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Rule 497(c)
File No. 811-5545
Registration No. 33-21489
1st Source Monogram Diversified Equity Fund
1st Source Monogram Income Equity Fund
1st Source Monogram Special Equity Fund
1st Source Monogram Income Fund
Each an Investment Portfolio of
THE SESSIONS GROUP
Statement of Additional Information
October 31, 1997
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the prospectus (the "Prospectus") of 1st
Source Monogram Diversified Equity Fund (the "Diversified Equity Fund"), 1st
Source Monogram Income Equity Fund (the "Income Equity Fund"), 1st Source
Monogram Special Equity Fund (the "Special Equity Fund") and 1st Source Monogram
Income Fund (the "Income Fund") (the Diversified Equity Fund, the Income Equity
Fund, the Special Equity Fund and the Income Fund are hereinafter collectively
referred to as the "Funds" and individually as a "Fund"), dated the date hereof.
The Funds are four funds of The Sessions Group (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) 766-8938.
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TABLE OF CONTENTS
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THE SESSIONS GROUP............................................................................................ B-1
INVESTMENT OBJECTIVES AND POLICIES............................................................................ B-1
Additional Information on Portfolio Instruments...................................................... B-1
Investment Restrictions.............................................................................. B-1
Portfolio Turnover................................................................................... B-10
NET ASSET VALUE............................................................................................... B-11
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................ B-12
MANAGEMENT OF THE GROUP....................................................................................... B-12
Trustees and Officers................................................................................ B-13
Investment Adviser................................................................................... B-13
Portfolio Transactions............................................................................... B-15
Glass-Steagall Act................................................................................... B-19
Administrator........................................................................................ B-21
Distributor.......................................................................................... B-22
Administrative Services Plan......................................................................... B-24
Custodian............................................................................................ B-26
Transfer Agency and Fund Accounting Services......................................................... B-27
Auditors ............................................................................................ B-27
Legal Counsel........................................................................................ B-29
ADDITIONAL INFORMATION........................................................................................ B-29
Description of Shares................................................................................ B-29
Additional Tax Information........................................................................... B-31
Yield................................................................................................ B-34
Calculation of Total Return.......................................................................... B-34
Distribution Rates................................................................................... B-35
Performance Comparisons.............................................................................. B-35
Miscellaneous........................................................................................ B-36
FINANCIAL STATEMENTS.......................................................................................... B-38
APPENDIX ..................................................................................................... A-1
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STATEMENT OF ADDITIONAL INFORMATION
THE SESSIONS GROUP
The Sessions Group (the "Group") is an open-end management investment
company which currently offers 17 separate investment portfolios. This Statement
of Additional Information deals with four of such portfolios, 1st Source
Monogram Diversified Equity Fund (the "Diversified Equity Fund"), 1st Source
Monogram Income Equity Fund (the "Income Equity Fund"), 1st Source Monogram
Special Equity Fund (the "Special Equity Fund") and 1st Source Monogram Income
Fund (the "Income Fund"), each a diversified portfolio of the Group (the
Diversified Equity Fund, the Income Equity Fund, the Special Equity Fund and the
Income Fund are hereinafter collectively referred to as the "Funds" and
individually as a "Fund").
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 a
Fund should be made without first reading the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
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The following policies supplement the investment objectives and
policies of each Fund as set forth in the Prospectus.
BANK OBLIGATIONS. Each of the Funds 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 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
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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. Issues of 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. The Funds may also invest in commercial paper
that is not rated but that is determined by the Adviser or the applicable
Sub-Adviser, as the case may be, 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 a Fund and the issuer, they
are not normally traded. Although there is no secondary market in the notes, a
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 for such Fund. 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
issuers, including ADRs, may subject the Funds 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
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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. A Fund will acquire
such securities only when the Adviser or the applicable Sub-Adviser, as the case
may be, believes the risks associated with such investments are minimal.
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.
