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Rule 497(a)
File No. 811-5545
33-21489
INFORMATION CONTAINED HEREIN SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
[SUBJECT TO COMPLETION: DATED SEPTEMBER 5, 1996]
THE KEYPREMIER ESTABLISHED GROWTH FUND
THE KEYPREMIER INTERMEDIATE TERM INCOME FUND
LOGO
- --------------------------------------------------------------------------------
3435 Stelzer Road
Columbus, Ohio 43219
For current yield, purchase,
and redemption information,
call (800) 766-3960.
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The Sessions Group (the "Group") is an open-end management investment company.
The Group includes The KeyPremier Established Growth Fund (the "Growth Fund")
and The KeyPremier Intermediate Term Income Fund (the "Income Fund"), each of
which is a diversified portfolio of the Group (the Growth and Income Funds are
hereinafter collectively referred to as the "Funds" and individually as a
"Fund"). The Trustees of the Group have divided each Fund's beneficial ownership
into an unlimited number of transferable units called shares (the "Shares").
Martindale Andres & Company, Inc., West Conshohocken, Pennsylvania (the
"Adviser"), which is a wholly owned subsidiary of Keystone Financial, Inc.
("Keystone"), acts as the investment adviser to each of the Funds.
Additional information about the Funds and the Group, contained in a Statement
of Additional Information, has been filed with the Securities and Exchange
Commission and is available upon request without charge by writing to the Group
at its address or by calling the Group at the telephone number shown above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference in its entirety into this Prospectus.
This Prospectus sets forth concisely the information about the Funds and the
Group that a prospective investor ought to know before investing. Investors
should read this Prospectus and retain it for future reference.
Each of the Growth Fund's and the Income Fund's net asset value per share will
fluctuate as the value of its portfolio changes in response to changing market
prices, market rates of interest and/or other factors.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
Columbus, Ohio, acts as the Funds' administrator and distributor. BISYS Fund
Services, Inc., Columbus, Ohio, the corporate general partner of BISYS, acts as
the Funds' transfer agent (the "Transfer Agent") and performs certain fund
accounting services for each of the Funds.
THE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, THE ADVISER, KEYSTONE OR ANY OF THEIR AFFILIATES. SUCH SHARES ARE
NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY, AND AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is October , 1996.
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PROSPECTUS SUMMARY
SHARES OFFERED: Units of beneficial interest ("Shares") of the Growth Fund
and the Income Fund, two separate investment funds of The Sessions Group, an
Ohio business trust (the "Group").
OFFERING PRICE: The public offering price of each of the Funds is equal to
the net asset value per share plus a sales charge of 4.50% of the public
offering price, reduced on investments of $100,000 or more (See "HOW TO PURCHASE
AND REDEEM SHARES--Sales Charges"). Under certain circumstances, the sales
charge may be eliminated (See "HOW TO PURCHASE AND REDEEM SHARES--Sales Charge
Waivers").
MINIMUM PURCHASE: $1,000 minimum initial investment with $25 minimum
subsequent investments. Such minimum initial investment is reduced for investors
using the Auto Invest Plan described herein and for employees of the Adviser and
its affiliates.
TYPE OF COMPANY: Each Fund is a diversified series of an open-end,
management investment company.
INVESTMENT OBJECTIVES: For the GROWTH FUND, growth of capital with some
current income as a secondary objective.
For the INCOME FUND, current income with long-term growth of capital as a
secondary objective.
INVESTMENT POLICIES: Under normal market conditions, the GROWTH FUND will
invest substantially all, but in no event less than 65%, of its total assets in
common stocks and securities convertible into common stocks.
Under normal market conditions, the INCOME FUND will invest substantially
all, but in no event less than 65%, of its total assets in fixed income
securities of all types, including high and medium grade corporate bonds, U.S.
Government bonds and mortgage-backed securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS: An investment in either of the
Funds is subject to certain risks, including market risk and interest rate risk,
as set forth in detail under "INVESTMENT OBJECTIVES AND POLICIES--Risk Factors
and Investment Techniques." As with other mutual funds, there can be no
assurance that either of the Funds will achieve its investment objectives. The
Funds, to the extent set forth under "INVESTMENT OBJECTIVES AND POLICIES," may
engage in the following practices: the use of repurchase agreements and reverse
repurchase agreements, entering into options and futures transactions, the
purchase of securities on a when-issued or delayed-delivery basis and the
purchase of foreign securities and derivatives.
INVESTMENT ADVISER: Martindale Andres & Company, Inc. (the "Adviser").
DIVIDENDS: Dividends from net income are declared and generally paid
monthly with respect to the Income Fund and quarterly with respect to the Growth
Fund. Net realized capital gains, if any, are distributed at least annually.
DISTRIBUTOR: BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("BISYS").
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FEE TABLE
<TABLE>
<CAPTION>
GROWTH FUND INCOME FUND
----------- -----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................. 4.50% 4.50%
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees1.................................................. 0.00% 0.00%
12b-1 Fees........................................................ None None
Other Expenses2................................................... 0.27 0.26
----------- -----------
Estimated Total Fund Operating Expenses........................... 0.27% 0.26%
=========== ===========
</TABLE>
Example You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
The Growth Fund............................................. $ 48 $53
The Income Fund............................................. $ 48 $53
</TABLE>
The purpose of the above table is to assist a potential purchaser of Shares of
a Fund in understanding the various costs and expenses that an investor in the
Fund will bear directly or indirectly. Such expenses do not include any fees
charged by the Adviser or any of its affiliates to its customer accounts which
may have invested in Shares of the Funds. See "MANAGEMENT OF THE GROUP" and
"GENERAL INFORMATION" for a more complete discussion of the annual operating
expenses of the Funds. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
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1 The Adviser has agreed with the Group to waive all of its investment advisory
fees for both the Growth Fund and Income Fund through March 31, 1997. Absent
such voluntary fee waivers, Management Fees and Estimated Total Fund Operating
Expenses for the Growth Fund would be 0.75% and 1.02%, respectively, and for
the Income Fund would be 0.60% and .86%, respectively.
2 "Other Expenses" are estimated for the current fiscal year.
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PERFORMANCE INFORMATION
From time to time performance information for the Funds showing the Funds'
average annual total return, aggregate total return and yield may be presented
in advertisements, sales literature and shareholder reports. SUCH PERFORMANCE
FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. Average annual total return will be calculated for the period since
commencement of operations for a Fund (or its respective collective investment
fund) and will reflect the imposition of the maximum sales charge, if any.
Average annual total return is measured by comparing the value of an investment
in a Fund at the beginning of the relevant period to the redeemable value of the
investment at the end of the period (assuming immediate reinvestment of any
dividends or capital gains distributions), which figure is then annualized.
Aggregate total return is calculated similarly to average annual total return
except that the return figure is aggregated over the relevant period instead of
annualized. Yield will be computed by dividing a Fund's net investment income
per share earned during a recent one-month period by that Fund's per share
maximum offering price (reduced by any undeclared earned income expected to be
paid shortly as a dividend) on the last day of the period and annualizing the
result. Each of the Funds may also present its average annual total return,
aggregate total return and yield, as the case may be, excluding the effect of a
sales charge.
Each of the Funds will be initially funded by the transfer of all of the
assets of a corresponding collective investment fund managed by the Adviser (the
"CIFs"). Because the management of the Growth Fund is substantially the same as
its corresponding CIF, the quoted performance of the Growth Fund will include
the performance of its corresponding CIF for the periods prior to the
effectiveness of the Group's registration statement as it relates to the Growth
Fund. Such CIF was not registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), and therefore was not subject to certain investment
restrictions that are imposed by the 1940 Act. If the CIF had been so
registered, its performance might have been adversely affected.
In addition, from time to time the Income Fund may also present its
distribution rate in supplemental sales literature and in shareholder reports,
both of which must be accompanied or preceded by a prospectus. Distribution
rates will be computed by dividing the distribution per share made by the Income
Fund over a twelve-month period by the maximum offering price per share at the
end of that period. The calculation of income in the distribution rate includes
both income and capital gain dividends and does not reflect unrealized gains or
losses, although the Income Fund may also present a distribution rate excluding
the effect of capital gains and/or a sales charge. The distribution rate differs
from the yield because it includes capital gain dividends which are often
non-recurring in nature, whereas yield does not include such items.
Investors may also judge the performance of a Fund by comparing or referencing
it to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices and to
data prepared by various services, which indices or data may be published by
such services or by other services or publications. In addition to performance
information, general information about the Funds that appears in such
publications may be included in advertisements, sales literature and reports to
Shareholders.
Yield and total return are generally functions of market conditions, interest
rates, types of investments held, and operating expenses. Consequently, current
yields and total return will fluctuate and are not necessarily representative of
future results. Any fees charged by Keystone or by any of its affiliates,
including the Adviser,
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to its customer accounts which may have invested in Shares of a Fund will not be
included in performance calculations; such fees, if charged, will reduce the
actual performance from that quoted. In addition, if the Adviser or BISYS
voluntarily reduces all or part of its fees for a Fund, as discussed below, the
yield and total return for that Fund will be higher than they would otherwise be
in the absence of such voluntary fee reductions.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
The investment objectives for the Growth Fund are growth of capital with some
current income as a secondary objective. The investment objectives for the
Income Fund are current income with long-term growth of capital as a secondary
objective. The investment objectives of each Fund are non-fundamental policies
and as such may be changed by the Group's Trustees without the vote of the
Shareholders of that Fund. There can be no assurance that the investment
objectives of either Fund will be achieved.
THE GROWTH FUND
Under normal market conditions, the Growth Fund will invest substantially all,
but in no event less than 65%, of its total assets in common stocks and
securities convertible into common stocks of companies with market
capitalizations of at least $1 billion. However, the Growth Fund intends to
operate with a fully invested philosophy, i.e., the Growth Fund will generally
invest 90% of its assets in common stocks. The Growth Fund's equity investments
will be based on two principles: (1) a solid long-term fundamental business
outlook and (2) an attractively valued stock price. The Growth Fund's investment
decisions are based upon a company's expected performance through a business and
market cycle which normally translates into a three to five year investment
horizon. In an effort to mitigate some volatility, the Growth Fund does seek to
maintain representation in all major economic sectors.
Given the Growth Fund's large market capitalization focus, the Growth Fund's
appropriate performance benchmark should be the Standard & Poor 500 Index. As a
result of the investment process, the Growth Fund expects to experience slightly
greater volatility than its benchmark. For purposes of the foregoing, securities
convertible into common stocks include convertible bonds, convertible preferred
stock, options and rights. The securities purchased by the Growth Fund are
generally traded on established U.S. markets and exchanges.
Under normal market conditions, the Growth Fund may also invest up to 35% of
its total assets in warrants, American Depositary Receipts, securities of other
investment companies and REITs (real estate investment trusts), cash and
Short-Term Obligations, as defined below, and may engage in other investment
techniques described below.
Subject to the limitation described above, the Growth Fund may invest in
foreign securities through the purchase of sponsored and unsponsored American
Depositary Receipts ("ADRs"). Unsponsored ADRs may be less liquid than sponsored
ADRs and there may be less information available regarding the underlying
foreign issuer for unsponsored ADRs.
"Short-Term Obligations" consist of obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities (including U.S. Treasury
securities stripped of the unmatured interest coupons and such stripped interest
coupons), with maturities of 12 months or less, certificates of deposit,
bankers' acceptances and demand and time deposits of selected banks, securities
of money market mutual funds, and commercial paper rated in one of the two
highest rating categories by appropriate nationally recognized statistical
rating organizations ("NRSROs," e.g., Stan-
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dard & Poor's Corporation and Moody's Investors Service) and repurchase
agreements collateralized by such obligations. These obligations are described
further in the Statement of Additional Information. The Growth Fund may also
invest up to 100% of its total assets in Short-Term Obligations and cash when
deemed appropriate for temporary defensive purposes as determined by the Adviser
to be warranted due to current or anticipated market conditions. However, to the
extent that the Growth Fund is so invested, it may not achieve its investment
objectives.
THE INCOME FUND
Generally. Under normal market conditions, the Income Fund will invest
substantially all, but in no event less than 65%, of its total assets in fixed
income securities of all types, including variable and floating rate securities
and variable amount master demand notes. A portion of the Income Fund (but under
normal market conditions no more than 35% of its total assets) may be invested
in securities of other investment companies, preferred stocks and, for cash
management purposes, Short-Term Obligations, and the Income Fund may engage in
other investment techniques described below. Fixed income securities include
bonds, debentures, notes, mortgage-backed and asset-backed securities, state,
municipal or industrial revenue bonds, obligations issued or supported as to
principal and interest by the U.S. Government or its agencies or
instrumentalities ("Government Obligations") and fixed-income securities
convertible into, or exchangeable for, common stocks. In addition, a portion of
the Income Fund may from time to time be invested in participation certificates
in pools of mortgages issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
Under normal market conditions, the Income Fund expects to invest primarily in
Government Obligations, mortgage-backed securities and in debt obligations of
United States corporations. The Income Fund also intends that, under normal
market conditions, its portfolio will maintain a dollar-weighted average
maturity of three to ten years.
The Income Fund expects to invest in a variety of U.S. Treasury obligations,
differing in their interest rates, maturities, and times of issuance, and other
Government Obligations. Obligations of certain agencies and instrumentalities of
the U.S. Government, such as the Government National Mortgage Association
("GNMA") and the Export-Import Bank of the United States, are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the Federal
National Mortgage Association ("FNMA"), are supported by the right of the issuer
to borrow from the Treasury; others, such as those of the Student Loan Marketing
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 Federal
Farm Credit Banks or the Federal Home Loan Mortgage Corporation ("FHLMC"), 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 agencies or instrumentalities if it is not obligated to do
so by law. The Income Fund will invest in the obligations of such agencies or
instrumentalities only when the Adviser believes that the credit risk with
respect thereto is minimal.
The Income Fund also expects to invest in bonds, notes and debentures of a
wide range of U.S. corporate issuers. Such obligations may be secured or
unsecured promises to pay and will in most cases differ in their interest rates,
maturities and times of issuance.
Except as noted in the next paragraph, the Income Fund invests only in debt
securities which are rated at the time of purchase within the four highest
rating groups assigned by one or more appropriate NRSROs or, if unrated, which
the Adviser deems to be of comparable
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quality. For a description of the rating symbols of the NRSROs, see the Appendix
to the Statement of Additional Information. For a discussion of debt securities
rated within the fourth highest rating group assigned by an NRSRO, see "Risk
Factors and Investment Techniques - Medium Grade Securities" below.
The Income Fund may also invest up to 20% of the value of its net assets in
debt securities which, in the case of bonds, are rated lower than the fourth
highest rating group by an appropriate NRSRO and as low as "B" by an appropriate
NRSRO. Investments rated Ba or lower by Moody's Investors Services, Inc.
("Moody's") and BB or lower by Standard & Poor's Corporation ("S&P") ordinarily
provide higher yields but involve greater risk because of their speculative
characteristics. Debt rated B by S&P is regarded, on balance, as predominately
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the obligation.
The Income Fund may also invest up to 100% of its total assets in Short-Term
Obligations and cash when deemed appropriate for temporary defensive purposes as
determined by the Adviser to be warranted due to current or anticipated market
conditions. However, to the extent that the Income Fund is so invested, it may
not achieve its investment objectives.
The Income Fund may also invest in U.S. dollar denominated international bonds
for which the primary trading market is in the United States ("Yankee Bonds"),
or for which the primary trading market is abroad ("Eurodollar Bonds"), and in
Canadian Bonds and bonds issued by institutions organized for a specific
purpose, such as the World Bank and the European Economic Community, by two or
more sovereign governments ("Supranational Agency Bonds").
Mortgage-Backed Securities. The Income Fund also invests in mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or by nongovernmental entities which are rated, at the time of
purchase, within the four highest bond rating categories assigned by one or more
appropriate NRSROs, or, if unrated, which the Adviser deems to be of comparable
quality to securities so rated. There are currently three basic types of
mortgage-backed securities: (1) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
FHLMC; (2) those issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and (3) those issued by
private issuers that represent an interest in or are collateralized by whole
mortgage loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
Such mortgage-backed securities may have mortgage obligations directly backing
such securities, including among others, conventional thirty year fixed rate
mortgage obligations, graduated payment mortgage obligations, fifteen year
mortgage obligations and adjustable rate mortgage obligations. All of these
mortgage obligations can be used to create pass-through securities. A
pass-through security is created when mortgage obligations are pooled together
and undivided interests in the pool or pools are sold. The cash flow from the
mortgage obligations is passed through to the holders of the securities in the
form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an individual mortgage
obligation prepays the remaining principal before the mortgage obligation's
scheduled maturity date.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
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prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. In addition,
prepayment rates will be used to determine a security's estimated average life
and the Income Fund's dollar-weighted average portfolio maturity. Accelerated
prepayments have an adverse impact on yields for pass-through securities
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligations are repaid. The opposite is
true for pass-through securities purchased at a discount. The Income Fund may
purchase mortgage-related securities at a premium or a discount. Reinvestment of
principal payments may occur at higher or lower rates than the original yield on
such securities. Due to the prepayment feature and the need to reinvest payments
and prepayments of principal at current rates, mortgage-related securities can
be less effective than typical bonds of similar maturities at maintaining yields
during periods of declining interest rates.
Collateralized Mortgage Obligations. The Income Fund may also acquire
collateralized mortgage obligations or "CMOs" and stripped mortgage-backed
securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively referred
to as "Mortgage Assets"). Payments of principal or interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs. CMOs may be issued by agencies or instrumentalities of the
U.S. Government or by private originators of, or investors in, mortgage loans.
IOs and POs. Stripped mortgage-backed securities are securities representing
interests in a pool of mortgages the cash flow from which has been separated
into interest and principal components. "IOs" (interest only securities) receive
the interest portion of the cash flow while "POs" (principal only securities)
receive the principal portion. Stripped mortgage-backed securities may be issued
by U.S. Government agencies or by private issuers, such as mortgage banks,
commercial banks, investment banks, savings and loan associations and special
purpose subsidiaries of the foregoing. As interest rates rise and fall, the
value of IOs tends to move in the same direction as interest rates. The value of
other mortgage-backed securities described herein, like other debt instruments,
will tend to move in the opposite direction compared to interest rates. POs
perform best when prepayments on the underlying mortgages rise since this
increases the rate at which the investment is returned and the yield to maturity
on the PO. When payments on mortgages underlying a PO are slow, the life of the
PO is lengthened and the yield to maturity is reduced.
