908
Church Street Station
New York, NY 10008
University of West Florida 6.42%
Foundation
11000 University Parkway
Pensacola, FL 32514-5750
Equity Value Fund Institutional First Union National Bank 5.11%
Trst J. Ball Dupont
401 S. Tyron St. CMG 1151
Charlotte, NC 28288
Equity Value Fund Retail Emerald Asset Management, Inc. 5.44%
3435 Stelzer Road
Columbus, OH 43219
Willis E. Alford 94.56%
and Jewel S. Alford
1676 Nassau Circle
Tavares, FL 32778
International Retail National Financial Services 19.22%
Equity Fund Corporation for the Exclusive
Benefit of Our Customers
Kendall Goodrich
2871 N. Ocean Blvd. 412
Boca Raton, FL 33431
National Financial Services 18.93%
Corporation for the Exclusive
Benefit of Our Customers
J.C. Jones Jr.
Christa Jones JTWROS
PSC 5 Box 484
APO AE NY AE 09050
National Financial Services 15.79%
Corporation for the Exclusive
Benefit of Our Customers
Huong Thi Nguyen
5073 French Street
Jacksonville, FL 32205
Barnett Banks Trust Company, 9.47%
Custodian
Dennis E. Bradt, IRA
546 W. Patterson St.
Lakeland, FL 33803-1246
Small Capitalization Retail National Financial Services 5.26%
Fund Corporation for the Exclusive
Benefit of Our Customers and
John T.R. Hayt, John T.R.
Hayt Living Trust,
1169 Queens Harbor Blvd.
Jacksonville, FL 32225
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name of Class of of
Fund Shares Name and Address Ownership
- ------- -------- ---------------- ----------
<S> <C> <C> <C>
Short-Term Fixed Retail National Financial Services 10.53%
Income Fund Corporation for the Exclusive
Benefit of Our Customers/FBO
John W. Selby
2888 La Concha Dr.
Clearwater, FL 34622
National Financial Services 5.24%
Corporation for the Exclusive
Benefit of Our Customers/
Wayne Bodie and
Nikki Bodie
P.O. Box 828
Defuniak Springs, FL 32433
National Financial Services 15.24%
Corporation for the Exclusive
Benefit of Our Customers/FBO
George A. Zellner
530 Park St.
Jacksonville, FL 32204
National Financial Services 5.18%
Corporation for the Exclusive
Benefit of Our Customers
Trinity Presbyterian Church
USA Inc.
156 Florida Park Drive
Palm Coast, FL 32037
U.S. Government Retail Barnett Bank & Trust Company N.A. 12.32%
Securities Fund Customer Capital Network Services
P.O. Box 40200
Jacksonville, FL 32203-0200
National Financial Services 52.03%
Corporation for the Exclusive
Benefit of Our Customers
P.O. Box 3908
Church Street Station
New York, NY 10008
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name of Class of of
Fund Shares Name and Address Ownership
- ------- -------- ---------------- ----------
<S> <C> <C> <C>
Managed Bond Fund Retail National Financial Services 5.94%
Corporation for the Exclusive
Benefit of Our Customers and
Susan A. Fairbank
Fairbank Rev. Trust
85 N. Pizarro Pt.
Lecanto, FL 34461
National Financial Services 7.44%
Corporation for the Exclusive
Benefit of Our Customers/FBO
Robert White
3101 Riverview Blvd.
Bradenton, FL 34205
National Financial Services 5.99%
Corporation for the Exclusive
Benefit of Our Customers
Keith Santi P. Adm.
Trans-Market Sales Equip. Inc.
401(k) Prof. Shar. Pl.
8915 Maislin Drive
Tampa, FL 33637
Florida Tax-Exempt Retail National Financial Services 60.84%
Fund Corporation for the Exclusive
Benefit of Our Customers
P.O. Box 3908
Church Street Station
New York, NY 10008
Prime Fund Retail National Financial Services 99.35%
Corporation for the Exclusive
Benefit of Our Customers
P.O. Box 3908
Church Street Station
New York, NY 10008
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name of Class of of
Fund Shares Name and Address Ownership
- ------- -------- ---------------- ----------
<S> <C> <C> <C>
Tax-Exempt Fund Retail National Financial Services 99.45%
Corporation for the
Exclusive
Benefit of Our Customers
P.O. Box 3908
Church Street Station
New York, NY 10008
Treasury Fund Institutional Wilmington Trust Company 8.19%
Attn: Margaret Wilhelm
Mutual Funds
1100 N. Market St.
Wilmington, DE 19890
Treasury Fund Service Hare & Co. 16.54%
Attn: Frank Nataro
Attn: STIF/Master Note
One Wall Street, 5th Floor
New York, NY 10286
Treasury Fund Retail National Financial Services 99.84%
Corporation for the Exclusive
Benefit of Our Customers
P.O. Box 3908
Church Street Station
New York, NY 10008
Prime Fund Institutional Wilmington Trust Company 39.02%
Attn: Margaret Wilhelm
Mutual Funds
1100 N. Market St.
Wilmington, DE 19890
Tax-Exempt Fund Service Hare & Co. 77.07%
Attn: Frank Nataro
Attn: STIF/Master Note
One Wall Street, 5th Floor
New York, NY 10286
</TABLE>
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered by the Funds'
Prospectus.
-36-
<PAGE>
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits
filed therewith may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Price
Waterhouse LLP, independent auditors, contained in the Funds' annual report to
shareholders for the fiscal year ended November 30, 1995 (the "Annual Report")
and the unaudited financial statements contained in the Funds' semi-annual
report to shareholders for the period ended May 31, 1996 (the "Semi-Annual
Report") are hereby incorporated herein by reference. No other parts of the
Annual Report or Semi-Annual Report are incorporated by reference. Copies of
the Annual Report and Semi-Annual Report may be obtained by writing to BISYS
Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035 or by calling
800-637-3759.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-
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term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
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"Duff 4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
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"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating
A-5
<PAGE>
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "B" or "B-" rating.
"CC" - Debt is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" - Debt is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default and is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes such payments will be made during
such grace period. "D" rating is also used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest
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are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the company ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
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"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
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"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
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speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
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MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Corporation for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
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D&P uses the ratings described under Corporate and Municipal Long-Term
Debt Ratings for tax-exempt notes and other short-term obligations.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
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