VARIABLE AND FLOATING RATE SECURITIES. The Income 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 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 such 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 security purchased by the
Income Fund, the Income 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 Income 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 Income 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 Income Fund is not
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entitled to receive the principal amount of a note within seven days, such a
security will be treated as an illiquid security for purposes of calculation of
such Fund's limitation on investments in illiquid securities, as set forth in
the Income Fund's investment restrictions. Variable or floating rate securities
may be secured by bank letters of credit.
RESTRICTED SECURITIES. Securities in which the Funds 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 Funds 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 a
Fund's limitations on investments in illiquid securities unless, pursuant to
procedures adopted by the Board of Trustees of the Group, the Adviser or
Subadviser, as the case may be, 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. Each Fund will limit its investment in Section
4(2) securities to not more than 10% of its net assets.
OPTIONS TRADING. Each Fund may purchase and write (sell) put and call
options. 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. Put and call options purchased by the
Funds will be valued at the last sale price, or in the absence of such a price,
at the mean between bid and asked price.
When a Fund writes a call option, an amount equal to the net premium
(the premium less the commission) received by the Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded
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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 a call 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.
Each Fund may also purchase or sell (write) index options. Index
options (or options on securities indices) are similar in many respects to
options on securities except that an index option gives the holder the right to
receive, upon exercise, cash instead of securities, 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.
FUTURE CONTRACTS. As discussed in the Prospectus, each of the Funds may
enter into futures contracts. This investment technique is designed primarily to
hedge against anticipated future changes in market conditions which otherwise
might adversely affect the value of securities which a 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 the 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 securities, 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 the
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
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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, a Fund will maintain in a segregated
account cash or liquid securities equal to the value of such contracts.
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 such Fund's total assets. A Fund will not engage in
transactions in financial 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-ISSUED SECURITIES. As discussed in the Prospectus, the Income 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 such 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, the Income Fund's custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case,
such 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 the Income Fund's commitment. It may be expected that the
Income 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 the Income 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 the value of its total assets. Under normal market
conditions, however, the Income Fund's commitment to purchase "when-issued" or
"delayed-delivery" securities will not exceed 25% of the value of its total
assets.
When the Income Fund engages in "when-issued" transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may result
in the Income Fund's incurring a loss or missing the opportunity to obtain a
price considered to be
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advantageous. The Income Fund will engage in "when-issued" delivery transactions
only for the purpose of acquiring portfolio securities consistent with such
Fund's investment objectives and policies and not for investment leverage.
MORTGAGE-RELATED SECURITIES. The Income Fund may, consistent with its
investment objective and policies, invest in mortgage-related securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities or
issued by nongovernmental entities.
Mortgage-related 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 also invest in mortgage-related securities which
are collateralized mortgage obligations structured on pools of mortgage
pass-through certificates or mortgage loans. Mortgage- related securities will
be purchased only if rated in the three
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highest bond rating categories assigned by one or more appropriate NRSROs, or,
if unrated, which the Adviser deems to be of comparable quality.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued by
the Government National 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. FNMA is
a government- sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to timely payment of the principal and interest by
FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States
or by any Federal Home Loan Banks and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
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 from banks and registered broker-dealers which the
Adviser or the applicable Sub-Adviser, as the case may be, 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
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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 holding such obligation would suffer a loss to the
extent that the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price under the agreement, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
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, although the Board of
Trustees of the Group believes that, under the regular procedures normally in
effect for custody of a Fund's securities subject to repurchase agreements and
under federal laws, a court of competent jurisdiction would rule in favor of the
Group if presented with the question. Securities subject to repurchase
agreements will be held by that Fund's custodian or another qualified custodian
or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As discussed in the Prospectus, each of
the Funds may borrow funds by entering into reverse repurchase agreements in
accordance with that Fund's 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. Each Fund intends to enter into reverse
repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time a Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account assets such as U.S. Government securities or other liquid securities
consistent with the 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 a Fund is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act.
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
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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 investment 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.