The Income Fund may purchase stripped mortgage-backed securities for hedging
purposes to protect the Income Fund against interest rate fluctuations. For
example, since an IO will tend to increase in value as interest rates rise, it
may be utilized to hedge against a decrease in value of other fixed-income
securities in a rising interest rate environment. If the Income Fund purchases a
mortgage-related security at a premium, all or part of the premium may be lost
if there is a decline in the market value of the security, whether resulting
from changes in interest rates or prepayments in the underlying mortgage
collateral. Moreover, with respect to stripped mortgage-backed securities, if
the underlying mortgage securities experience greater than anticipated
prepayments of principal, the Income Fund may fail to recoup fully its initial
investment in these securities even if the securities are rated in the
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highest rating category by an NRSRO. Stripped mortgage-backed securities may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. 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
stripped mortgage-backed securities that receive 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. No more
than 10% of the Income Fund's assets will be invested in IOs and POs.
Asset-Backed Securities. Asset-backed securities are similar to
mortgage-backed securities except that instead of using mortgages to
collateralize the obligations, a broad range of other assets may be used as
collateral, primarily automobile and credit card receivables and home equity
loans. Such receivables and loans are securitized in pass-through structures
similar to the mortgage pass-through or pay-through structures described above.
Certain debt securities such as, but not limited to, mortgage-backed
securities, CMOs, asset backed securities and securitized loan receivables, as
well as other securities subject to prepayment of principal prior to the stated
maturity date, are expected to be repaid prior to their stated maturity dates.
As a result, the effective maturity of these securities is expected to be
shorter than the stated maturity. For purposes of compliance with stated
maturity policies and calculation of the Income Fund's dollar-weighted average
maturity, the effective maturity of such securities will be used.
Variable Amount Master Demand Notes. Variable amount master demand notes in
which the Income Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and that provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between the Income Fund and the issuer,
they are not normally traded. Although there is no secondary market in the
notes, the Income Fund may demand payment of principal and accrued interest at
any time. While the notes are not typically rated by NRSROs, the Adviser must
determine them to be of comparable credit quality to commencial paper in which
the Income Fund could invest. The Adviser will consider the earning power, cash
flow, and other liquidity ratios of the issuers of such notes and will
continuously monitor their financial status and ability to meet payment on
demand. In determining dollar-weighted average portfolio maturity, a variable
amount master demand note will be deemed to have a maturity equal to the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
Zero Coupon Securities. The Income Fund may invest in zero coupon securities
which are debt securities issued or sold at a discount from their face value
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and perceived
credit quality of the issuer. Zero coupon securities also may take the form of
debt securities that have been stripped of their unmatured interest coupons, the
coupons themselves and receipts or certificates representing interests in such
stripped debt obligations and coupons. The market prices of zero coupon
securities generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit qualities. For further information regarding zero coupon
securities, see "Additional General Tax Infor-
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mation" in the Statement of Additional Information.
Variable and Floating Rate Securities. Securities purchased by the Income Fund
may include rated and unrated variable and floating rate obligations. A variable
rate obligation is one whose terms provide for the adjustment of its interest
rate on set dates and which, upon such adjustment, can reasonably be expected to
have a market value that approximates its par value.
A floating rate obligation is one whose terms provide for the adjustment of
its interest rate whenever a specified interest rate changes and which, at any
time, can reasonably be expected to have a market value that approximates its
par value. Such notes are frequently not rated by credit rating agencies;
however, unrated variable and floating rate notes purchased by the Income Fund
will be determined by the Adviser to be of comparable quality at the time of
purchase to rated instruments eligible for purchase under the Income Fund's
investment policies. In making such determinations, the Adviser will consider
the earning power, cash flow and other liquidity ratios of the issuers of such
notes (such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable or
floating rate obligation purchased by the Income Fund, the Income Fund may
attempt to resell the obligation at any time to a third party. The absence of an
active secondary market, however, could make it difficult for the Income Fund to
dispose of a variable or floating rate obligation in the event the issuer of the
note defaulted on its payment obligations and the Income Fund could, as a result
or for other reasons, suffer a loss to the extent of the default. Variable or
floating rate obligations may be secured by bank letters of credit.
In the event the interest rate of a variable or floating rate obligation is
established by reference to an index or an interest rate that may from time to
time lag behind other market interest rates, there is the risk that the market
value of such obligation, on readjustment of its interest rate, will not
approximate its par value.
Variable and floating rate obligations for which no readily available market
exists and which are not subject to a demand feature that will permit the Income
Fund to receive payment of the principal within seven days after demand by the
Income Fund, will be considered illiquid and therefore, together with other
illiquid securities held by such Fund, will not exceed 15% of the Income Fund's
net assets.
An increase in interest rates will generally reduce the value of the
investments in the Income Fund, and a decline in interest rates will generally
increase the value of those investments, although as described above, some
securities bear the risk of early prepayment. Depending upon the prevailing
market conditions, the Adviser may purchase debt securities at a discount from
face value, which produces a yield greater than the coupon rate. Conversely, if
debt securities are purchased at a premium over face value, the yield will be
lower than the coupon rate. In making investment decisions, the Adviser will
consider many factors other than current yield, including the preservation of
capital, maturity, and yield to maturity.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in either of the Funds entails
certain risks. Equity securities such as those in which the Growth Fund may
invest are more volatile and carry more risk than some other forms of
investment, including investments in high grade fixed income securities.
Therefore, the Growth Fund is subject to stock market risk, i.e., the
possibility that stock prices in general will decline over short or even
extended periods of time.
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Since the Income Fund invests in bonds, investors in such a Fund are exposed
to bond market risk, i.e., fluctuations in the market value of bonds. Bond
prices are influenced primarily by changes in the level of interest rates. When
interest rates rise, the prices of bonds generally fall; conversely, when
interest rates fall, bond prices generally rise although certain types of bonds
are subject to the risks of prepayment as described above when interest rates
fall. While bonds normally fluctuate less in price than stocks, there have been
in the recent past extended periods of cyclical increases in interest rates that
have caused significant declines in bond prices and have caused the effective
maturity of securities with prepayment features to be extended, thus effectively
converting short or intermediate term securities into longer term securities.
Depending upon the performance of each Funds' investments, the net asset value
per share of a Fund may decrease instead of increase.
Each Fund may invest in any one or more of the following securities: certain
variable or floating rate securities, mortgage-backed securities, including IOs
and POs and, as described below, each Fund may invest in put and call options
and futures. Such instruments are considered to be "derivatives." A derivative
is generally defined as an instrument whose value is based upon, or derived
from, some underlying index, reference rate (e.g., interest rates), security,
commodity or other asset. No Fund will not invest more than 20% of its total
assets in any such derivatives, except that with respect to the Income Fund,
there is no limitation on the amount of its total assets which may be invested
in variable or floating rate obligations.
Repurchase Agreements. Securities held by each of the Funds may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities, in exchange for cash, from banks and/or registered
broker-dealers which the Adviser deems creditworthy under guidelines approved by
the Group's Board of Trustees. The seller agrees to repurchase such securities
at a mutually agreed date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates, which may be more or less than the rate on the underlying
portfolio securities. Securities subject to repurchase agreements must be of the
same type and quality as those in which the Fund may invest directly. Repurchase
agreements are considered to be loans by a Fund under the 1940 Act. For further
information about repurchase agreements and the related risks, see "INVESTMENT
OBJECTIVES AND POLICIES--Additional information on Portfolio
Instruments--Repurchase Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements. Each Fund may borrow funds by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed-upon date and price. At the time a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid
high-grade debt securities consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will continually monitor the account to ensure that such equivalent value is
maintained at all times. Reverse repurchase agreements involve the risk that the
market value of the securities sold by a Fund may decline below the price at
which such Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings by a Fund under the 1940 Act and
therefore a form of leverage. A Fund may experience a negative impact on its net
asset value if interest rates rise during the term of a reverse repur-
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chase agreement. A Fund generally will invest the proceeds of such borrowings
only when such borrowings will enhance the Fund's liquidity or when the Fund
reasonably expects that the interest income to be earned from the investment of
the proceeds is greater than the interest expense of the transaction. For
further information about reverse repurchase agreements, see "INVESTMENT
OBJECTIVES AND POLICIES--Additional Information on Portfolio
Instruments--Reverse Repurchase Agreements" in the Statement of Additional
Information.
Except as otherwise disclosed to the Shareholders of the Funds, the Group will
not execute portfolio transactions through, acquire portfolio securities issued
by, make savings deposits in, or enter into repurchase or reverse repurchase
agreements with the Adviser, BISYS, or their affiliates, and will not give
preference to the Adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
Medium-Grade Securities. As described above, the Income Fund may invest in
debt securities within any of the six highest rating groups assigned by an
NRSRO, including debt securities within the fourth highest rating group (e.g.
BBB or Baa by S&P and Moody's, respectively) and comparable unrated securities.
These securities within the fourth highest rating group are considered by
Moody's to have some speculative characteristics, and while interest payments
and principal security appears adequate for the present, such securities lack
certain protective elements or may be characteristically unreliable over any
great period of time.
Should subsequent events cause the rating of a debt security purchased by the
Income Fund to fall below BBB or Baa, as the case may be, the Adviser will
consider such an event in determining whether the Income Fund should continue to
hold that security. In no event, however, would the Income Fund be required to
liquidate any such portfolio security where the Income Fund would suffer a loss
on the sale of such security.
Foreign Investments. Investments in foreign securities (including Yankee
Bonds, Eurodollar Bonds and Supranational Bonds) may subject a Fund to
investment risks that differ in some respects from those related to investments
in securities of U.S. domestic issuers. Such risks include future adverse
political and economic developments, the possible imposition of withholding
taxes on interest or other investment income, possible seizure, nationalization,
or expropriation of foreign deposits or investments, the possible establishment
of exchange controls or taxation at the source, less stringent disclosure
requirements, less liquid or developed securities markets or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal, interest or dividends on such securities or the purchase or sale
thereof. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks. The Income Fund will acquire securities issued
by foreign branches of U.S. banks, foreign banks, or other foreign issuers only
when the Adviser believes that the risks associated with such instruments are
minimal.
Restricted Securities. Securities in which the Income Fund may invest include
securities issued by corporations without registration under the Securities Act
of 1933, as amended (the "1933 Act"), such as securities issued in reliance on
the so-called "private placement" exemption from registration which is afforded
by Section 4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2)
securities are restricted as to disposition under the Federal securities laws,
and generally are sold to institutional investors such as the Income Fund
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who agree that they are purchasing the securities for investment and not with a
view to public distribution. Any resale must also generally be made in an exempt
transaction. Section 4(2) securities are normally resold, if at all, to other
institutional investors through or with the assistance of the issuer or
investment dealers who facilitate the resale of such Section 4(2) securities,
thus providing some liquidity.
Pursuant to procedures adopted by the Board of Trustees of the Group, the
Adviser may determine Section 4(2) securities to be liquid if such securities
are eligible for resale under Rule 144A under the 1933 Act and are readily
saleable. Rule 144A permits the Income Fund to purchase securities which have
been privately placed and resell such securities to certain qualified
institutional buyers without restriction. For purposes of determining whether a
Rule 144A security is readily saleable, and therefore liquid, the Adviser must
consider, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and the
number of potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and marketplace trades of such
security. However, investing in Rule 144A securities, even if such securities
are initially determined to be liquid, could have the effect of increasing the
level of the Income Fund's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
Securities Lending. In order to generate additional income, each Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks, or
institutional borrowers of securities. A Fund must receive 100% collateral in
the form of cash or U.S. Government securities. This collateral will be valued
daily by the Adviser. Should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest received on such securities. Loans are subject to termination by the
Fund or the borrower at any time. While a Fund does not have the right to vote
securities on loan, each Fund intends to terminate the loan and regain the right
to vote if that is considered important with respect to the investment. In the
event the borrower would default in its obligations, a Fund bears the risk of
delay in recovery of the portfolio securities and the loss of rights in the
collateral. A Fund will enter into loan agreements only with broker-dealers,
banks, or other institutions that the Adviser has determined are creditworthy
under guidelines established by the Group's Board of Trustees.
Writing Covered Call and Put Options. Each Fund may write covered call and
covered put options on securities, or futures contracts regarding securities, in
which such Fund may invest, in an effort to realize additional income. A put
option gives the purchaser the right to sell the underlying security at the
stated exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. A call option gives the
purchaser of the option the right to buy, and a writer has the obligation to
sell, the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the security.
The premium paid to the writer is consideration for undertaking the obligations
under the option contract. Such options will be listed on national securities or
futures exchanges. Each Fund may write covered call options as a means of
seeking to enhance its income through the receipt of premiums in instances in
which the Adviser determines that the underlying securities or futures contracts
are not likely to increase in value above the exercise price. Each Fund also may
seek to earn additional income through the receipt of premiums by writing put
options. By writing a call option, a Fund limits its oppor-
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tunity to profit from any increase in the market value of the underlying
security above the exercise price of the option; by writing a put option, a Fund
assumes the risk that it may be required to purchase the underlying security at
a price in excess of its then current market value.
Each of the Funds, as part of its option transactions, also may write index
put and call options. Through the writing of index options a Fund can achieve
many of the same objectives as through the use of options on individual
securities. Options on securities indices are similar to options on a security
except that, rather than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
When a Fund writes an option, an amount equal to the net premium (the premium
less the commission) received by that Fund is included in the liability section
of the Fund's statement of assets and liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked-to-market to reflect
the current value of the option written. The current value of the traded option
is the last sale price or, in the absence of a sale, the mean between bid and
asked price. If an option expires on the stipulated expiration date or if the
Fund enters into a closing purchase transaction, it will realize a gain (or a
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund may deliver the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received and the Fund will
realize a gain or loss.
Purchasing Options. In addition, each Fund may purchase put and call options
written by third parties covering indices and those types of financial
instruments or securities in which the Fund may invest to attempt to provide
protection against adverse price effects from anticipated changes in prevailing
prices for such instruments. The purchase of a put option is intended to protect
the value of a Fund's holdings in a falling market while the purchase of a call
option is intended to protect the value of a Fund's positions in a rising
market. Put and call options purchased by a Fund will be valued at the last sale
price, or in the absence of such a price, at the mean between bid and asked
price. Such options will be listed on national securities or futures exchanges.
In purchasing a call option, a Fund would be in a position to realize a gain
if, during the option period, the price of the underlying security, index or
futures contract increased by an amount in excess of the premium paid for the
call option. It would realize a loss if the price of the underlying security,
index or futures contract declined or remained the same or did not increase
during the period by more than the amount of the premium. By purchasing a put
option, the Fund would be in a position to realize a gain if, during the option
period, the price of the security, index or futures contract declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the security, index or futures contract increased or remained the same or did
not decrease during that period by more than the amount of the premium. If a put
or call option purchased by the Fund were permitted to expire without being sold
or exercised, its premium would represent a realized loss to the Fund.
Futures Contracts. Each Fund may purchase or sell contracts for the future
delivery of the specific financial instruments or securities in which that Fund
may invest, and indices based upon the types of securities in which that Fund
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may invest (collectively, "Futures Contracts"). Each Fund may use this
investment technique as a substitute for a comparable market position in the
underlying securities or to hedge against anticipated future changes in market
interest rates, which otherwise might adversely affect either the value of such
Fund's securities or the prices of securities which such Fund intends to
purchase at a later date. In addition, the Income Fund may purchase or sell
futures contracts to hedge against changes in market interest rates which may
result in the premature call at par value of certain securities which the Income
Fund has purchased at a premium.
To the extent a Fund is engaging in a futures transaction as a hedging device,
because of the risk of an imperfect correlation between securities in the Fund's
portfolio that are the subject of a hedging transaction and the futures contract
used as a hedging device, it is possible that the hedge will not be fully
effective if, for example, losses on the portfolio securities exceed gains on
the futures contract or losses on the futures contract exceed gains on the
portfolio securities. For futures contracts based on indices, the risk of
imperfect correlation increases as the composition of a Fund's portfolio varies
from the composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the future contract has
been less or greater than that of the securities. Such "over hedging" or "under
hedging" may adversely affect a Fund's net investment results if the market does
not move as anticipated when the hedge is established.
Successful use of futures by a Fund also is subject to the Adviser's ability
to predict correctly movements in the direction of the market or interest rates.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting the value of securities held in its portfolio and
prices increase instead, the Fund will lose part or all of the benefit of the
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
Call options sold by a Fund with respect to futures contracts will be covered
by, among other things, entering into a long position in the same contract at a
price no higher than the strike price of the call option, or by ownership of the
instruments underlying, or instruments the prices of which are expected to move
relatively consistently with the instruments underlying, the futures contract.
Put options sold by a Fund with respect to futures contracts will be covered
when, among other things, cash or liquid securities are placed in a segregated
account to fulfill the obligation undertaken.
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Each Fund may utilize various index futures to protect against changes in the
market value of the securities in its portfolio or which it intends to acquire.
Securities index futures contracts are based on an index of various types of
securities, e.g., stocks or long-term corporate bonds. The index assigns
relative values to the securities included in an index, and fluctuates with
changes in the market value of such securities. The contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash based upon the difference between the value of the index at the close of
the last trading day of the contract and the price at which the index contract
was originally written. The acquisition or sale of an index futures contract
enables a Fund to protect its assets from fluctuations in rates or prices of
certain securities without actually buying or selling such securities.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts. The Income Fund may purchase and sell interest rate futures contracts
and options on interest rate futures contracts as a substitute for a comparable
market position or to hedge against adverse movements in interest rates.
To the extent the Income Fund has invested in interest rate futures contracts
or options on interest rate futures contracts as a substitute for a comparable
market position, the Income Fund will be subject to the investment risks of
having purchased the securities underlying the contract.
The Income Fund may purchase call options on interest rate futures contracts
to hedge against a decline in interest rates and may purchase put options on
interest rate futures contracts to hedge its portfolio securities against the
risk of rising interest rates.
If the Income Fund has hedged against the possibility of an increase in
interest rates adversely affecting the value of securities held in the Income
Fund's portfolio and rates decrease instead, the Income Fund will lose part or
all of the benefit of the increased value of the securities which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Income Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. These sales of securities may, but will not
necessarily, be at increased prices which reflect the decline in interest rates.
The Income Fund may sell call options on interest rate futures contracts to
partially hedge against declining prices of its portfolio securities. If the
futures price at expiration of the option is below the exercise price, the
Income Fund will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Income Fund's
portfolio holdings. The Income Fund may sell put options on interest rate
futures contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contracts. If the futures price at
expiration of the option is higher than the exercise price, the Income Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Income Fund intends to
purchase. If a put or call option sold by the Income Fund is exercised, the
Income Fund will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Income Fund's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of its portfolio securities.
The Income Fund also may sell options on interest rate futures contracts as
part of closing purchase transactions to terminate its options positions. No
assurance can be given that such closing transactions can be effected or that
there will be a correlation between price move-
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ments in the options on interest rate futures and price movements in the Income
Fund's portfolio securities which are the subject of the hedge. In addition, the
Income Fund's purchase of such options will be based upon predictions as to
anticipated interest rate trends, which could prove to be inaccurate.
In general, the value of futures contracts sold by a Fund to offset declines
in its portfolio securities will not exceed the total market value of the
portfolio securities to be hedged, and futures contracts purchased by a Fund
will be covered by a segregated account consisting of cash or liquid securities
in an amount equal to the total market value of such futures contracts, less the
initial margin deposited therefor.
When buying futures contracts and when writing put options, a Fund will be
required to segregate in a separate account cash and/or U.S. Government
securities in an amount sufficient to meet its obligations. When writing call
options, a Fund will be required to own the financial instrument or futures
contract underlying the option or segregate cash and/or U.S. Government
securities in an amount sufficient to meet its obligations under written calls.
When-Issued or Delayed-Delivery Securities. Each Fund may purchase securities
on a when-issued or delayed-delivery basis. These transactions are arrangements
in which a Fund purchases securities with payment and delivery scheduled for a
future time. Each Fund will engage in when-issued and delayed-delivery
transactions only for the purpose of acquiring portfolio securities consistent
with and in furtherance of its investment objectives and policies, not for
investment leverage, although such transactions represent a form of leveraging.
When-issued or delayed-delivery securities are securities purchased for delivery
beyond the normal settlement date at a stated price and yield and thereby
involve a risk that the yield obtained in the transaction will be less than
those available in the market when delivery takes place. A Fund will generally
not pay for such securities or start earning interest or dividends on them until
they are received on the settlement date. When a Fund agrees to purchase such
securities, however, its custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Securities
purchased on a when-issued or delayed-delivery basis are recorded as an asset
and are subject to changes in the value based upon changes in the general level
of interest rates. In when-issued and delayed-delivery transactions, a Fund
relies on the seller to complete the transaction; the seller's failure to do so
may cause that Fund to miss a price or yield considered to be advantageous.
Investment Company Securities. Each Fund may also invest in the securities of
other investment companies in accordance with the limitations of the 1940 Act
and any exemptions therefrom. Each Fund intends to invest in other investment
companies which, in the opinion of the Adviser will assist such Fund in
achieving its investment objectives and in money market mutual funds for
purposes of short-term cash management. A Fund will incur additional expenses
due to the duplication of fees and expenses as a result of investing in mutual
funds. Additional restrictions on the Funds' investments in the securities of
other mutual funds are contained in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of investment restrictions that may be
changed only by a vote of a majority of the outstanding Shares of that Fund (as
defined under "General Information--Miscellaneous" herein). Each Fund will not:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, if,
immediately after such
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purchase, more than 5% of the Fund's total assets would be invested in such
issuer or the Fund would hold more than 10% of the outstanding voting
securities of the issuer, except that 25% or less of the Fund's total assets
may be invested without regard to such limitations. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills, notes, or
other obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
2. Purchase any securities which would cause more than 25% of the Fund's
total assets at the time of purchase to be invested in securities of one or
more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements secured by obligations of the
U.S. Government, its agencies or instrumentalities; (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 their 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.
3. Borrow money or issue senior securities except as and to the extent
permitted by the 1940 Act or any rule, order or interpretation thereunder.
4. Make loans, except that the Fund may purchase or hold debt instruments
and lend portfolio securities in accordance with its investment objective and
policies, make time deposits with financial institutions and enter into
repurchase agreements.
The following additional investment restriction may be changed without the
vote of a majority of the outstanding Shares of a Fund: each Fund may not
purchase or otherwise acquire any security if, as a result, more than 15% of its
net assets would be invested in securities that are illiquid. For purposes of
this investment restriction, illiquid securities include securities which are
not readily marketable and repurchase agreements with maturities in excess of
seven days.
VALUATION OF SHARES
The net asset value of each Fund is determined and its Shares are priced as of
the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. Eastern time) on each Business Day of that Fund. The time
at which the Shares of the Funds are priced is hereinafter referred to as the
"Valuation Time." A "Business Day" of a Fund is a day on which the Exchange is
open for trading and any other day (other than a day on which no Shares of the
Fund are tendered for redemption and no order to purchase any Shares of the Fund
is received) during which there is sufficient trading in portfolio instruments
such that the Fund's net asset value per share might be materially affected. The
Exchange will not be open in observance of the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share for purposes of pricing
purchases and redemptions is calculated by dividing the value of all securities
and other assets belonging to a Fund, less the liabilities charged to that Fund,
by the number of that Fund's outstanding Shares.
The net asset value per share for each Fund will fluctuate as the value of the
investment portfolio of that Fund changes. The Trustees of the Group have set
the initial price of each Fund's Shares at $10 per share.
The portfolio securities for which market quotations are readily available are
valued based upon their current available prices in the principal market in
which such securities normally are traded. Unlisted securities for which
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market quotations are readily available are
valued at such market values. Other securities, including restricted securities
and other securities for which market quotations are not readily available, and
other assets are valued at fair value by the Adviser under procedures
established by, and under the supervision of the Group's Board of Trustees.
Securities may be valued by an independent pricing service approved by the
Group's Board of Trustees. Investments in debt securities with remaining
maturities of 60 days or less may be valued based upon the amortized cost
method.
HOW TO PURCHASE
AND REDEEM SHARES
DISTRIBUTOR
Shares in the Funds are sold on a continuous basis by the Group's distributor,
BISYS (the "Distributor"). The principal office of the Distributor is 3435
Stelzer Road, Columbus, Ohio 43219. If you wish to purchase Shares, telephone
the Group at (800) 766-3960.
PURCHASES OF SHARES
Shares may be purchased through procedures established by the Distributor in
connection with the requirements of qualified accounts maintained by or on
behalf of certain persons ("Customers") by the Adviser, its affiliates or its
correspondent entities (collectively, "Entities").
Shares of the Funds sold to the Entities acting in a fiduciary, advisory,
custodial, agency, or other similar capacity on behalf of Customers will
normally be held of record by the Entities. With respect to Shares of a Fund so
sold, it is the responsibility of the particular Entity to transmit purchase or
redemption orders to the Distributor and to deliver federal funds for purchase
on a timely basis. Beneficial ownership of Shares will be recorded by the
Entities and reflected in the account statements provided by the Entities to
Customers.
Investors may also purchase Shares of the Funds by completing and signing an
Account Registration Form and mailing it, together with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, payable to the applicable Fund, to The KeyPremier Funds, P.O. Box
182707, Columbus, Ohio 43218-2707. Subsequent purchases of Shares of a Fund may
be made at any time by mailing a check (or other negotiable bank draft or money
order) payable to the Group, to the above address.
If an Account Registration Form has been previously received by the Group,
investors may also purchase Shares by wiring funds to the Funds' custodian.
Prior to wiring any such funds and in order to ensure that wire orders are
invested promptly, investors must call the Group at (800) 766-3960 to obtain
instructions regarding the bank account number into which the funds should be
wired and other pertinent information.
Shares of the Funds are purchased at the net asset value per share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor, its
agents or broker-dealers with whom it has an agreement of an order in good form
to purchase Shares plus any applicable sales charge as described below.
Purchases of Shares of a Fund will be effected only on a Business Day (as
defined in "VALUATION OF SHARES") of that Fund.
For an order for the purchase of Shares of a Fund that is placed through a
broker-dealer, the applicable public offering price will be the net asset value
as so determined (plus any applicable sales charge), but only if the broker-
dealer receives the order and transmits it to the Distributor prior to the
Valuation Time for that day. The broker-dealer is responsible for transmitting
such orders by the Valuation Time. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. If the broker-dealer receives the order
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<PAGE> 20
after the Valuation Time for that day, the price will be based on the net asset
value determined as of the Valuation Time for the next Business Day.
MINIMUM INVESTMENT
Except as otherwise discussed below under "Auto Invest Plan," the minimum
investment is $1,000 for the initial purchase of Shares of a Fund by an investor
and $25 for subsequent purchases of Shares of that Fund. The initial minimum
investment amount is reduced to $250 for employees of the Adviser, Keystone or
any of their affiliates.
Depending upon the terms of a particular Customer's account, the Entities or
their affiliates may charge a Customer account fees for automatic investment and
other cash management services provided in connection with an investment in a
Fund. Information concerning these services and any charges will be provided by
the Entities. This Prospectus should be read in conjunction with any such
information received from the Entities or their affiliates.
Each Fund reserves the right to reject any order for the purchase of its
Shares in whole or in part, including purchases made with foreign checks and
third party checks not originally made payable to the order of the investor.
Every Shareholder will receive a confirmation of each new transaction in his
or her account, which will also show the total number of Shares owned by the
Shareholder and the number of Shares being held in safekeeping by the Transfer
Agent for the account of the Shareholder. Reports of purchases and redemptions
of Shares by Entities on behalf of their Customers will be sent by the Entities
to their Customers. Shareholders may rely on these statements in lieu of
certificates. Certificates representing Shares will not be issued.
AUTO INVEST PLAN
The KeyPremier Funds Auto Invest Plan enables Shareholders to make regular
monthly or quarterly purchases of Shares of the Funds through automatic
deduction from their bank accounts, provided that the Shareholder's bank is a
member of the Federal Reserve and the Automated Clearing House (ACH) system.
With Shareholder authorization the Transfer Agent will deduct the amount
specified (subject to the applicable minimums) from the Shareholder's bank
account which will automatically be invested in Shares of the designated Fund at
the public offering price next determined after receipt of payment by the
Transfer Agent. The required minimum initial investment when opening an account
using the Auto Invest Plan is $250; the minimum amount for subsequent
investments is $25. To participate in the Auto Invest Plan, Shareholders should
complete the appropriate section of the Account Registration Form or a
supplemental sign-up form which can be acquired by calling the Group at (800)
766-3960. For a Shareholder to change the Auto Invest instructions, the request
must be made in writing to the Group at: 3435 Stelzer Road, Columbus, Ohio
43219.
The Group may eliminate or change the Auto Invest Plan at any time or from
time to time without notice thereof.
SALES CHARGES
The public offering price of Shares of each Fund equals net asset value plus a
sales charge in accordance with the table below. BISYS receives this sales
charge as Distributor and reallows a portion of it as dealer discounts and
brokerage commissions. However, the Distributor, in its sole discretion may pay
certain dealers all or part of the portion of the sales charge it receives. The
broker or dealer who receives a reallowance in excess of 90% of the sales charge
may be deemed to be an "under-
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<PAGE> 21
writer" for purposes of the Securities Act of 1933.
<TABLE>
<CAPTION>
DEALER
DISCOUNTS AND
SALES CHARGE BROKERAGE
AMOUNT OF AS % OF NET SALES CHARGE AS COMMISSIONS AS
TRANSACTION AT AMOUNT % OF PUBLIC % OF PUBLIC
PUBLIC OFFERING PRICE INVESTED OFFERING PRICE OFFERING PRICE
- --------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Less than $100,000... 4.71% 4.50% 4.05%
$100,000 but less
than $250,000....... 3.63 3.50 3.15
$250,000 but less
than $500,000....... 2.56 2.50 2.25
$500,000 but less
than $1,000,000..... 1.52 1.50 1.35
$1,000,000 or more... 0 0 0
</TABLE>
From time to time dealers who receive dealer discounts and brokerage
commissions from the Distributor may reallow all or a portion of such dealer
discounts and brokerage commissions to other dealers or brokers. The
Distributor, at its expense, will also provide additional compensation to
dealers in connection with sales of Shares of the Funds. Such compensation will
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Funds, and/or other dealer-sponsored special events. In
some instances, this compensation will be made available only to certain dealers
whose representatives have sold a significant amount of such Shares.
Compensation will include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Compensation will also
include the following types of non-cash compensation offered through sales
contests: (1) vacation trips, including the provision of travel arrangements and
lodging at luxury resorts at an exotic location, (2) tickets for entertainment
events (such as concerts, cruises and sporting events) and (3) merchandise (such
as clothing, trophies, clocks and pens). Dealers may not use sales of the Funds'
Shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by any Fund or its Shareholders.
SALES CHARGE WAIVERS
The Distributor will waive sales charges for the purchase of Shares of a Fund
by or on behalf of (1) purchasers for whom Keystone, the Adviser, one of their
affiliates or another financial institution acts in a fiduciary, advisory,
agency, custodial (other than individual retirement accounts), or similar
capacity, (2) officers, trustees, directors, advisory board members, employees
and retired employees (including spouses, children and parents of the foregoing)
of Keystone, the Adviser, the Group, BISYS and any affiliated company thereof,
(3) investors who purchase Shares with the proceeds from a distribution from the
Adviser, Keystone or an affiliate trust or agency account, and (4) brokers,
dealers and agents who have a sales agreement with the Distributor, and their
employees (and their spouses and children under 21). The Distributor may change
or eliminate the foregoing waivers at any time or from time to time without
notice thereof. The Distributor may also periodically waive all or a portion of
the sales charge for all investors with respect to a Fund.
In addition, the Distributor may waive sales charges for the purchase of a
Fund's Shares with the proceeds from the recent redemption of shares of a
non-money market fund that imposes a sales charge. The purchase must be made
within 60 days of the redemption, and the Distributor must be notified in
writing by the investor, or by his financial institution, at the time the
purchase is made. A copy of the investor's account statement showing such
redemption must accompany such notice.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combin-
21
<PAGE> 22
ing concurrent purchases of a Fund and one or more of the other funds of the
Group sold with a sales charge and advised by the Adviser ("KeyPremier Load
Funds"). For example, if a Shareholder concurrently purchases Shares in the
Growth Fund at the total public offering price of $50,000 and Shares in the
Income Fund at the total public offering price of $50,000, the sales charge
would be that applicable to a $100,000 purchase as shown in the table above.
This privilege, however, may be modified or eliminated at any time or from time
to time by the Group without notice thereof.
LETTER OF INTENT
An investor may obtain a reduced sales charge by means of a written Letter of
Intent which expresses the intention of such investor to purchase Shares of a
Fund at a designated total public offering price within a designated 13-month
period. Each purchase of Shares under a Letter of Intent will be made at the net
asset value plus the sales charge applicable at the time of such purchase to a
single transaction of the total dollar amount indicated in the Letter of Intent.
A Letter of Intent may include purchases of Shares made not more than 90 days
prior to the date such investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. This program may be modified or eliminated
at any time or from time to time by the Group without notice. For further
information about letters of intent, interested investors should contact the
Group at (800) 766-3960.
A Letter of Intent is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Letter of
Intent is 5% of such amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the Shares actually
purchased if the full amount indicated is not purchased, and such escrowed
Shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed Shares, whether paid in cash or reinvested in
additional Shares, are not subject to escrow. The escrowed Shares will not be
available for disposal by the investor until all purchases pursuant to the
Letter of Intent have been made or the higher sales charge has been paid. When
the full amount indicated has been purchased, the escrow will be released. An
adjustment will be made to reflect any reduced sales charge applicable to Shares
purchased during the 90-day period prior to the date the Letter of Intent was
entered into at the conclusion of the 13-month period and in the form of
additional Shares credited to the Shareholder's account at the then current
public offering price applicable to a single purchase of the total amount of the
total purchases. Additionally, if the total purchases within the 13-month period
exceed the amount specified, a similar adjustment will be made to reflect
further reduced sales charges applicable to such purchases, if any.
RIGHT OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to purchase
Shares of a Fund at the public offering price applicable to the total of (a) the
total public offering price of the Shares of the KeyPremier Load Fund then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's combined holdings of the Shares of all KeyPremier Load Funds. The
"purchaser's combined holdings" described in the preceding sentence shall
include the combined holdings of the purchaser, the purchaser's spouse and
children under the age of 21 and the purchaser's retirement plan accounts. To
receive the applicable public offering price pursuant to the right of
accumulation, Shareholders must, at the time of purchase, give the Transfer
Agent sufficient information to permit confir-
22
<PAGE> 23
mation of qualification. This right of accumulation, however, may be modified or
eliminated at any time or from time to time by the Group without notice.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged for Shares of The KeyPremier Prime Money
Market Fund or any other KeyPremier Load Fund at respective net asset values if
the amount to be exchanged meets the applicable minimum investment requirements
and the exchange is made in states where it is legally authorized. When shares
of The KeyPremier Prime Money Market Fund are exchanged for Shares of a Fund or
other KeyPremier Load Fund, the applicable sales load will be assessed, unless
such shares to be exchanged were acquired through a previous exchange for shares
on which a sales charge was paid. Under such circumstances, the Shareholder must
notify the Group that a sales charge was originally paid and provide the Group
with sufficient information to permit confirmation of the Shareholder's right
not to pay a sales charge.
An exchange is considered a sale of Shares for federal income tax purposes.
However, a Shareholder may not include any sales charge on Shares of a Fund as a
part of the cost of those Shares for purposes of calculating the gain or loss
realized on an exchange of those Shares within 90 days of their purchase.
The Group may at any time modify or terminate the foregoing exchange
privileges. The Group, however, will give Shareholders 60 days' advance written
notice of any such modification.
A Shareholder wishing to exchange his or her Shares may do so by contacting
the Group at (800) 766-3960 or by providing written instructions to the Group.
Any Shareholder who wishes to make an exchange should obtain and review the
current prospectus of the fund in which he or she wishes to invest before making
the exchange. For a discussion of risks associated with unauthorized telephone
exchanges, see "Redemption by Telephone" below.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by mail or by telephone. However, all or
part of a Customer's Shares may be redeemed in accordance with instructions and
limitations pertaining to his or her account at an Entity. For example, if a
Customer has agreed with an Entity to maintain a minimum balance in his or her
account with the Entity, and the balance in that account falls below that
minimum, the Customer may be obliged to redeem, or the Entity may redeem on
behalf of the Customer, all or part of the Customer's Shares of a Fund to the
extent necessary to maintain the required minimum balance.