Investment Restrictions
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Each Fund's investment objective is a non-fundamental policy and may be
changed without a vote of the holders of a majority of such Fund's outstanding
Shares. In addition to the fundamental investment policies listed in the
Prospectus, the following investment restrictions may be changed with respect to
a particular Fund only by a vote of the majority of the outstanding Shares of
that 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 of the Funds may not:
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 the Fund.
The following additional investment restrictions may be changed without
the vote of a majority of the outstanding Shares of a Fund. Each Fund may not:
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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; and
3. Mortgage or hypothecate the Fund's assets in excess of one-third of
the 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 such Fund's Prospectus for its investment in illiquid
securities, the 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, such Fund would not be required to liquidate any portfolio securities
where the Fund would suffer a loss on the sale of such securities.
Portfolio Turnover
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The portfolio turnover rate for each of the Funds 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
calculation excludes all securities whose remaining maturities at the time of
acquisition were one year or less.
The portfolio turnover rates for each of the Diversified Equity Fund,
the Income Equity Fund, the Special Equity Fund, and the Income Fund for the
fiscal period ended June 30, 1997, were 76.54%, 38.49%, 152.81% and 118.33%,
respectively.
The portfolio turnover rate 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.
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NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund is
determined and the Shares of each Fund are priced as of the Valuation Time on
each Business Day of that Fund. A "Business Day" of a Fund is a day on which the
New York Stock Exchange is open for trading and any other day (other than a day
on which no Shares of that Fund are tendered for redemption and no order to
purchase any Shares of that Fund is received) during which there is sufficient
trading in portfolio instruments that such Fund's net asset value per share
might be materially affected. The New York Stock Exchange will not open in
observance of the following holidays: New Year's Day, Martin Luther King, Jr.'s
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
Investments in securities for which market quotations are readily
available are valued based upon their current available prices in the principal
market in which such securities are normally traded. Unlisted securities for
which market quotations are readily available are valued at such market value.
Securities and other assets for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures established by and under the general supervision of the
Trustees of the Group. Short-term securities (i.e., with maturities of 60 days
or less) are valued at either amortized cost or original cost plus accrued
interest, which approximates current value.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each 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 New York Stock
Exchange (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-12
<PAGE> 15
MANAGEMENT OF THE GROUP
Trustees and Officers
- ---------------------
Overall responsibility for management of the Group rests with its Board
of Trustees. 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 Principal Occupation
Name and Address With the Group During Past 5 Years
- ---------------- -------------- -------------------
<S> <C> <C>
Walter B. Grimm* Chairman, From June, 1992 to present,
3435 Stelzer Road President and employee of BISYS Fund
Columbus, Ohio 43219 Trustee Services Limited
Age: 52 Partnership.
Nancy E. Converse* Trustee and Since July, 1990, employee
3435 Stelzer Road Assistant of BISYS Fund Services
Columbus, Ohio 43219 Secretary Limited Partnership.
Age: 48
Maurice G. Stark Trustee Consultant with Battelle
505 King Avenue Memorial Institute; from 1979
Columbus, Ohio 43201 to December, 1994, Vice
Age: 62 President-Finance and Chief
Financial Officer, Battelle
Memorial Institute
(scientific research and
development service
corporation).
James H. Woodward, Ph.D. Trustee Since July 1989, Chancellor
The University of North of The University of North
Carolina at Charlotte Carolina at Charlotte.
Charlotte, NC 28223
Age: 57
Chalmers P. Wylie Trustee From April, 1993 to present,
754 Stonewood Court of Counsel with Kegler,
Columbus, Ohio 43235 Brown, Hill & Ritter (law
Age: 76 firm); from January, 1993 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-13
<PAGE> 16
<TABLE>
<S> <C> <C>
J. David Huber Vice President Since January, 1996,
3435 Stelzer Road President of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 51 Partnership; from June, 1987
to December, 1995, employee
of BISYS Fund Services
Limited Partnership.
William J. Tomko Vice President From April, 1987 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 39 Partnership.
Thresa B. Dewar Treasurer From March, 1997 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 43 Partnership; prior thereto,
Vice President and
Controller of Federated
Administrative Services, Inc.
(investment management firm).