Redemption by Mail
A written request for redemption must be received by the Group, at the address
shown on the front page of this Prospectus, in order to honor the request. The
Transfer Agent will require a signature guarantee by an eligible guarantor
institution. The signature guarantee requirement will be waived if the following
conditions apply: (1) the redemption check is payable to the Shareholder(s) of
record, and (2) the redemption check is mailed to the Shareholder(s) at the
address of record or mailed or wired to a commercial bank account previously
designated on the Account Registration Form. There is no charge for having
redemption proceeds mailed to a designated bank account. To change the address
to which a redemption check is to be mailed, a written request therefor must be
received by the Transfer Agent. In connection with such request, the Transfer
Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall
include banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing
23
<PAGE> 24
agencies and savings associations as those terms are defined in the Securities
Exchange Act of 1934. The Transfer Agent reserves the right to reject any
signature guarantee if (1) it has reason to believe that the signature is not
genuine, (2) it has reason to believe that the transaction would otherwise be
improper, or (3) the guarantor institution is a broker or dealer that is neither
a member of a clearing corporation nor maintains net capital of at least
$100,000.
Redemption by Telephone
If a Shareholder has so designated on the Account Registration Form, a
Shareholder may request a redemption of his or her Shares by telephoning the
Group and having the payment of redemption requests sent electronically directly
to a domestic commercial bank account previously designated by the Shareholder
on the Account Registration Form. A shareholder may also have such payment
mailed directly to the Shareholder at the Shareholder's address as recorded by
the Transfer Agent. However, this option may be suspended for a period of 30
days following a telephonic address change. Under most circumstances, such
payments will be transmitted on the next Business Day following receipt of a
valid request for redemption. Such wire redemption requests may be made by the
Shareholder by telephone to the Group. The Group may reduce the amount of a wire
redemption payment by the then-current wire redemption charge of the Funds'
custodian. There is currently no charge for having payment of redemption
requests mailed or sent electronically to a designated bank account. For
telephone redemptions, call the Group at (800) 766-3960.
Neither the Group, the Funds nor their service providers will be liable for
any loss, damages, expense or cost arising out of any telephone redemption
effected in accordance with the Group's telephone redemption procedures, acting
upon instructions reasonably believed to be genuine. The Group will employ
procedures designed to provide reasonable assurance that instructions by
telephone are genuine; if these procedures are not followed, the Group, the
Funds or their service providers may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures include recording all
phone conversations, sending confirmations to Shareholders within 72 hours of
the telephone transaction, verification of account name and account number or
tax identification number, and sending redemption proceeds only to the address
of record or to a previously authorized bank account. If, due to temporary
adverse conditions, Shareholders are unable to effect telephone transactions,
Shareholders may also mail the redemption request to the Group at the address
shown on the front page of this Prospectus.
AUTO WITHDRAWAL PLAN
The Auto Withdrawal Plan enables Shareholders of a Fund, with an account
balance in such Fund of $5,000 or more, to make regular monthly or quarterly
redemptions of Shares. With Shareholder authorization, the Transfer Agent will
automatically redeem Shares at the net asset value on the dates of the
withdrawal and have a check in the amount specified mailed to the Shareholder.
The required minimum withdrawal is $50 monthly. To participate in the Auto
Withdrawal Plan, Shareholders should call (800) 766-3960 for more information.
Purchases of additional Shares, including use of the Auto Invest Plan described
above, concurrent with withdrawals may be disadvantageous to certain
Shareholders because of tax liabilities and sales charges. For a Shareholder to
change the Auto Withdrawal instructions, the request must be made in writing to
the Group.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders
24
<PAGE> 25
for Shares redeemed will be made within seven days after receipt by the
Distributor of the request for redemption. However, to the greatest extent
possible, each Fund will attempt to honor requests from Shareholders for next
day payments upon redemption of Shares if the request for redemption is received
by the Distributor before the Valuation Time on a Business Day or, if the
request for redemption is received after the Valuation Time, to honor requests
for payment on the second Business Day. Each Fund will attempt to so honor
redemption requests unless it would be disadvantageous to a Fund or the
Shareholders of that Fund to sell or liquidate portfolio securities in an amount
sufficient to satisfy requests for payments in that manner.
At various times, the Group may be requested to redeem Shares for which it has
not yet received good payment. In such circumstances, the Group may delay the
forwarding of proceeds for up to 15 days or more until payment has been
collected for the purchase of such Shares. The Group intends to pay cash for all
Shares redeemed, but under abnormal conditions which make payment in cash
unwise, the Group may make payment wholly or partly in portfolio securities at
their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, the Group
reserves the right to redeem, at net asset value, the Shares of a Fund of any
Shareholder if, because of redemptions of Shares by or on behalf of the
Shareholder (but not as a result of a decrease in the market price of such
Shares, the deduction of any sales charge or the establishment of an account
with less than $1,000 using the Auto Invest Plan), the account of such
Shareholder has a value of less than $1,000 ($250 if the Shareholder is an
employee of the Adviser or one of its affiliates). Accordingly, an investor
purchasing Shares of a Fund in only the minimum investment amount may be subject
to such involuntary redemption if he or she thereafter redeems some of his or
her Shares. Before the Group exercises its right to redeem such Shares and to
send the proceeds to the Shareholder, the Shareholder will be given notice that
the value of the Shares in his or her account is less than the minimum amount
and will be allowed at least 60 days to make an additional investment in an
amount which will increase the value of the account to at least $1,000 ($250 if
the Shareholder is an employee of the Adviser or one of its affiliates).
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION" in the Statement of
Additional Information for examples of when the Group may suspend the right of
redemption.
DIVIDENDS AND TAXES
DIVIDENDS
A dividend for the Income Fund is declared monthly and a dividend for the
Growth Fund is declared quarterly, each at the close of business on the day of
declaration consisting of an amount of accumulated undistributed net income of
that Fund as determined necessary or appropriate by the appropriate officers of
the Group. Such dividend is generally paid monthly with respect to the Income
Fund and quarterly with respect to the Growth Fund. Shareholders will
automatically receive all income dividends and capital gains distributions in
additional full and fractional Shares of that Fund at the net asset value as of
the date of payment, unless the Shareholder elects to receive dividends or
distributions in cash. Such election, or any revocation thereof, must be made in
writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio 43219, and
will become effective with respect to dividends and distributions having record
dates after its receipt by the Transfer Agent.
Distributable net realized capital gains, if any, for a Fund are distributed
at least annu-
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<PAGE> 26
ally. Dividends are paid in cash not later than seven Business Days after a
Shareholder's complete redemption of his or her Shares in that Fund.
If a Shareholder elects to receive distributions in cash, and checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
the Shareholder's cash election will be changed automatically and future
dividend and capital gains distributions will be reinvested in that Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in that Fund at
the per share net asset value determined as of the date of cancellation.
FEDERAL TAXES
Each Fund is treated as a separate entity for federal income tax purposes and
intends to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986 (the "Code") for so long as such qualification is in the
best interest of that Fund's Shareholders. Qualification as a regulated
investment company under the Code requires, among other things, that the
regulated investment company distribute to its shareholders at least 90% of its
investment company taxable income. Each Fund contemplates declaring as dividends
all or substantially all of its investment company taxable income (before
deduction of dividends paid).
A non-deductible 4% excise tax is imposed on regulated investment companies
that do not distribute in each calendar year (regardless of having a
non-calendar taxable year) an amount equal to 98% of their ordinary income for
the calendar year plus 98% of their capital gain net income for the one-year
period ending on October 31 of such calendar year. If distributions during a
calendar year were less than the required amount, a Fund would be subject to a
nondeductible 4% excise tax on the deficiency.
It is expected that each Fund will distribute annually to its Shareholders all
or substantially all of that Fund's net ordinary income and net realized capital
gains and that such distributed net ordinary income and distributed net realized
capital gains will be taxable income to Shareholders for federal income tax
purposes, even if paid in additional Shares of the Fund and not in cash. The
dividends received deduction for corporations will apply to the aggregate of
such ordinary income distributions in the same proportion as the aggregate
dividends eligible for the dividends deduction, if any, received by a Fund bear
to its gross income. Since all of the Income Fund's net investment income is
expected to be derived from earned interest and short-term capital gains, it is
anticipated that no part of any distribution from the Income Fund will be
eligible for the dividends received deduction for corporations.
Distribution by a Fund of the excess of net long-term capital gain, if any,
over net short-term capital loss is taxable to Shareholders as long-term capital
gain in the year in which it is received, regardless of how long the Shareholder
has held the Shares. Such distributions are not eligible for the dividends
received deduction.
If the net asset value of a Share is reduced below the Shareholder's cost of
that Share by the distribution of income or gain realized on the sale of
securities, the distribution, from a practical stand point, is a return of
invested principal, although taxable as described above.
Prior to purchasing Shares, the impact of dividends or capital gains
distributions which are expected to be declared or have been declared, but have
not been paid, should be carefully considered. Any such dividends or capital
gains distributions paid shortly after a purchase of Shares prior to the record
date will have the effect of reducing the per share net asset value of the
Shares by the amount of the dividends or
26
<PAGE> 27
distributions. All or a portion of such dividends or distributions, although in
effect a return of capital, is subject to tax. Additional information regarding
federal taxes is contained in the Statement of Additional Information under the
heading "ADDITIONAL INFORMATION--Additional General Tax Information." However,
the information contained in this Prospectus and the additional material in the
Statement of Additional Information are only brief summaries of some of the
important tax considerations generally affecting the Funds and their
Shareholders. Accordingly, potential investors are urged to consult their own
tax advisers concerning the application of federal, state and local taxes as
such laws and regulations affect their own tax situation.
Shareholders will be advised at least annually as to the federal income tax
consequences of distributions made to them during the year.
MANAGEMENT OF THE GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with its Board of
Trustees. Unless so required by the Group's Declaration of Trust or By-Laws or
by Ohio law, at any given time all of the Trustees may not have been elected by
the shareholders of the Group. The Group will be managed by the Trustees in
accordance with the laws of Ohio governing business trusts. The Trustees, in
turn, elect the officers of the Group to supervise its day-to-day operations.
The Trustees of the Group receive fees and are reimbursed for their expenses
in connection with each meeting of the Board of Trustees they attend. However,
no officer or employee of BISYS Fund Services Inc., the sole general partner of
BISYS, or BISYS receives any compensation from the Group for acting as a Trustee
of the Group. The officers of the Group receive no compensation directly from
the Group for performing the duties of their offices. BISYS receives fees from
each Fund for acting as Administrator, may receive fees under the Administrative
Services Plan discussed below and may retain all or a portion of any sales load
imposed upon purchases of Shares. BISYS Fund Services, Inc. receives fees from
each Fund for acting as Transfer Agent and for providing certain fund accounting
services.
INVESTMENT ADVISER
Martindale Andres & Company, Inc., Four Falls Corporate Center, Suite 200,
West Conshohocken, Pennsylvania 19428, is the investment adviser of each Fund
and has served as such since the Funds' inception. The Adviser is a wholly owned
subsidiary of Keystone Financial, Inc., 1 Keystone Plaza, Harrisburg,
Pennsylvania 17101 ("Keystone"). The Adviser was organized in 1989 and was
acquired by Keystone in December 1995. The Adviser has not previously served as
the investment adviser to a registered open-end management investment company.
However, the Adviser has managed since its founding the investment portfolio of
high net worth individuals, endowments, pension and common trust funds. The
Adviser currently has over $1.6 billion under management.
Subject to the general supervision of the Board of Trustees of the Group and
in accordance with the investment objectives and restrictions of the Funds, the
Adviser manages each Fund, makes decisions with respect to and places orders for
all purchases and sales of its portfolio securities, and maintains each Fund's
records relating to such purchases and sales.
William C. Martindale, Jr. is primarily responsible for the day-to-day
management of the Growth Fund's portfolio and, with over 25 years of equity
investment experience, provides a rigorous approach to large capitalization
equity analysis and stock selection. Mr. Martin-
27
<PAGE> 28
dale co-founded the Adviser in 1989 and serves as its Chief Investment Officer.
Prior to 1989, Mr. Martindale served in various investment-related capacities
with Dean Witter Reynolds.
Colleen M. Marsh is primarily responsible for the day-to-day management of the
Income Fund's portfolio. Ms. Marsh is a senior portfolio manager in the fixed
income division of the Adviser. She has over 12 years of experience managing
fixed income portfolios and funds for clients. She spent the first 10 years of
her investment management career with Keystone and has managed the Intermediate
Term Income Fund (the predecessor CIF to the Income Fund) for Keystone over this
time period. She applies an active management approach emphasizing duration
management, yield curve analysis and the identification of relative value
opportunities among the various sectors of the bond market. Ms. Marsh is
currently enrolled as a level II candidate for the Chartered Financial Analysts
designation.
For the services provided and expenses assumed pursuant to its Investment
Advisory Agreement with the Group, the Adviser receives a fee from the Growth
Fund, computed daily and paid monthly, at the annual rate of seventy-five
one-hundredths of one percent (.75%) of such Fund's average daily net assets.
With respect to the Income Fund, the Adviser receives a fee from such Fund,
computed daily and paid monthly, at the annual rate of sixty one-hundredths of
one percent (.60%) of such Fund's average daily net assets.
The Adviser may periodically voluntarily reduce all or a portion of its
advisory fee with respect to a Fund to increase the net income of that Fund
available for distribution as dividends. The Adviser may not seek reimbursement
of such voluntarily reduced fees after the end of the fiscal year in which the
fees were reduced. The reduction of such fee will cause the yield and total
return of that Fund to be higher than they would otherwise be in the absence of
such a reduction.
ADMINISTRATOR AND DISTRIBUTOR
BISYS is the administrator for each Fund and also acts as the Funds' principal
underwriter and distributor (the "Administrator" or the "Distributor," as the
context indicates). BISYS and its affiliated companies, including BISYS Fund
Services, Inc., are wholly owned by The BISYS Group, Inc., a publicly-held
company which is a provider of information processing, loan servicing and 401(k)
administration and recordkeeping services to and through banking and other
financial organizations.
The Administrator generally assists in all aspects of a Fund's administration
and operation. For expenses assumed and services provided as administrator
pursuant to its management and administration agreement with the Group, the
Administrator receives a fee from each Fund, computed daily and paid
periodically, calculated at an annual rate of eleven and one-half one-hundredths
of one percent (.115%) of that Fund's average daily net assets. The
Administrator may periodically voluntarily reduce all or a portion of its
administration fee with respect to a Fund to increase the net income of that
Fund available for distribution as dividends. The Administrator may not seek
reimbursement of such reduced fees after the end of the fiscal year in which the
fees were reduced. The voluntary reduction of such fee will cause the yield and
total return of that Fund to be higher than they would otherwise be in the
absence of such a fee reduction.
The Distributor acts as agent for the Funds in the distribution of their
Shares and, in such capacity, solicits orders for the sale of Shares,
advertises, and pays the costs of advertising, office space and its personnel
involved in such activities. The Distributor receives no compensation under its
Distribution Agreement with the Group, but may retain all or a portion of any
sales charge imposed upon the purchase of Shares. See "HOW TO PURCHASE AND
REDEEM SHARES--Sales Charges."
28
<PAGE> 29
EXPENSES
The Adviser and the Administrator each bear all expenses in connection with
the performance of their services as investment adviser and administrator,
respectively, other than the cost of securities (including brokerage
commissions, if any) purchased for the Funds. Each Fund will bear the following
expenses relating to its operations: organizational expenses, taxes, interest,
any brokerage fees and commissions, fees and expenses of the Trustees of the
Group, Commission fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to the
Fund's current shareholders, outside auditing and legal expenses, advisory fees,
fees and out-of-pocket expenses of the custodian, fund accountant and Transfer
Agent, costs for independent pricing services, certain insurance premiums, costs
of maintenance of the Group's existence, costs of shareholders' reports and
meetings, expenses incurred under the Administrative Services Plan described
below and any extraordinary expenses incurred in the Fund's operation.
ADMINISTRATIVE SERVICES PLAN
The Group has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which each Fund is authorized to pay compensation to banks and other
financial institutions (each a "Service Organization"), which may include the
Adviser, Entities, and BISYS, which agree to provide certain ministerial, record
keeping and/or administrative support services for their customers or account
holders (collectively, "customers") who are the beneficial or record owner of
Shares of that Fund. In consideration for such services, a Service Organization
receives a fee from each Fund, computed daily and paid monthly, at an annual
rate of up to .25% of the average daily net asset value of Shares of that Fund
owned beneficially or of record by such Service Organization's customers for
whom the Service Organization provides such services.
The servicing agreements adopted under the Services Plan (the "Servicing
Agreements") require the Service Organizations receiving such compensation to
perform certain ministerial, record keeping and/or administrative support
services with respect to the beneficial or record owners of Shares of the Funds,
such as processing dividend and distribution payments from the Funds on behalf
of customers, providing periodic statements to customers showing their positions
in the Shares of the Funds, providing sub-accounting with respect to Shares
beneficially owned by such customers and providing customers with a service that
invests the assets of their accounts in Shares of a Fund pursuant to specific or
pre-authorized instructions. As of the date hereof, no such servicing agreements
have been entered into by the Group with respect to either Fund.
BANKING LAWS
The Adviser believes that it possesses the legal authority to perform the
investment advisory services for each Fund contemplated by its investment
advisory agreement with the Group, as described in this Prospectus, without
violation of applicable banking laws and regulations, and has so represented in
its investment advisory agreement with the Group. Future changes in Federal or
state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations could change the manner in which the Adviser could
continue to perform such services for the Funds. See "MANAGEMENT OF THE
GROUP--Glass-Steagall Act" in the Statement of Additional Information for
further discussion of applicable law and regulations.
29
<PAGE> 30
GENERAL INFORMATION
DESCRIPTION OF THE GROUP AND ITS SHARES
The Group was organized as an Ohio business trust on April 25, 1988. The Group
consists of sixteen funds, each having its own class of shares. Each share
represents an equal proportionate interest in a fund with other shares of the
same fund, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to the fund as are declared at the discretion of
the Trustees (see "Miscellaneous" below). The other funds of the Group are The
KeyPremier Prime Money Market Fund, The KeyPremier Pennsylvania Municipal Bond
Fund, 1st Source Monogram U.S. Treasury Obligations Money Market Fund, 1st
Source Monogram Diversified Equity Fund, 1st Source Monogram Income Equity Fund,
1st Source Monogram Special Equity Fund, 1st Source Monogram Income Fund, 1st
Source Monogram Intermediate Tax-Free Bond Fund, Riverside Capital Money Market
Fund, Riverside Capital Value Fund, Riverside Capital Fixed Income Fund,
Riverside Capital Growth Fund, Riverside Capital Tennessee Municipal Obligations
Fund and Riverside Capital Low Duration Government Securities Fund.
Shareholders are entitled to one vote for each dollar of value invested and a
proportionate fractional vote for any fraction of a dollar invested, and will
vote in the aggregate and not by fund except as otherwise expressly required by
law. For example, Shareholders of a Fund will vote in the aggregate with other
shareholders of the Group with respect to the election of Trustees. However,
Shareholders of that Fund will vote as a fund, and not in the aggregate with
other shareholders of the Group, for purposes of approval or amendment of the
Fund's investment advisory agreement.
Overall responsibility for the management of each Fund is vested in the Board
of Trustees of the Group. See "Management of the Group-- Trustees of the Group."
Individual Trustees are elected by the shareholders of the Group, although
Trustees may under certain circumstances, fill vacancies, including vacancies
created by expanding the size of the Board. Trustees may be removed by the Board
of Trustees or shareholders in accordance with the provisions of the Declaration
of Trust and By-Laws of the Group and Ohio law. See "Additional
Information--Miscellaneous" in the Statement of Additional Information for
further information.
An annual or special meeting of shareholders to conduct necessary business is
not required by the Declaration of Trust, the 1940 Act or other authority
except, under certain circumstances, to elect Trustees, amend the Declaration of
Trust, the investment advisory agreement or a Fund's fundamental policies and to
satisfy certain other requirements. To the extent that such a meeting is not
required, the Group does not intend to have an annual or special meeting of
shareholders.
The Group has represented to the Commission that the Trustees will call a
special meeting of shareholders for purposes of considering the removal of one
or more Trustees upon written request therefor from shareholders holding not
less than 10% of the outstanding votes of the Group. At such a meeting, a quorum
of shareholders (constituting a majority of votes attributable to all
outstanding shares of the Group), by majority vote, has the power to remove one
or more Trustees.
Immediately prior to the public offering of the Funds' Shares, BISYS Fund
Services Ohio, Inc. was the sole shareholder of each Fund. It is expected that
immediately after the public offering of the Funds' Shares, BISYS Fund Services
Ohio, Inc.'s holding of Shares of each Fund will be reduced below 5%.
CUSTODIAN
The Bank of New York serves as the custodian for each Fund.
30
<PAGE> 31
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as
the Funds' transfer agent pursuant to a Transfer Agency Agreement with the Group
and receives a fee for such services. BISYS Fund Services, Inc. also provides
certain accounting services for the Funds pursuant to a Fund Accounting
Agreement and receives a fee from each Fund for such services equal to the
greater of (a) a fee computed at an annual rate of 0.03% of that Fund's average
daily net assets or (b) the annual fee of $30,000. See "Management of the
Group--Transfer Agency and Fund Accounting Services" in the Statement of
Additional Information for further information.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual reports
audited by independent public accountants.
As used in this Prospectus and in the Statement of Additional Information,
"assets belonging to the fund" means the consideration received by the fund upon
the issuance or sale of shares in that fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or amounts derived from any reinvestment of such proceeds, and any general
assets of the Group not readily identified as belonging to a particular fund
that are allocated to such fund by the Group's Board of Trustees. The Board of
Trustees may allocate such general assets in any manner it deems fair and
equitable. Determinations by the Board of Trustees of the Group as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to the Funds are
conclusive.
As used in this Prospectus and in the Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of a Fund means the affirmative
vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more
of the votes of Shareholders of that Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
such Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of that Fund.
Inquiries regarding the Funds may be directed in writing to the Group at 3435
Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 766-3960.
31
<PAGE> 32
INVESTMENT ADVISER
Martindale Andres & Company, Inc.
Four Falls Corporate Center, Suite 200
West Conshohocken, Pennsylvania 19428
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219
LEGAL COUNSEL
Baker & Hostetler
65 East State Street
Columbus, Ohio 43215
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 2
FEE TABLE............................. 3
PERFORMANCE INFORMATION............... 4
INVESTMENT OBJECTIVES AND POLICIES.... 5
INVESTMENT RESTRICTIONS............... 17
VALUATION OF SHARES................... 18
HOW TO PURCHASE AND REDEEM SHARES..... 19
DIVIDENDS AND TAXES................... 25
MANAGEMENT OF THE GROUP............... 27
GENERAL INFORMATION................... 30
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTOR, BISYS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
THE FUNDS OR BY BISYS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
LOGO
THE
KEYPREMIER
ESTABLISHED
GROWTH FUND
THE
KEYPREMIER
INTERMEDIATE TERM
INCOME FUND
MARTINDALE,
ANDRES & COMPANY, INC.
INVESTMENT ADVISER
Prospectus
dated October , 1996
<PAGE> 33
Rule 497(a)
File No. 811-5545
33-21489
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor any
offers to buy be accepted prior to the time the registration statement becomes
effective. This Statement of Additional Information does not constitute a
prospectus.
SUBJECT TO COMPLETION: September 5, 1996
The KeyPremier Established Growth Fund
The KeyPremier Intermediate Term Income Fund
Two Investment Portfolios of
THE SESSIONS GROUP
Statement of Additional Information
October __, 1996
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectus (the "Prospectus") of The KeyPremier
Established Growth Fund (the "Growth Fund") and The KeyPremier Intermediate Term
Income Fund (the "Income Fund"), each dated as of the date hereof. The Growth
Fund and the Income Fund are hereafter collectively referred to as the "Funds"
and individually as a "Fund." The Funds are two of sixteen funds of The Sessions
Group, an Ohio business trust (the "Group"). This Statement of Additional
Information is incorporated in its entirety into the Prospectus. Copies of the
Prospectus may be obtained by writing the Group at 3435 Stelzer Road, Columbus,
Ohio 43219, or by telephoning toll free (800) 766-3960.
<PAGE> 34
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE SESSIONS GROUP............................................................................................ B-1
INVESTMENT OBJECTIVES AND POLICIES............................................................................ B-1
Additional Information on Portfolio Instruments...................................................... B-1
Investment Restrictions.............................................................................. B-14
Portfolio Turnover................................................................................... B-16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................ B-16
MANAGEMENT OF THE GROUP....................................................................................... B-17
Trustees and Officers................................................................................ B-17
Investment Adviser................................................................................... B-19
Portfolio Transactions............................................................................... B-21
Glass-Steagall Act................................................................................... B-23
Administrator........................................................................................ B-24
Expenses ............................................................................................ B-25
Distributor.......................................................................................... B-26
Administrative Services Plan......................................................................... B-26
Custodian............................................................................................ B-27
Transfer Agency and Fund Accounting Services......................................................... B-27
Auditors ............................................................................................ B-29
Legal Counsel........................................................................................ B-29
ADDITIONAL INFORMATION........................................................................................ B-29
Description of Shares................................................................................ B-29
Vote of a Majority of the Outstanding Shares......................................................... B-30
Additional General Tax Information................................................................... B-30
30-Day Yield of the Funds............................................................................ B-34
Calculation of Total Return.......................................................................... B-35
Distribution Rates................................................................................... B-35
Performance Comparisons.............................................................................. B-35
Miscellaneous........................................................................................ B-36
APPENDIX ..................................................................................................... A-1
</TABLE>
- i -
<PAGE> 35
STATEMENT OF ADDITIONAL INFORMATION
THE SESSIONS GROUP
The Sessions Group (the "Group") is an open-end management investment
company which currently offers sixteen separate investment portfolios. This
Statement of Additional Information deals with two of those portfolios, the
Growth Fund and the Income Fund, each of which is considered to be a diversified
portfolio.
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus. Capitalized terms
not defined herein are defined in the Prospectus. No investment in Shares of
either Fund should be made without first reading the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
- -----------------------------------------------
The following policies supplement the investment objectives and
policies of the Funds as set forth in the respective Prospectus.
BANK OBLIGATIONS. Each Fund may invest in bank obligations such as
bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by the Funds will be those guaranteed by
domestic and foreign banks having, at the time of investment, capital, surplus,
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and demand and time deposits will be those of domestic and foreign banks and
savings and loan associations, if (a) at the time of investment the depository
institution has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of
<PAGE> 36
commercial paper normally have maturities of less than nine months and fixed
rates of return.
The Funds will purchase commercial paper consisting of issues rated at
the time of purchase by one or more appropriate nationally recognized
statistical rating organizations ("NRSRO") (e.g., Standard & Poor's Corporation
and Moody's Investors Service, Inc.) in one of the two highest rating categories
for short-term debt obligations. Each Fund may also invest in commercial paper
that is not rated but that is determined by the Adviser to be of comparable
quality to instruments that are so rated by an NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of the NRSROs, see the Appendix.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes in which the Income Fund may invest are unsecured demand notes that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between the Income Fund and the issuer,
they are not normally traded. Although there is no secondary market in the
notes, the Income Fund may demand payment of principal and accrued interest at
any time within 30 days. While such notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial and other business concerns), must
satisfy, for purchase by the Income Fund, the same criteria as set forth above
for commercial paper. The Adviser will consider the earning power, cash flow,
and other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the longer of the period of time
remaining until the next interest rate adjustment or the period of time
remaining until the principal amount can be recovered from the issuer through
demand.
FOREIGN INVESTMENT. Investments in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including ADRs,
may subject a Fund to investment risks that differ in some respects from those
related to investment in obligations of U.S. domestic issuers or in U.S.
securities markets. Such risks include future adverse political and economic
developments, possible seizure, nationalization, or expropriation of foreign
investments, less stringent disclosure requirements, the possible establishment
of exchange controls or taxation at the source, or the adoption of other foreign
governmental restrictions. The Funds will acquire such securities only when the
Adviser believes the risks associated with such investments are minimal.
B-2
<PAGE> 37
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others 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 agencies or
instrumentalities if it is not obligated to do so by law.
Each Fund may also invest in the following types of U.S. Treasury
securities: direct obligations issued by the U.S. Treasury including bills,
notes and bonds which differ from each other only in interest rates, maturities
and times of issuance; U.S. Treasury securities that have been stripped of their
unmatured interest coupons (which typically provide for interest payments
semi-annually); interest coupons that have been stripped from such U.S. Treasury
securities; receipts and certificates for such stripped debt obligations and
stripped coupons (collectively, "Stripped Treasury Securities"); and in
repurchase agreements collateralized by such securities. Stripped Treasury
Securities will include (1) coupons that have been stripped from U.S. Treasury
bonds, which may be held through the Federal Reserve Bank's book-entry system
called "Separate Trading of Registered Interest and Principal of Securities"
("STRIPS") or through a program entitled "Coupon Under Book-Entry Safekeeping"
("CUBES").
Treasury bills have maturities of one year or less; Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
greater than ten years. Stripped Treasury Securities are sold at a deep discount
because the buyer of those securities receives only the right to receive a
future fixed payment (representing principal or interest) on the security and
does not receive any rights to periodic interest payments on the security.
VARIABLE AND FLOATING RATE SECURITIES. Each Fund may acquire variable
and floating rate securities, subject to such Fund's investment objectives,
policies and restrictions. A variable rate security is one whose terms provide
for the adjustment of its interest rate on set dates and which, upon such
adjustment, can reasonably be expected to have a market value that approximates
its par value. A floating rate security is one whose terms provide for the
adjustment of its interest rate whenever a specified interest rate changes and
which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such securities are frequently not rated by credit
rating agencies; however, unrated variable and floating rate securities
purchased by
B-3
<PAGE> 38
a Fund will be determined by the Adviser to be of comparable quality at the time
of purchase to rated instruments eligible for purchase under that Fund's
investment policies. In making such determinations, the Adviser will consider
the earning power, cash flow and other liquidity ratios of the issuers of such
securities (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
variable or floating rate security purchased by a Fund, the Fund may resell the
security at any time to a third party. The absence of an active secondary
market, however, could make it difficult for the Fund to dispose of a variable
or floating rate security in the event the issuer of the security defaulted on
its payment obligations and the Fund could, as a result or for other reasons,
suffer a loss to the extent of the default. To the extent that there exists no
readily available market for such security and the Fund is not entitled to
receive the principal amount of a security within seven days, such a security
will be treated as an illiquid security for purposes of calculation of that
Fund's limitation on investments in illiquid securities, as set forth in its
investment restrictions. Variable or floating rate securities may be secured by
bank letters of credit.
RESTRICTED SECURITIES. Securities in which the Income Fund may invest
include securities issued by corporations without registration under the
Securities Act of 1933, as amended (the "1933 Act"), such as securities issued
in reliance on the so-called "private placement" exemption from registration
which is afforded by Section 4(2) of the 1933 Act ("Section 4(2) securities").
Section 4(2) securities are restricted as to disposition under the Federal
securities laws, and generally are sold to institutional investors such as the
Income Fund who agree that they are purchasing the securities for investment and
not with a view to public distribution. Any resale must also generally be made
in an exempt transaction. Section 4(2) securities are normally resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in such Section 4(2) securities, thus
providing liquidity. Any such restricted securities will be considered to be
illiquid for purposes of the Income Fund's limitations on investments in
illiquid securities unless, pursuant to procedures adopted by the Board of
Trustees of the Group, the Adviser has determined such securities to be liquid
because such securities are eligible for resale under Rule 144A under the 1933
Act and are readily saleable. The Income Fund will limit its investment in
Section 4(2) securities to not more than 10% of its net assets.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Income Fund may,
consistent with its investment objective and policies, invest in
mortgage-related securities issued or guaranteed by the U.S.
B-4
<PAGE> 39
Government or its agencies or instrumentalities or by non-governmental entities.
Mortgage-backed securities, for purposes of the Prospectus and this
Statement of Additional Information, represent pools of mortgage loans assembled
for sale to investors by various governmental agencies such as the Government
National Mortgage Association and government-related organizations such as the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation, as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If the Income Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment, thereby shortening the
average life of the security and shortening the period of time over which income
at the higher rate is received. Conversely, when interest rates are rising, the
rate of prepayment tends to decrease, thereby lengthening the average life of
the security and lengthening the period of time over which income at the lower
rate is received. For these and other reasons, a mortgage-related security's
average maturity may be shortened or lengthened as a result of interest rate
fluctuations and, therefore, it is not possible to predict accurately the
security's return to the Income Fund. In addition, regular payments received in
respect of mortgage-related securities include both interest and principal. No
assurance can be given as to the return the Income Fund will receive when these
amounts are reinvested.
The Income Fund may invest in mortgage-backed securities which are
collateralized mortgage obligations ("CMOs") structured on pools of mortgage
pass-through certificates or mortgage loans. Mortgage-backed securities will be
purchased only if rated in the four highest bond rating categories assigned by
one or more appropriate NRSROs, or, if unrated, which the Adviser deems to be of
comparable quality to securities so rated.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-related securities issued by
the Government National
B-5
<PAGE> 40
Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates
(also known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. The FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When the FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
Mortgage-backed and asset-based securities have certain characteristics
which are different from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Income Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Income Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
The Income Fund may invest a portion of its assets in derivative mortgage-backed
securities such as stripped mortgage-backed securities which are highly
sensitive to changes in prepayment and interest rates. The Adviser will seek to
manage
B-6
<PAGE> 41
these risks (and potential benefits) by investing in a variety of such
securities and through hedging techniques.
Mortgage-backed securities and asset-backed securities, like all fixed
income securities, generally decrease in value as a result of increases in
interest rates. In addition, although generally the value of fixed-income
securities increases during periods of falling interest rates and, as stated
above, decreases during periods of rising interest rates, as a result of
prepayments and other factors, this is not always the case with respect to
mortgage-backed securities and asset-backed securities.
Although the extent of prepayments on a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of declining interest rates.
Accordingly, amounts available for reinvestment by the Income Fund are likely to
be greater during a period of declining interest rates and, as a result, likely
to be reinvested at lower interest rates than during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors,
such as changes in credit use and payment patterns resulting from social, legal
and economic factors, will predominate. Mortgage-backed securities and
asset-backed securities generally decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
There are certain risks associated specifically with CMOs. CMOs issued
by private entities are not U.S. government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, as stated above, the Income Fund will
invest only in CMOs which are rated in one of the four highest rating categories
by an NRSRO or, if unrated, are determined to be of comparable quality. Also, a
number of different factors, including the extent of prepayment of principal of
the underlying obligations, affect the availability of cash for principal
payments by the CMO issuer on any payment date and, accordingly, affect the
timing of principal payments on each CMO class.
Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured, and the
B-7
<PAGE> 42
debtors are entitled to the protection of a number of state and federal consumer
credit laws, some of which may reduce the ability to obtain full payment. In
case of automobile receivables, due to various legal and economic factors,
proceeds from repossessed collateral may not always be sufficient to support
payments on these securities.
The cash flows and yields on IOs and POs are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
obliations. For example, a rapid or slow rate of principal payments may have a
material adverse effect on the yield of IOs or POs, respectively. If the
underlying obligations experience greater than anticipated prepayments of
principal, an investor may fail to recoup fully its initial investment in an IO.
Furthermore, if the underlying obligations experience slower than anticipated
prepayments of principal, the yield of a PO will be affected more severely than
would be the case with a traditional mortgage-backed security. IOs and POs have
exhibited large price changes in response to changes in interest rates and are
considered to be volatile in nature.
WHEN-ISSUED SECURITIES. As discussed in the Prospectus, each Fund may
purchase securities on a "when-issued" basis (I.E., for delivery beyond the
normal settlement date at a stated price and yield). When a Fund agrees to
purchase securities on a "when-issued" basis, the Fund's custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, a Fund's custodian will set aside portfolio
securities to satisfy the purchase commitment, and in such a case, the Fund may
be required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of
that Fund's commitment. It may be expected that a Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. In addition, because a
Fund will set aside cash or liquid portfolio securities to satisfy its purchase
commitments in the manner described above, such Fund's liquidity and the ability
of the Adviser to manage it might be affected in the event its commitments to
purchase "when-issued" securities ever exceeded 25% of its total assets. Under
normal market conditions, however, each Fund's commitment to purchase
"when-issued" or "delayed-delivery" securities will not exceed 25% of its total
assets.