George L. Stevens Secretary From September, 1996 to
3435 Stelzer Road present, employee of BISYS
Columbus, Ohio 43219 Fund Services Limited
Age: 46 Partnership; from September,
1995 to August, 1996,
consultant on bank
investment products and
activities; from June, 1980
to September, 1995, employee
of AmSouth Bank.
Alaina V. Metz Assistant From June, 1995 to present,
3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 30 Partnership; prior to June,
1995, supervisor of Blue
Sky Compliance at Alliance
Capital Management, L.P.
(investment management
firm).
- -------------------
<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 any 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 the Funds for acting as
Administrator and pursuant to the Distribution and Shareholder Service Plan
described below, and may receive fees pursuant to the Administrative Services
Plan described below. BISYS Fund Services, Inc. receives fees from
B-14
<PAGE> 17
the Funds for acting as transfer agent and for providing certain fund accounting
services. Ms. Converse, Ms. Dewar and Ms. Metz and Messrs. Grimm, Huber, Tomko
and Stevens 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, 1997. 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>
Walter B. Grimm $0 $0
Trustee
Nancy E. Converse $0 $0
Trustee
Maurice G. Stark $14,473 $14,473
Trustee
James H. Woodward, Ph.D. $16,162 $16,162
Trustee
Chalmers P. Wylie $14,973 $14,973
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.
</TABLE>
Investment Adviser
- ------------------
Investment advisory and management services are provided to the Funds
of the Group by 1st Source Bank (the "Adviser"), pursuant to an Investment
Advisory Agreement dated as of August 20, 1996. Under the terms of the
Investment Advisory Agreement, the Adviser has agreed to provide, either
directly or through one or more subadvisers, investment advisory services as
described in the Prospectus of the Funds. For the services provided and expenses
assumed pursuant to the Investment Advisory Agreement, each Fund pays the
Adviser a fee, computed daily and paid monthly, at the following annual rates:
(1) for the Diversified Equity Fund, one hundred ten one-hundredths of one
percent (1.10%) of such Fund's average daily net assets; (2) for both the Income
Equity Fund and the Special Equity Fund, eighty one-hundredths of one percent
B-15
<PAGE> 18
(0.80%) of such Fund's average daily net assets; and (3) for the Income Fund,
fifty-five one-hundredths of one percent (0.55%) of such Fund's average daily
net assets. 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 fiscal period ended June 30, 1997, the Adviser earned the
amounts indicated below with respect to its investment advisory services to the
indicated Funds pursuant to the Investment Advisory Agreement.
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
-------------------
<S> <C>
Diversified Equity Fund $579,272
Income Equity Fund 207,742
Special Equity Fund 166,740
Income Fund 210,181
- ----------------------
<FN>
1 Commenced operations September 23, 1996, September 25, 1996, September
20, 1996 and September 24, 1996, respectively.
</TABLE>
Unless sooner terminated, the Investment Advisory Agreement will
continue in effect until August 20, 1998, and year to year thereafter for
successive annual periods ending on August 20, if, as to each 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 the relevant Fund (as defined
under "GENERAL INFORMATION - Miscellaneous" in the Funds' 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
B-16
<PAGE> 19
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 licensed the name "1st Source Monogram" to the Funds on
a royalty-free basis, and the Adviser has reserved to itself the right to grant
the non-exclusive right to use the name "1st Source Monogram" 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 "1st Source
Monogram."
Subadvisers
- -----------
Pursuant to the terms of the Investment Advisory Agreement, the Adviser
has entered into three separate Sub-Investment Advisory Agreements each dated as
of August 20, 1996 (collectively, the "Sub-Advisory Agreements"). The first
Sub-Advisory Agreement is with Miller Anderson & Sherrerd LLP, One Tower Bridge,
Suite 1100, West Conshohocken, Pennsylvania 19428 ("Miller Anderson"). The
second Sub-Advisory Agreement is with Loomis, Sayles & Company, L.P., 3 First
National Plaza, Suite 5450, Chicago, Illinois 60600 ("Loomis"). The third
Sub-Advisory Agreement is with Columbus Circle Investors, One Station Place,
Stamford, Connecticut 06902 ("Columbus"). Pursuant to the terms of such
Sub-Investment Advisory Agreements, Miller Anderson, Loomis and Columbus have
each been retained by the Adviser to manage the investment and reinvestment of a
portion the assets of the Diversified Equity Fund, subject to the direction and
control of the Adviser and the Group's Board of Trustees.
Under this arrangement, the Sub-Advisers are responsible for the
day-to-day management of the Diversified Equity Fund's assets, investment
performance, policies and guidelines, and maintaining certain books and records,
and the Adviser is responsible for selecting and monitoring the performance of
each of the Sub- Advisers, and for reporting the activities of the Sub-Advisers
in managing the Diversified Equity Fund to the Group's Board of Trustees.
For their services provided and expenses assumed pursuant to their
respective Sub-Investment Advisory Agreement with the Adviser, the Sub-Advisers
receive from the Adviser a fee (computed daily and paid monthly as a percentage
of the Diversified Equity Fund's average daily net assets managed by that
Sub-Adviser) at the following annual rates: for Miller Anderson, 0.625% up to
$25,000,000 and 0.375% of the excess over $25,000,000; for Loomis, 0.65% up to
$5,000,000 and 0.50% of the excess over $5,000,000; and for Columbus, 1.00% up
to $10,000,000 and 0.50% of the excess over $10,000,000.
B-17
<PAGE> 20
Miller Anderson was founded in 1969 and is wholly owned by Morgan
Stanley, Dean Witter, Discover & Co.
Loomis was founded in 1926 and established its Chicago office in 1952.
Loomis' sole general partner is Loomis, Sayles & Company, Incorporated.
Columbus was founded in 1975 and is a sub-partnership of PIMCO Advisors
L.P., a publicly held limited partnership whose general partner is owned by
Pacific Mutual Life Insurance Company and the managing directors of one of the
subpartnerships of PIMCO Advisors L.P.
For the fiscal period ended June 30, 1997, the Subadvisers earned the
amounts indicated below with respect to their subinvestment advisory services to
the Diversified Equity Fund pursuant to the Sub-Investment Advisory Agreements:
<TABLE>
<CAPTION>
Fiscal Period Ended
Sub-Adviser June 30, 1997(1)
- ----------- ----------------
<S> <C>
Miller Anderson $109,119
Loomis 89,219
Columbus 121,527
- ----------------------
<FN>
1 Commenced operations September 23, 1996.
</TABLE>
Unless sooner terminated, each of the Sub-Investment Advisory
Agreements continue in effect as to the Diversified Equity Fund until August 20,
1998, and thereafter for successive one-year periods ending August 20 of each
year if 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 such Fund (as
defined under "GENERAL INFORMATION - Miscellaneous" in the Funds' Prospectus),
and a majority of the Trustees who are not parties to the Sub-Investment
Advisory Agreements or interested persons (as defined in the 1940 Act) of any
party to the Sub-Investment Advisory Agreements by votes cast in person at a
meeting called for such purpose. Each of the Sub-Investment Advisory Agreements
are terminable as to the Diversified Equity Fund at any time on 60 days' written
notice without penalty by the Fund, by vote of a majority of the outstanding
shares of that Fund, or on 60 days' prior written notice from the Subadviser.
Such Agreements also terminate automatically in the event of any assignment, as
defined in the 1940 Act.
Each of the Sub-Investment Advisory Agreements provide that the
respective Sub-Advisers shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Group in
B-18
<PAGE> 21
connection with the performance of their duties, 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 respective Sub-Advisers in the performance of
their duties, or from reckless disregard of their duties and obligations
thereunder.