When a Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
that Fund's incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. Each Fund will engage in "when-issued" delivery
transactions only for the purpose of acquiring portfolio securities consistent
with such
B-8
<PAGE> 43
Fund's investment objectives and policies and not for investment leverage.
REPURCHASE AGREEMENTS. Securities held by each Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities from banks and registered broker-dealers which the Adviser
deems creditworthy under guidelines approved by the Group's Board of Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price would generally equal the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
continually the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). This requirement will be
continually monitored by the Adviser. If the seller were to default on its
repurchase obligation or become insolvent, the Fund would suffer a loss to the
extent that the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price under the agreement, or to the extent that the
disposition of such securities by such Fund were delayed pending court action.
Additionally, there is no controlling legal precedent confirming that a Fund
would be entitled, as against a claim by such seller or its receiver or trustee
in bankruptcy, to retain the underlying securities. Securities subject to
repurchase agreements will be held by the Fund's custodian or another qualified
custodian or in the Federal Reserve/Treasury book-entry system.
REVERSE REPURCHASE AGREEMENTS. As discussed in the Prospectus, each
Fund may borrow funds by entering into reverse repurchase agreements in
accordance with its investment restrictions. Pursuant to such agreements, a Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase the securities at a mutually agreed-upon
date and price. At the time a Fund enters into a reverse repurchase agreement,
it will place in a segregated custodial account assets such as U.S. Government
securities or other liquid, high grade debt securities consistent with that
Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest), and will subsequently continually monitor the
account to ensure that such equivalent value is maintained at all times. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the price at which that Fund is obligated to
repurchase the securities. Reverse repurchase agreements are considered to be
borrowings by a Fund under the 1940 Act and therefore a form of leveraging.
B-9
<PAGE> 44
LOWER RATED BONDS. The Income Fund is permitted to invest in securities
rated Ba and B by Moody's or BB and B by another appropriate NRSRO. Such bonds,
though higher yielding, are characterized by risk. See the Appendix hereto for a
general description of NRSRO ratings of debt obligations. Although ratings may
be useful in evaluating the safety of interest and principal payments, they do
not evaluate the market value risk of these bonds. The Income Fund will rely on
the Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer.
Investors should be aware that the market values of many of these bonds
tend to be more sensitive to economic conditions than are higher rated
securities. These bonds generally are considered by S&P and Moody's to be, on
balance, predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation and generally
will involve more credit risk than securities in the higher rating categories.
Because there is no established retail secondary market for many of
these securities, the Income Fund anticipates that such securities could be sold
only to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these bonds does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Income Fund's ability to dispose of particular issues when necessary to meet its
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Income Fund to obtain accurate market quotations for purposes of valuing the
Income Fund's portfolio and calculating its net asset value. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of these securities. In such cases, judgment
may play a greater role in valuation because less reliable objective data may be
available.
These bonds may be particularly susceptible to economic downturns. It
is likely that any economic recession could severely disrupt the market for such
securities and may have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default of such securities.
The Income Fund may acquire these bonds during an initial offering.
Such securities may involve special risks because they
B-10
<PAGE> 45
are new issues. The Income Fund has no arrangement with any persons concerning
the acquisition of such securities, and the Adviser will review carefully the
credit and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon securities in which the Income Fund may invest. Zero
coupon bonds carry an additional risk in that, unlike bonds which pay interest
through the period to maturity, the Income Fund will realize no cash until the
cash payment date unless a portion of such securities are sold and, if the
issuer defaults, the Income Fund may obtain no return at all on its investment.
HEDGING TRANSACTIONS. Hedging transactions, including the use of
options and futures, in which the Funds are authorized to engage as described in
the Prospectus, have risks associated with them including possible default by
the other party to the transaction, illiquidity and, to the extent the Adviser's
view as to certain market movements is incorrect, the risk that the use of such
hedging transactions could result in losses greater than if they had not been
used.
Use of put and call options may result in losses to a Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation a Fund can
realize on its investments or cause a Fund to hold a security it might otherwise
sell. The use of options and futures transactions entails certain other risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund create the possibility that losses on the hedging instrument may be greater
than gains in the value of such Fund's position. In addition, futures and
options markets may not be liquid in all circumstances. As a result, in certain
markets, the Funds might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of hedging transactions would reduce net asset
value, and possible income, and such losses can be greater than if the hedging
transactions had not been utilized.
B-11
<PAGE> 46
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many hedging
transactions involving options require segregation of a Fund's assets in special
accounts, as described further below.
With certain exceptions, exchange-listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options are cash settled for the net
amount, if any, by which the option is "in-the-money" (i.e., where the value of
the underlying instrument exceeds, in the case of a call option, or is less
than, in the case of a put option, the exercise price of the option) at the time
the option is exercised. Frequently, rather than taking or making delivery of
the underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option. A Fund's ability to close out
its position as a purchaser or seller of a put or call option is dependent in
part, upon the liquidity of the option market. In addition, the hours of trading
for listed options may not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the option markets close
before the markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Exchange-listed options generally have standardized terms and
performance mechanics unlike over-the-counter traded options. The Funds
currently expect to purchase and sell only exchange traded options.
Exchange-traded options generally are guaranteed by the clearing agency which is
the issuer or counterparty to such options. This guarantee usually is supported
by a daily payment system (i.e., variation margin requirements) operated by the
clearing agency in order to reduce overall credit risk. As a result, unless the
clearing agency defaults, there is relatively little counterparty credit risk
associated with options purchased on an exchange.
All options written by the Funds must be "covered" (i.e., a Fund must
own the securities or futures contract subject to a call option or must meet the
asset segregation requirements) as long as the call is outstanding. Even though
a Fund will receive the option premium to help protect it against loss, a call
option written by a Fund exposes such Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require such Fund to hold a security
or instrument which it might
B-12
<PAGE> 47
otherwise have sold. With respect to put options written by the Funds, each Fund
will place high quality liquid debt securities in a segregated account to cover
its obligations under such put option and will monitor the value of the assets
in such account and its obligations under the put option daily.
FUTURES CONTRACTS. As discussed in the Prospectus, each Fund may enter
into futures contracts. This investment technique is designed primarily to act
as a substitute for a position in the underlying security and to hedge against
anticipated future changes in market conditions or interest rates which
otherwise might adversely affect the value of securities which such Fund holds
or intends to purchase. For example, when interest rates are expected to rise or
market values of portfolio securities are expected to fall, a Fund can seek
through the sale of futures contracts to offset a decline in the value of its
portfolio securities. When interest rates are expected to fall or market values
are expected to rise, a Fund, through the purchase of such contracts, can
attempt to secure better rates or prices for such Fund than might later be
available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period.
Futures transactions involve brokerage costs and require a Fund to
segregate liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt obligations, to cover its performance under such
contracts. A Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if such Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities, limiting the Fund's ability to hedge effectively against interest
rate and/or market risk and giving rise to additional risks. There is no
assurance of liquidity in the secondary market for purposes of closing out
futures positions.
REGULATORY RESTRICTIONS. To the extent required to comply with
Securities and Exchange Commission Release No. IC-10666, when purchasing a
futures contract or writing a put option, each Fund will maintain in a
segregated account cash or liquid high-grade securities equal to the value of
such contracts.
B-13
<PAGE> 48
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being classified as a "commodity
pool operator," a Fund will not enter into a futures contract or purchase an
option thereon if immediately thereafter the initial margin deposits for futures
contracts held by such Fund plus premiums paid by it for open options on futures
would exceed 5% of the liquidation value of such Fund's total assets after
taking into account unrealized profits and unrealized losses on any contracts
entered into. The Funds will not engage in transactions in futures contracts or
options thereon for speculation, but only to attempt to hedge against changes in
market conditions affecting the values of securities which such Fund holds or
intends to purchase. When futures contracts or options thereon are purchased to
protect against a price increase on securities intended to be purchased later,
it is anticipated that at least 25% of such intended purchases will be
completed.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
securities issued by other investment companies. 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
voting stock of any one investment company will be owned by such Fund. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that such Fund bears directly in connection with its own operations.
Investment companies in which the Funds may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by such Fund and, therefore, will be borne directly by shareholders of such
Fund.
Investment Restrictions
- -----------------------
The Funds' investment objectives are non-fundamental policies and may
be changed without a vote of the shareholders of the applicable Fund. In
addition to the fundamental investment policies listed in the Prospectus, the
following investment restrictions may be changed only by a vote of the majority
of the outstanding Shares of a Fund (as defined under "ADDITIONAL INFORMATION -
Vote of a Majority of the Outstanding Shares").
In addition to the investment restrictions set forth in the Prospectus,
each Fund may not:
B-14
<PAGE> 49
1. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities and except as may
be necessary to make margin payments in connection with derivative securities
transactions;
2. Underwrite the securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities;"
3. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein are not prohibited by this restriction); and
4. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of such Fund.
The following additional investment restrictions may be changed without
the vote of a majority of the outstanding Shares of the Funds. Each Fund may
not:
1. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, and (b)
to the extent permitted by the 1940 Act, or pursuant to any exemptions
therefrom;
2. Engage in any short sales;
3. Purchase or retain the securities of an issuer if the officers or
trustees of the Group, or the officers or directors of the Adviser, who each
owns beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities; and
4. Mortgage or hypothecate the Fund's assets in excess of one-third of
such Fund's total assets.
If any percentage restriction or requirement described above is
satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in asset value will not constitute a
violation of such restriction or requirement. However, should a change in net
asset value or other external events cause a Fund's investments in illiquid
securities, repurchase agreements with maturities in excess of seven days and
other instruments in such Fund which are not readily marketable to exceed the
limit set forth in that Fund's Prospectus for its investment in illiquid
securities, such Fund will act to cause the aggregate amount of such securities
to come within such limit as soon as reasonably practicable. In such an event,
however, no Fund
B-15
<PAGE> 50
would be required to liquidate any portfolio securities where such Fund would
suffer a loss on the sale of such securities.
Portfolio Turnover
- ------------------
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the portfolio securities. The Commission requires
that the calculation exclude all securities whose remaining maturities at the
time of acquisition were one year or less.
The portfolio turnover rates for the Growth Fund and the Income Fund
for their first fiscal period ending June 30, 1997, are each estimated to be
less than 100%. The portfolio turnover rate for a Fund may vary greatly from
year to year as well as within a particular year, and may also be affected by
cash requirements for redemptions of Shares. High portfolio turnover rates will
generally result in higher transaction costs, including brokerage commissions,
to a Fund and may result in additional tax consequences to a Fund's
Shareholders. Portfolio turnover will not be a limiting factor in making
investment decisions.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by BISYS, and BISYS
has agreed to use appropriate efforts to solicit all purchase orders. In
addition to purchasing Shares directly from BISYS, Shares may be purchased
through procedures established by BISYS in connection with the requirements of
accounts at the Adviser or the Adviser's affiliated entities (collectively,
"Entities"). Customers purchasing Shares of the Funds may include officers,
directors, or employees of the Adviser or the Entities.
The Group may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the Exchange is
restricted by applicable rules and regulations of the Commission, (b) the
Exchange is closed for other than customary weekend and holiday closings, (c)
the Commission has by order permitted such suspension, or (d) an emergency
exists as a result of which (i) disposal by the Group of securities owned by it
is not reasonably practical, or (ii) it is not reasonably practical for the
Group to determine the fair value of its net assets.
B-16
<PAGE> 51
MANAGEMENT OF THE GROUP
Trustees and Officers
- ---------------------
Overall responsibility for management of the Group rests with its Board
of Trustees, which is elected by the shareholders of the Group's funds. The
Trustees elect the officers of the Group to supervise actively its day-to-day
operations.
The names of the Trustees and officers of the Group, their addresses,
and principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held With Principal Occupation
Name, Address and Age the Group During Past 5 Years
- --------------------- --------- -------------------
<S> <C> <C>
Walter B. Grimm* Chairman, From June, 1992 to present, employee of
3435 Stelzer Road President and BISYS Fund Services Limited Partnership
Columbus, Ohio 43219 Trustee (formerly The Winsbury Company); from
Age: 50 July, 1981 to June, 1992, President of
Leigh Investments Consulting (investment
firm).
Nancy E. Converse* Trustee and Since June, 1990, employee of BISYS
3435 Stelzer Road Secretary Fund Services Limited Partnership
Columbus, Ohio 43219 (formerly The Winsbury Company) or
Age: 46 BISYS Fund Services Ohio, Inc.
(formerly The Winsbury Service
Corporation).
Maurice G. Stark Trustee Consultant; from 1979 to December,
7662 Cloister Drive 1994, Vice President-Finance and Chief
Columbus, Ohio 43235 Financial Officer, Battelle Memorial
Age: 59 Institute (scientific research and
development service corporation).
James H. Woodward, Ph.D. Trustee Since July 1991, Chancellor of The
The University of North University of North Carolina at
Carolina at Charlotte Charlotte.
Charlotte, NC 28223
Age: 56
Chalmers P. Wylie Trustee From April, 1993 to present, of Counsel
754 Stonewood Court with Emens, Kegler, Brown, Hill &
Columbus, Ohio 43235 Ritter (law firm); from January, 1993
Age: 74 to present, Adjunct Professor at The
Ohio State University; from January,
1967 to January, 1993, Member of the
United States House of Representatives
for the 15th District.
</TABLE>
B-17
<PAGE> 52
<TABLE>
<S> <C> <C>
J. David Huber Vice President Since January, 1996, President of BISYS
3435 Stelzer Road Fund Services Limited Partnership; from
Columbus, Ohio 43219 June, 1987 to December, 1995, employee
Age: 49 of BISYS Fund Services Limited
Partnership (formerly The Winsbury
Company); from September, 1988 to present,
Vice President of BISYS Fund Services Ohio,
Inc. (formerly The Winsbury Service
Corporation).
William J. Tomko Vice President From April, 1987 to present, employee
3435 Stelzer Road of BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership (formerly The Winsbury
Age: 36 Company).
Stephen G. Mintos Treasurer From January, 1987 to present, employee
3435 Stelzer Road of BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership (formerly The Winsbury
Age: 41 Company).
R. Jeffrey Young Assistant From October 1993 to present, employee
3435 Stelzer Road Secretary of BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership or BISYS Fund Services
Age: 30 Ohio, Inc.; from April 1989 to October
1993, employee of The Heebink Group.
Alaina V. Metz Assistant From June, 1995 to present, employee of
3435 Stelzer Road Secretary BISYS Fund Services Limited
Columbus, Ohio 43219 Partnership; prior to June, 1995,
Age: 28 supervisor at Alliance Capital
Management, L.P. (investment management
firm). Secretary
- -------------------
<FN>
*Mr. Grimm and Ms. Converse are each considered to be an "interested
person" of the Group as defined in the 1940 Act.
</TABLE>
As of the date of this Statement of Additional Information, the Group's
officers and trustees, as a group, own less than 1% of either Fund's Shares.
No officer or employee of BISYS or BISYS Fund Services, Inc. receives
any compensation from the Group for acting as trustee of the Group. The officers
of the Group receive no compensation directly from the Group for performing the
duties of their offices. BISYS receives fees from each Fund for acting as
Administrator and may receive fees pursuant to the Administrative Services Plan
described below. BISYS Fund Services, Inc. receives fees from the Funds for
acting as transfer agent and for providing certain fund
B-18
<PAGE> 53
accounting services. Messrs. Grimm, Huber, Mintos, Tomko and Young, Ms. Converse
and Ms. Metz are employees of BISYS.
The following table sets forth information regarding all compensation
paid by the Group to its Trustees for their services as trustees during the
fiscal year ended June 30, 1995. The Group has no pension or retirement plans.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Total Compensation
Name and Position Compensation From the Group
With the Group From the Group and the Fund Complex*
- -------------- -------------- ---------------------
<S> <C> <C>
Maurice G. Stark $7,871 $7,871
Trustee
Michael M. VanBuskirk(1) $7,871 $7,871
Trustee
Chalmers P. Wylie $7,871 $7,871
Trustee
- ----------------
<FN>
*For purposes of this Table, Fund Complex means one or more mutual
funds, including the Funds, which have a common investment adviser or affiliated
investment advisers or which hold themselves out to the public as being related.
(1) Mr. VanBuskirk resigned his position as a trustee of the Group
effective May 3, 1996.
</TABLE>
Dr. Woodward was not a trustee of the Group during such fiscal year.
Investment Adviser
- ------------------
Investment advisory and management services are provided to the Funds
by Martindale, Andres & Company, Inc. (the "Adviser"), pursuant to an Investment
Advisory Agreement dated as of July 9, 1996, as amended as of October ___, 1996.
Under the Investment Advisory Agreement, the Adviser has agreed to provide
investment advisory services as described in the Prospectuses. For the services
provided and expenses assumed pursuant to the Investment Advisory Agreement, the
Growth Fund pays the Adviser a fee, computed daily and paid monthly, at the
annual rate of seventy-five one-hundredths of one percent (.75%) of the average
daily net assets of the Growth Fund, and the Income Fund pays the Adviser a fee,
computed daily and paid monthly, at the annual rate of sixty one-hundredths of
one percent (.60%) of the average daily net assets of the Growth Bond Fund.
Pursuant to such Investment Advisory Agreement, the Adviser also provides
investment advisory
B-19
<PAGE> 54
and management services to two other funds of the Group: The KeyPremier Prime
Money Market Fund (the "Money Market Fund") and The KeyPremier Pennsylvania
Municipal Bond Fund the "Pennsylvania Bond Fund"). The Money Market Fund pays
the Adviser a fee, computed daily and paid monthly, at the annual rate of forty
one-hundredths of one percent (.40%) of the average daily net assets of the
Money Market Fund, and the Pennsylvania Bond Fund pays the Adviser a fee,
computed daily and paid monthly, at the annual rate of sixty one-hundredths of
one percent (.60%) of the average daily net assets of the Pennsylvania Bond
Fund. The Adviser may from time to time voluntarily reduce all or a portion of
its advisory fee with respect to a Fund to increase the net income of that Fund
available for distribution as dividends.
For the year ended June 30, 1996, the Adviser had not received any
compensation under the Advisory Agreement since neither Fund had yet commenced
operations.
Unless sooner terminated, the Investment Advisory Agreement will
continue in effect with respect to a Fund until July 9, 1998, and from year to
year thereafter, for successive annual periods ending on July 9th, if, as to
that Fund, such continuance is approved at least annually by the Group's Board
of Trustees or by vote of a majority of the outstanding Shares of that Fund (as
defined under "GENERAL INFORMATION - Miscellaneous" in such Fund's Prospectus),
and a majority of the Trustees who are not parties to the Investment Advisory
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Investment Advisory Agreement by votes cast in person at a meeting called for
such purpose. The Investment Advisory Agreement is terminable as to a Fund at
any time on 60 days' written notice without penalty by the Trustees, by vote of
a majority of the outstanding Shares of that Fund, or by the Adviser. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by a Fund in connection with the performance of the Investment Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its duties, or from reckless disregard by the Adviser of its
duties and obligations thereunder.
The Adviser has agreed that the Funds and the Group may use the name
"KeyPremier" on a royalty-free basis and the Adviser has reserved to itself the
right to grant the non-exclusive right to use the name "KeyPremier" to any other
person. At such time as the Investment Advisory Agreement is no longer in
effect, the Adviser may require the Funds to cease using the name "KeyPremier."
B-20
<PAGE> 55
Portfolio Transactions
- ----------------------
Pursuant to the Investment Advisory Agreement, the Adviser determines,
subject to the general supervision of the Board of Trustees of the Group and in
accordance with the Funds' investment objectives and restrictions, which
securities are to be purchased and sold by each Fund, and which brokers and
dealers are to be eligible to execute the Funds' portfolio transactions.
Purchases and sales of portfolio securities with respect to the Income Fund
usually are principal transactions in which portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Purchases and sales of portfolio securities with
respect to the Growth Fund usually are effected on a national securities
exchange or in the over-the-counter market. Transactions on stock exchanges
involve the payment of negotiated brokerage commissions. Transactions in the
over-the-counter market are generally principal transactions with dealers. With
respect to the over-the-counter market, the Group, where possible, will deal
directly with dealers who make a market in the securities involved except in
those circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various
brokers and dealers is determined by the Adviser in its best judgment and in a
manner deemed fair and reasonable to Shareholders. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Subject to this consideration, brokers and dealers who provide supplemental
investment research to the Adviser may receive orders for transactions on behalf
of the Funds. The Adviser is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing each such Fund's
brokerage transactions which is in excess of the amount of commission another
broker would have charged for effecting that transaction if, but only if, the
Adviser determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such broker
viewed in terms of that particular transaction or in terms of all of the
accounts over which it exercises investment discretion. Any such research and
other statistical and factual information provided by brokers to a Fund or to
the Adviser is considered to be in addition to and not in lieu of services
required to be performed by the Adviser under its agreement regarding management
of the Fund. The cost, value and specific application of such information are
indeterminable and
B-21
<PAGE> 56
hence are not practicably allocable among the Funds and other clients of the
Adviser who may indirectly benefit from the availability of such information.
Similarly, the Funds may indirectly benefit from information made available as a
result of transactions effected for such other clients. Under the Investment
Advisory Agreement, the Adviser is permitted to pay higher brokerage commissions
for brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event the Adviser does follow such a
practice, it will do so on a basis which is fair and equitable to the Group and
the Funds.
While the Adviser generally seeks competitive commissions, the Group
may not necessarily pay the lowest commission available on each brokerage
transaction, for reasons discussed above. 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 advisory fees payable to the Adviser by a Fund. Such information
may be useful to the Adviser in serving both the Fund and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the Adviser in carrying out its obligations to a
Fund.
Except as otherwise disclosed to the Shareholders of the Funds and as
permitted by applicable laws, rules and regulations, the Group will not, on
behalf of a Fund, execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, Keystone, BISYS, or their
affiliates, and will not give preference to the Adviser's or Keystone's
correspondents with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those
for other funds of the Group or any other investment company or account managed
by the Adviser. Any such other fund, investment company or account may also
invest in the same securities as the Group on behalf of a Fund. When a purchase
or sale of the same security is made at substantially the same time on behalf of
a Fund and another fund of the Group, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Adviser believes to be equitable to
the Fund and such other fund, 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 a 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 funds of the Group, investment
companies or accounts in order to obtain best execution. As provided by the
Investment Advisory
B-22
<PAGE> 57
Agreement, in making investment recommendations for the Funds, the Adviser will
not inquire or take into consideration whether an issuer of securities proposed
for purchase or sale by the Group is a customer of the Adviser, its parent or
its subsidiaries or affiliates and, in dealing with its customers, the Adviser,
its parent, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Funds or any
other fund of the Group.
Glass-Steagall Act
- ------------------
In 1971, the United States Supreme Court held in INVESTMENT COMPANY
INSTITUTE V. CAMP that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a mutual 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 the effect that the Glass-Steagall Act and such decision: (a)
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 (b) 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. In the BOARD
OF GOVERNORS case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
The Adviser believes that it possesses the legal authority to perform
the services for the Funds contemplated by the Prospectus, this Statement of
Additional Information and the Investment Advisory Agreement without violation
of applicable statutes and regulations. Future changes in either Federal or
state statutes and regulations relating to the permissible activities of banks
or bank holding companies and the subsidiaries or affiliates of those entities,
as well as further judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent or restrict the
Adviser from continuing to perform such services for the Group. In addition,
current state securities laws on the issue of the registration of banks as
brokers or
B-23
<PAGE> 58
dealers may differ from the interpretation of federal law, and banks and
financial institutions may be required to register as dealers pursuant to the
laws of a specific state. Depending upon the nature of any changes in the
services which could be provided by the Adviser, the Board of Trustees of the
Group would review the Group's relationship with the Adviser and consider taking
all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of the Adviser and/or the Adviser's
affiliated and correspondent banks in connection with Customer purchases of
Shares of a Fund, those banks might be required to alter materially or
discontinue the services offered by them to Customers. It is not anticipated,
however, that any change in the Group's method of operations would affect its
net asset value per share or result in financial losses to any Customer.
Administrator
- -------------
BISYS serves as administrator (the "Administrator") to the Funds
pursuant to a Management and Administration Agreement dated July 9, 1996, as
amended as of October __, 1996 (the "Administration Agreement"). The
Administrator assists in supervising all operations of the Funds (other than
those performed by the Adviser under the Investment Advisory Agreement, by The
Bank of New York under the Custody Agreement and by BISYS Fund Services, Inc.
under the Transfer Agency Agreement and Fund Accounting Agreement). The
Administrator is a broker-dealer registered with the Commission, and is a member
of the National Association of Securities Dealers, Inc. The Administrator
provides financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities; furnish statistical and research data, clerical,
certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Commission on Form N-SAR or any replacement forms
therefor; compile data for, prepare for execution by the Funds and file all of
the Funds' federal and state tax returns and required tax filings other than
those required to be made by the Funds' custodian and Transfer Agent; prepare
compliance filings pursuant to state securities laws with the advice of the
Group's counsel; assist to the extent requested by the Group with the Group's
preparation of its Annual and Semi-Annual Reports to Shareholders and its
Registration Statement (on Form N-1A or any replacement therefor); compile data
for, prepare and file timely Notices to the Commission required pursuant to Rule
24f-2 under the 1940 Act; keep and maintain the financial accounts and records
of the Funds, including calculation of daily expense accruals; and generally
assist in all aspects of the Funds' operations other than those performed by the
Adviser under the Investment Advisory Agreement, by The Bank of New York
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<PAGE> 59
under the Custody Agreement and by BISYS Fund Services, Inc. under the Transfer
Agency Agreement and Fund Accounting Agreement. Under the Administration
Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
equal to a fee, calculated daily and paid periodically, at the annual rate equal
to eleven and one-half one-hundredths of one percent (.115%) of that Fund's
average daily net assets.
For the fiscal year ended June 30, 1996, the Administrator had not
received any compensation under the Administration Agreement since neither of
the Funds had yet commenced operations.
Unless sooner terminated as provided therein, the Administration
Agreement has an initial term expiring on July 9, 1999, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Administration Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Administration Agreement; through a failure to renew at the end of a one-year
term; upon 180 days' written notice by the Group after the initial term but only
in connection with the reorganization of the Funds into another registered
management investment company; and for cause (as defined in the Administration
Agreement) by the party alleging cause, on not less than 60 days' notice by the
Group's Board of Trustees or by the Administrator.
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 a
Fund in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
Expenses
- --------
If total expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Adviser and
the Administrator will reimburse such Fund by the amount of such excess in
proportion to their respective fees. As of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Funds limits each Fund's aggregate annual expenses, including management and
advisory fees but excluding interest, taxes, brokerage commissions and certain
other expenses, to 2 1/2% of the first $30 million of the Fund's average net
assets, 2% of the next $70
B-25
<PAGE> 60
million of the Fund's average net assets, and 1/2% of the Fund's remaining
average net assets. Any expense reimbursements will be estimated daily and
reconciled and paid on a monthly basis. Fees imposed upon customer accounts by
the Adviser or its affiliated or correspondent banks for cash management
services would not be included within Fund expenses for purposes of any such
expense limitation.
Distributor
- -----------
BISYS serves as agent for each Fund in the distribution of its Shares
pursuant to a Distribution Agreement dated July 9, 1996, as amended as of
October __, 1996 (the "Distribution Agreement"). Unless otherwise terminated,
the Distribution Agreement has an initial term expiring on July 9, 1998, and
thereafter shall be renewed automatically for successive annual periods ending
July 9th if approved at least annually (i) by the Group's Board of Trustees or
by the vote of a majority of the outstanding Shares of the Funds, and (ii) by
the vote of a majority of the Trustees of the Group who are not parties to the
Distribution Agreement or interested persons (as defined in the 1940 Act) of any
party to the Distribution Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
In its capacity as Distributor, BISYS solicits orders for the sale of
Shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. BISYS receives no compensation under the
Distribution Agreement with the Group but retain all or a portion of any sales
charge imposed upon a purchase of the Shares.
Administrative Services Plan
- ----------------------------
As described in the Prospectus, the Group has also adopted an
Administrative Services Plan (the "Services Plan") under which each Fund is
authorized to pay certain financial institutions, including the Adviser, its
affiliates and their correspondent banks, and BISYS (a "Service Organization"),
to provide certain ministerial, record keeping, and administrative support
services to their customers who own of record or beneficially Shares in the
Funds. Payments to such Service Organizations are made pursuant to Servicing
Agreements between the Group and the Service Organization. The Services Plan
authorizes each Fund to make payments to Service Organizations in an amount, on
an annual basis, of up to 0.25% of the average daily net asset value of that
Fund. The Services Plan has been approved by the Board of Trustees of the Group,
including a majority of the Trustees who are not interested persons of the Group
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the
B-26
<PAGE> 61
Services Plan or in any Servicing Agreements thereunder (the "Disinterested
Trustees"). The Services Plan may be terminated as to a Fund by a vote of a
majority of the Disinterested Trustees. The Trustees review quarterly a written
report of the amounts expended pursuant to the Services Plan and the purposes
for which such expenditures were made. The Services Plan may be amended by a
vote of the Trustees, provided that any material amendments also require the
vote of a majority of the Disinterested Trustees. For so long as the Services
Plan is in effect, selection and nomination of those Disinterested Trustees
shall be committed to the discretion of the Group's Disinterested Trustees. All
Servicing Agreements may be terminated at any time without the payment of any
penalty by a vote of a majority of the Disinterested Trustees. The Services Plan
will continue in effect for successive one-year periods, provided that each such
continuance is specifically approved by a majority of the Board of Trustees,
including a majority of the Disinterested Trustees. As of the date hereof, there
are no Servicing Agreements in place.
Custodian
- ---------
The Bank of New York, 48 Wall Street, New York, New York, 10286, serves
as custodian (the "Custodian") to the Funds pursuant to the Custody Agreement
dated as of July 9, 1996, as amended as of October __, 1996. The Custodian's
responsibilities include safeguarding and controlling each Fund's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on each Fund's investments.
Transfer Agency and Fund Accounting Services
- --------------------------------------------
BISYS Fund Services, Inc. serves as transfer agent and dividend
disbursing agent (the "Transfer Agent") for the Funds pursuant to the Transfer
Agency Agreement dated July 9, 1996, as amended as of October __, 1996. Pursuant
to such Agreement, the Transfer Agent, among other things, performs the
following services in connection with the Funds' Shareholders of record:
maintenance of shareholder records for each of the Funds' Shareholders of
record; processing Shareholder purchase and redemption orders; processing
transfers and exchanges of Shares of the Funds on the Shareholder files and
records; processing dividend payments and reinvestments; and assistance in the
mailing of Shareholder reports and proxy solicitation materials. For such
services the Transfer Agent receives a fee based on the number of shareholders
of record. For the fiscal year ended June 30, 1996, the Transfer Agent received
no compensation from the Group for services as transfer agent for the Funds
since the Funds had not yet commenced operations.
In addition, BISYS Fund Services, Inc. provides certain fund
accounting services to each of the Funds pursuant to a Fund
B-27
<PAGE> 62
Accounting Agreement dated July 9, 1996, as amended as of October __, 1996.
BISYS Fund Services, Inc. receives a fee from each Fund for such services equal
to the greater of (a) a fee computed at an annual rate of three one-hundredths
of one percent (.03%) of that Fund's average daily net assets, or (b) the annual
fee of $30,000. Under such Agreement, BISYS Fund Services, Inc. maintains the
accounting books and records for the Funds, including journals containing an
itemized daily record of all purchases and sales of portfolio securities, all
receipts and disbursements of cash and all other debits and credits, general and
auxiliary ledgers reflecting all asset, liability, reserve, capital, income and
expense accounts, including interest accrued and interest received, and other
required separate ledger accounts; maintains a monthly trial balance of all
ledger accounts; performs certain accounting services for the Funds, including
calculation of the net asset value per share, calculation of the dividend and
capital gain distributions, if any, and of yield, reconciliation of cash
movements with the Funds' custodian, affirmation to the Funds' custodian of all
portfolio trades and cash settlements, verification and reconciliation with the
Funds' custodian of all daily trade activity; provides certain reports; obtains
dealer quotations, prices from a pricing service or matrix prices on all
portfolio securities in order to mark the portfolio to the market; and prepares
an interim balance sheet, statement of income and expense, and statement of
changes in net assets for the Funds.
Unless sooner terminated as provided therein, the Fund Accounting
Agreement has an initial term expiring on July 9, 1999, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Fund Accounting Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Fund Accounting Agreement; upon 180 days' written notice by the Group after the
initial term but only in connection with the reorganization of the Funds into
another registered management investment company; and for cause (as defined in
the Fund Accounting Agreement) by the party alleging cause, on not less than 60
days' notice by the Group's Board of Trustees or by BISYS Fund Services, Inc.
The Fund Accounting Agreement provides that BISYS Fund Services, Inc.
shall not be liable for any error of judgment or mistake of law or any loss
suffered by a Fund in connection with the matters to which the Fund Accounting
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
or negligence in the performance of its duties, or from the reckless disregard
by BISYS Fund Services, Inc. of its obligations and duties thereunder.
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<PAGE> 63
For the fiscal year ended June 30, 1996, BISYS Fund Services, Inc.
earned no fees with respect to its fund accounting services to the Funds since
the Funds had not yet commenced operations.
Auditors
- --------
KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio 43215, has
been selected as the independent auditors for the Funds and as such will audit
the financial statements of the Funds.
Legal Counsel
- -------------
Baker & Hostetler, 65 East State Street, Columbus, Ohio 43215 is
counsel to the Group and will pass upon the legality of the Shares offered
hereby.
ADDITIONAL INFORMATION
Description of Shares
- ---------------------
The Group is an Ohio business trust. The Group was organized on April
25, 1988, and the Group's Declaration of Trust was filed with the Secretary of
State of Ohio on April 25, 1988. The Declaration of Trust authorizes the Board
of Trustees to issue an unlimited number of shares, which are shares of
beneficial interest, without par value. The Group presently has sixteen series
of shares, one of which represents interests in the Growth Fund and one of which
represents interests in the Income Fund. The other fourteen series are Riverside
Capital Money Market Fund, Riverside Capital Value Equity Fund, Riverside
Capital Fixed Income Fund, Riverside Capital Tennessee Municipal Obligations
Fund, Riverside Capital Low Duration Government Securities Fund, Riverside
Capital Growth Fund, the Money Market Fund, the Pennsylvania Bond Fund, 1st
Source Monogram U.S. Treasury Obligations Money Market Fund, 1st Source Monogram
Diversified Equity Fund, 1st Source Monogram Income Equity Fund, 1st Source
Monogram Special Equity Fund, 1st Source Monogram Income Fund and 1st Source
Monogram Intermediate Tax-Free Bond Fund. The Group's Declaration of Trust
authorizes the Board of Trustees to divide or redivide any unissued shares of
the Group into one or more additional series by setting or changing in any one
or more respects their respective preferences, conversion or other rights,
voting power, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectus and this
Statement of Additional Information, the Shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Group,
shareholders of a fund are
B-29
<PAGE> 64
entitled to receive the assets available for distribution belonging to that
fund, and a proportionate distribution, based upon the relative asset values of
the respective funds, of any general assets not belonging to any particular fund
which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Group 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. For purposes of determining whether the
approval of a majority of the outstanding shares of a fund will be required in
connection with a matter, a fund will be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not affect any interest of the fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in 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, Rule 18f-2 also
provides that the election of Trustees may be effectively acted upon by
shareholders of the Group voting without regard to series.
As of the date immediately preceding the public offering of the Funds'
Shares, BISYS Fund Services Ohio, Inc. owned all of the issued and outstanding
Shares of each of the Funds. It is anticipated that, upon commencement of the
public offering of the Funds' Shares, BISYS Fund Services Ohio, Inc.'s holdings
of Shares in each Fund will be reduced below 5%.
Vote of a Majority of the Outstanding Shares
- --------------------------------------------
As used in the Prospectus and this Statement of Additional Information,
a "vote of a majority of the outstanding Shares" of a Fund means the affirmative
vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more
of the votes of Shareholders of that Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
such Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of that Fund.
Additional General Tax Information
- ----------------------------------
Each of the sixteen funds of the Group is treated as a separate entity
for federal income tax purposes and intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), for so long as such qualification is in the best interest of that
fund's shareholders. In order to qualify as a regulated investment company, a
Fund must,
B-30
<PAGE> 65
among other things: derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities, or
currencies; derive less than 30% of its gross income from the sale or other
disposition of stock, securities, options, future contracts or foreign
currencies held less than three months; and diversify its investments within
certain prescribed limits. In addition, to utilize the tax provisions specially
applicable to regulated investment companies, a Fund must distribute to its
Shareholders at least 90% of its investment company taxable income for the year.
In general, the Fund's investment company taxable income will be its 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.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, the
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its 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, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of its taxable income will be subject to
federal tax at regular corporate rates (without any deduction for distributions
to its Shareholders). In such event, dividend distributions would be taxable to
Shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.
It is expected that each Fund will distribute annually to Shareholders
all or substantially all of that Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to Shareholders for federal income
tax purposes, even if paid in additional Shares of that Fund and not in cash.
B-31
<PAGE> 66
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss, if any, is taxable to Shareholders as long-term
capital gain in the year in which it is received, regardless of how long the
Shareholder has held the Shares. Such distributions are not eligible for the
dividends-received deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the marginal tax rate may be in excess
of 39.6%, because adjustments reduce or eliminate the benefit of the personal
exemption and itemized deductions for individuals with gross income in excess of
certain threshold amounts.
Capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on long-term capital gains
of individuals cannot exceed 28%. Capital losses may be used to offset capital
gains. In addition, individuals may deduct up to $3,000 of net capital loss each
year to offset ordinary income. Excess net capital loss may be carried forward
and deducted in future years.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Because all of the Funds'
net investment income is expected to be derived from earned interest, it is
anticipated that no distributions from either Fund will qualify for the 70%
dividends received deduction.
Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Since less than 50% in value of
any Fund's total assets at the end of its fiscal year are expected to be
invested in stocks or securities of foreign corporations, such Fund will not be
entitled under the Code to pass through to its Shareholders their pro rata share
of the
B-32
<PAGE> 67
foreign taxes paid by that Fund. These taxes will be taken as a deduction by the
Fund.
Under Section 1256 of the Code, gain or loss realized by a Fund from
certain financial futures and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss will arise upon exercise or lapse of such futures and options as well as
from closing transactions. In addition, any such futures and options remaining
unexercised at the end of a Fund's taxable year will be treated as sold for
their then fair market value, resulting in additional gain or loss to such Fund
characterized in the manner described above.
Offsetting positions held by a Fund involving certain futures contracts
or options transactions may be considered, for tax purposes, to constitute
"straddles." Straddles are defined to include "offsetting positions" in actively
traded personal property. The tax treatment of straddles is governed by Sections
1092 and 1258 of the Code, which, in certain circumstances, overrides or
modifies the provisions of Section 1256. As such, all or a portion of any short
or long-term capital gain from certain straddle and/or conversion transactions
may be recharacterized as ordinary income.
If a Fund were treated as entering into straddles by reason of its
engaging in futures or options transactions, such straddles would be
characterized as "mixed straddles" if the futures or options comprising a part
of such straddles were governed by Section 1256 of the Code. A Fund may make one
or more elections with respect to mixed straddles. If no election is made, to
the extent the straddle rules apply to positions established by a Fund, losses
realized by such Fund will be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle and conversion
transaction rules, short-term capital losses on straddle positions may be
recharacterized as long-term capital losses and long-term capital gains may be
recharacterized as short-term capital gain or ordinary income.
Investment by the Income Fund in securities issued at a discount or
providing for deferred interest or for payment of interest in the form of
additional obligations could, under special tax rules, affect the amount, timing
and character of distributions to Shareholders. For example, the Income Fund
could be required to take into account annually a portion of the discount (or
deemed discount) at which such securities were issued and to distribute such
portion in order to maintain its qualification as a regulated investment
company. In that case, the Income Fund may have to dispose of securities which
it might otherwise have continued to hold in order to generate cash to satisfy
these distribution requirements.
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Each Fund may be required by federal law to withhold and remit to the
U.S. Treasury 31% of taxable dividends, if any, and capital gain distributions
to any Shareholder, and the proceeds of redemption or the values of any
exchanges of Shares of the Fund, if such Shareholder (1) fails to furnish the
Fund with a correct taxpayer identification number, (2) under-reports dividend
or interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.
Information set forth in the Prospectus and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of Shares of the Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of the Funds or their
Shareholders and this discussion is not intended as a substitute for careful tax
planning. Accordingly, potential purchasers of Shares of a Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
In addition, the tax discussion in the Prospectus and this Statement of
Additional Information is based on tax laws and regulations which are in effect
on the date of the Prospectus and this Statement of Additional Information; such
laws and regulations may be changed by legislative or administrative action. As
of the date hereof, several proposals have been introduced by the 104th
Congress, which if enacted, could affect much of the information contained in
this section. However, it is not possible at this time to assess which, if any,
of such proposals will be acted upon and the effect thereof, if any, on this
information.
Information as to the federal income tax status of all distributions
will be mailed annually to each Shareholder.
30-Day Yield of the Funds
- -------------------------
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," the yield of the Funds will be computed by annualizing net
investment income per share for a recent 30-day period and dividing that amount
by the Fund Share's maximum offering price (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last trading day of
that period. Net investment income will reflect amortization of any market value
premium or discount of fixed income securities (except for obligations backed by
mortgages or other assets) and may include recognition of a pro rata portion of
the stated dividend rate of dividend paying portfolio securities. The yield of a
Fund will vary from time to time depending upon market conditions, the
composition of the Fund's portfolio and operating expenses of the Group
allocated to such Fund. These factors and possible differences in the methods
used in calculating yield should be
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<PAGE> 69
considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's Shares and to the
relative risks associated with the investment objectives and policies of that
Fund.
Calculation of Total Return
- ---------------------------
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," average annual total return is a measure of the change in value of
an investment in a Fund over the period covered, which assumes any dividends or
capital gains distributions are reinvested in that Fund immediately rather than
paid to the investor in cash. Average annual total return will be calculated by:
(1) adding to the total number of Shares purchased by a hypothetical $1,000
investment in a Fund (less the maximum sales charge, if any) all additional
Shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of Shares owned at the end of
the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
annualizing the result for periods of less than one year. A Fund, however, may
also advertise aggregate total return in addition to average annual total
return. Aggregate total return is a measure of the change in value of an
investment in a Fund over the relevant period and is calculated similarly to
average annual total return except that the result is not annualized.
Distribution Rates
- ------------------
The Income Fund may from time to time advertise current distribution
rates which are calculated in accordance with the method disclosed in the
Prospectus.
Performance Comparisons
- -----------------------
Investors may judge the performance of the Funds by comparing them to
the performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies through various mutual fund or market indices
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation and to data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service which monitors the performance of mutual funds.
Comparisons may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, Morningstar, Inc., Ibbotson
Associates, CDA/Wiesenberger, The New York Times, Business Week, U.S.A. Today
and local
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<PAGE> 70
periodicals. In addition to performance information, general information about
the Funds that appears in a publication such as those mentioned above may be
included in advertisements, sales literature and reports to shareholders. The
Funds may also include in advertisements and reports to shareholders information
discussing the performance of the Adviser in comparison to other investment
advisers and to other institutions.
From time to time, the Group may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of dollar
cost averaging); (2) discussions of general economic trends; (3) presentations
of statistical data to supplement such discussions; (4) descriptions of past or
anticipated portfolio holdings for the Funds; (5) descriptions of investment
strategies for the Funds; (6) descriptions or comparisons of various investment
products, which may or may not include the Funds; (7) comparisons of investment
products (including the Funds) with relevant market or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) testimonials describing the experience
of persons that have invested in a Fund. The Group 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 a Fund.
Current yields or total return will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
total return may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and total
return are functions of a Fund's quality, composition and maturity, as well as
expenses allocated to that Fund. Fees imposed upon Customer accounts by the
Adviser, its affiliates or its affiliated or correspondent banks for cash
management services or other services will reduce a Fund's effective yield and
total return to Customers.
Miscellaneous
- -------------
Individual Trustees are generally elected by the shareholders and,
subject to removal by the vote of two-thirds of the Board of Trustees, serve for
a term lasting until the next meeting of shareholders at which Trustees are
elected. Such meetings are not required to be held at any specific intervals.
Generally, shareholders owning not less than 20% of the outstanding shares of
the Group entitled to vote may cause the Trustees to call a special meeting.
However, the Group has represented to the Commission that the Trustees will call
a special meeting for the purpose of
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considering the removal of one or more Trustees upon written request therefor
from shareholders owning not less than 10% of the outstanding votes of the Group
entitled to vote. At such a meeting, a quorum of shareholders (constituting a
majority of votes attributable to all outstanding shares of the Group), by
majority vote, has the power to remove one or more Trustees.
The Group is registered with the Commission as a management investment
company. Such registration does not involve supervision by the Commission of the
management or policies of the Group.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
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APPENDIX
COMMERCIAL PAPER RATINGS. Commercial paper ratings of Standard & Poor's
Corporation ("S&P") are current assessments of the likelihood of timely payment
of debt considered short term in the relevant market. Commercial paper rated A-1
by S&P indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted A-1+. Commercial paper rated A-2 by S&P indicates that capacity for
timely payment on issues is satisfactory. However, the relative degree of safety
is not as high as for issues designated A-1.
Moody's Investors Service, Inc.'s ("Moody's") commercial paper rating
are opinions of the ability of issuers to repay punctually senior debt
obligations which have an original maturity not exceeding one year. The rating
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-1 (or supporting institutions) are considered to have a superior
capacity for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics of Prime-1 rated issuers, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variations. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Commercial paper rated F-1+ by Fitch Investors Service ("Fitch") is
regarded as having the strongest degree of assurance for timely payments.
Commercial paper rated F-1 by Fitch is regarded as having an assurance of timely
payment only slightly less than the strongest rating, I.E., F-1+. Commercial
paper rated F-2 by Fitch is regarded as having a satisfactory degree of
assurance of timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.
The description of the two highest short-term debt ratings by Duff &
Phelps, Inc. ("Duff") (Duff incorporates gradations of "1+" (one plus) and "1-"
(one minus) to assist investors in recognizing quality differences within the
highest rating category) are as follows. Duff 1+ is regarded as having the
highest certainty of timely payment. Short-term liquidity, including internal
operating factors and/or access to alternative sources of funds, is outstanding,
and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1
is regarded as having a very high certainty of timely payment. Liquidity factors
are excellent and
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supported by good fundamental protection factors. Risk factors are minor. Duff
1- is regarded as having a high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are minor. Duff 2 is regarded as having a 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.
Commercial paper rated A1 by IBCA Limited and its affiliate, IBCA Inc.
(collectively "IBCA") is regarded by IBCA as obligations supported by the
highest capacity for timely repayment. Where issues possess a particularly
strong credit feature, a rating of A1+ is assigned. Obligations rated A2 are
supported by a good capacity for timely repayment.
The following summarizes the description of the two highest short-term
ratings of Thomson BankWatch, Inc. ("Thomson"). TBW-1 is the highest category
and indicates a very high likelihood that principal and interest will be paid on
a timely basis. TBW-2 is the second highest category indicating that while the
degree of safety regarding timely repayment of principal and interest is strong,
the relative degree of safety is not as high as for issues rated "TBW-1."
The plus (+) sign is used after a rating symbol to designate the
relative position of an issuer within the rating category.
CORPORATE DEBT RATINGS. A S&P corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated A has a strong capacity to
pay interest and repay principal although it is somewhat more susceptible to
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
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. Debt
rated BB and B is regard as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. BB indicates the
lease degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated BB 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
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assigned an actual or implied BBB rating. Debt rated B 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.
The following summarizes the six highest ratings used by Moody's for
corporate debt. Bonds that are rated Aaa by Moody's 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. Bonds
that are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Bonds that are
rated A by Moody's possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future. Bonds that
are rated Baa by Moody's are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Bonds that are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bond which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds
rated Aa through B. The modifier 1 indicates that the bond being rated 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 bond ranks in the lower
end of its generic rating category.
The following summarizes the six highest long-term debt ratings by
Duff. Debt rated AAA has the highest credit quality.
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<PAGE> 75
The risk factors are negligible being only slightly more than for risk-free U.S.
Treasury debt. Debt rated AA has a high credit quality and protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions. Debt rated A has protection factors that are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress. Debt rated BBB has below average protection factors but is
still considered sufficient for prudent investment. However, there is
considerable variability in risk during economic cycles. Debt rated BB is below
investment grade but deemed likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move up or down frequently
within this category. Debt rated B is below investment grade and possesses risk
that obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
To provide more detailed indications of credit quality, the ratings AA
to B may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
The following summarizes the six highest long-term debt ratings by
Fitch (except for AAA ratings, plus or minus signs are used with a rating symbol
to indicate the relative position of the credit within the rating category).
Bonds rated AAA are 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. Bonds rated AA are 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 issues is generally
rated "F-1+." Bonds rated as A are 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. Bonds
rated BBB are 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 adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings for these bonds will fall
below investment grade is higher than for bonds with higher ratings. Bonds rated
BB are considered speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements. Bonds rated B are
considered highly speculative. While bonds in this class are
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currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
The following summarizes IBCA's six highest long-term debt ratings.
Obligations rated AAA are those 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 significantly. Obligations
rated AA are those 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. Obligations rated A are those 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. Obligations rated
BBB are those for which there is currently a low expectation of investment risk.
Capacity for timely repayment of principal and interest is adequate, although
adverse changes in business, economic, or financial conditions are more likely
to lead to increased investment risk than for obligations in other categories.
Obligations rated BB are those for which there is a possibility of investment
risk developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions. Obligations rated B are those for which investment risk
exists. Timely repayment of principal and interest is not sufficiently protected
against adverse changes in business, economic or financial conditions.
The following summarizes Thomson's description of its six highest
long-term debt ratings (Thomson may include a plus (+) or minus (-) designation
to indicate where within the respective category the issue is placed). AAA is
the highest category and indicates that the ability to repay principal and
interest on a timely basis is very high. AA is the second highest category and
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 is
the third highest category and indicates 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 is the 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. While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations. Issuer rated B show a higher degree of uncertainty and
therefore greater likelihood of default that higher-rated issuers. Adverse
developments could well
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negatively affect the payment of interest and principal on a timely basis.
Municipal Obligations Ratings
- -----------------------------
The following summarizes the three highest ratings used by Moody's for
state and municipal short-term obligations. Obligations bearing MIG-1 or VMIG-1
designations 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. Obligations rated MIG-2 or VMIG-2 denote high quality
with ample margins of protection although not so large as in the preceding
rating group. Obligations bearing MIG-3 or VMIG-3 denote favorable quality. All
security elements are accounted for but there is 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.
S&P SP-1, SP-2, and SP-3 municipal note ratings (the three highest
ratings assigned) are described as follows:
"SP-1": Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
"SP-2": Satisfactory capacity to pay principal and
interest.
"SP-3": Speculative capacity to pay principal and
interest.
The following summarizes the six highest ratings used by Moody's for
state and municipal bonds:
"Aaa": Bonds judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa": Bonds 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
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make the long-term risks appear somewhat larger than in
Aaa securities.
"A": Bonds which possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
"Baa": Bonds which are considered as medium grade obligations,
i.e, they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba": Bonds which are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B": Bonds which generally lack characteristics of the
desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
The following summarizes the six highest ratings used by S&P for state
and municipal bonds:
"AAA": Debt which has the highest rating assigned by
S&P. Capacity to pay interest and repay principal is
extremely strong.
"AA": Debt which has a very strong capacity to pay
interest and repay principal and differs from the highest
rated issues only in small degree.
"A": Debt which has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. It differs
from the two higher ratings because:
General Obligations Bonds -- There is some weakness
in the local economic base, in debt burden, in the balance
between revenues and expenditures, or in quality
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of management. Under certain adverse circumstances, any one
such weakness might impair the ability of the issuer to meet
debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but
not exceptional. Stability of the pledged revenues could show
some variations because of increased competition or economic
influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance
appears adequate.
"BBB": Of the investment grade, this is the lowest.
General Obligation Bonds -- Under certain adverse
conditions, several of the above factors could contribute to a
lesser capacity for payment of debt service. The difference
between "A" and "BBB" rating is that the latter shows more
than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one
deficiency among the factors considered.
Revenue Bonds -- Debt coverage is only fair.
Stability of the pledged revenues could show substantial
variations, with the revenue flow possibly being subject to
erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
"BB" and "B": Debt which is regarded as having predominantly
speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of
speculation of the two. 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 which has less near-term vulnerability to default
than other speculative grade debt. 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
payment.
"B": Debt which has a greater vulnerability to default
but presently has the capacity to meet interest payments
and principal repayments. Adverse business, financial or
economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
The following summarizes the six highest ratings used by Fitch for
state and municipal bonds. The ratings represent Fitch's assessment of the
issuer's ability to meet the obligations of a
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specific debt issue or class of debt. The ratings take into consideration
special features of the issue, its relationship to other obligations of the
issuer, the current financial condition and operative performance of the issuer
and of any guarantor, as well as the political and economic environment that
might affect the issuer's future financial strength and credit quality.
"AAA": Bonds which are 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 which are 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 which are 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 which are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
"BB": Bonds which are considered speculative. The
obligor's ability to pay interest and repay principal may
be affected over time by adverse economic changes.
However, business and financial alternatives can be
identified which could assist the obligor in satisfying
its debt service requirements.
"B": Bonds which are considered highly speculative. While
bonds in this class are currently meeting debt service
requirements, the probability of continued timely payment of
principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic
activity throughout the life of the issue.
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Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
"F-1+": Exceptionally Strong Credit Quality. Issues
assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1": Very Strong Credit Quality. Issues assigned this
rating reflect an assurance of timely payment only
slightly less in degrees than issues rated F-1+.
"F-2": Good Credit Quality. Issues carrying this rating
have a satisfactory degree of assurance for timely
payments, but the margin of safety is not as great as the
F-1+ and F-1 categories.
Definitions of Certain Money Market Instruments
- -----------------------------------------------
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed
as to payment of principal and interest by the full faith and
credit of the U.S. Government. These obligations may include
Treasury bills, notes and bonds, and issues of agencies and
instrumentalities of the U.S. Government, provided such obligations
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are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations of the U.S. Government include Treasury bills, certificates
of indebtedness, notes and bonds, and issues of agencies and instrumentalities
of the U.S. Government, such as the Government National Mortgage Association,
the Tennessee Valley Authority, the Farmers Home Administration, the Federal
Home Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, 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 those of the Federal National
Mortgage Association, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Student Loan Marketing 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 Federal Farm Credit
Banks, 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.
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