Portfolio Transactions
- ----------------------
Pursuant to the Investment Advisory Agreement with respect to each
Fund, other than the Diversified Equity Fund, the Adviser determines, subject to
the general supervision of the Board of Trustees of the Group and in accordance
with each such Fund's investment objective and restrictions, which securities
are to be purchased and sold by a Fund, and which brokers are to be eligible to
execute such Fund's portfolio transactions. Pursuant to the Sub-Investment
Advisory Agreements, the Sub-Advisers determine, subject to the supervision of
the Adviser and the overall general supervision of the Group's Board of Trustees
and in accordance with the Diversified Equity Fund's investment objectives and
policies, which securities are to be purchases and sold by such Fund, and which
brokers are to be eligible to execute such Fund's 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.
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 or the applicable Sub-Adviser,
as the case may be, 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 or the applicable Sub-Adviser, as the case may be, may receive
orders for transactions on behalf of the Funds. The Adviser and each Sub-Adviser
are authorized to pay a broker-dealer
B-19
<PAGE> 22
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 or Sub-Adviser, as the case may be, 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 or
Sub-Adviser, as the case may be, is considered to be in addition to and not in
lieu of services required to be performed by such Adviser or Sub-Adviser under
its respective agreement regarding management of the Fund. The cost, value and
specific application of such information are indeterminable and hence are not
practicably allocable among the Funds and other clients of the Adviser or
Sub-Adviser, as the case may be, 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 and Sub-Advisory
Agreements, the Adviser and Sub-Advisers are 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 and/or the Sub-
Advisers do follow such a practice, they will do so on a basis which is fair and
equitable to the Group and the Funds.
While the Adviser and the Sub-Advisers generally seek competitive
commissions, the Group may not necessarily pay the lowest commission available
on each brokerage transaction for reasons discussed above. For the fiscal
period ended June 30, 1997, the Funds paid the following brokerage commissions
in connection with their respective portfolio transactions:
<TABLE>
<CAPTION>
Fund Brokerage Commissions
---- ---------------------
<S> <C>
Diversified Equity Fund $88,731
Income Equity Fund 81,914
Special Equity Fund 61,590
Income Fund 0
</TABLE>
The Adviser, on behalf of the Diversified Equity Fund, the Income
Equity Fund and the Special Equity Fund, may direct brokerage transactions to
various brokers, including Bear Stearns, Bradcourt, Interstate Securities,
William O'Neill, Frank Russell and Weeden, in return for the provision of
research, including research and news services, such as Bloomberg, ISI Research
service, Value Line, William Inference Research Service and Leuthold Research.
For the fiscal period ended June 30, 1997, the amount of such transactions and
related commissions on behalf of the Diversified Equity Fund were $5,151,355
and $5,635, respectively, on behalf of the Income Equity Fund were $926,932 and
$3,260, respectively, and on behalf of the Special Equity Fund were $4,794,907
and $15,729, respectively.
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 the Funds, execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, the Sub-Advisers, BISYS, or
their affiliates, and will not give preference to the Adviser's correspondents
with respect to such transactions, securities,
B-20
<PAGE> 23
savings deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those
for the other Funds, other funds of the Group or any other investment company or
account managed by the Adviser or any of the Sub-Advisers. Any such other fund,
investment company or account may also invest in the same securities as the
Group on behalf of the Funds. When a purchase or sale of the same security is
made at substantially the same time on behalf of a Fund and another 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 or the Sub-Adviser, as the case may be, 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 and the Sub-Advisers may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for the other Funds or
for other investment companies or accounts in order to obtain best execution. As
provided by the Investment Advisory Agreement and the Sub- Advisory Agreements,
in making investment recommendations for the Funds, neither the Adviser nor any
Sub-Adviser will inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Group is a customer of the
Adviser, any Sub-Adviser, any of their parents or subsidiaries or affiliates
and, in dealing with its customers, the Adviser, the Sub-Advisers, their
respective parents, 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.
For the fiscal period ended June 30, 1997, the Diversified Equity Fund
held securities of its regular brokers or dealers, as defined in Rule 10b-1
under the 1940 Act, or their parent companies. As of June 30, 1997, such Fund
held $406,000 of common stock of Merrill, Lynch, Pierce, Fenner & Smith.
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
B-21
<PAGE> 24
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 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 any of the Funds, 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
B-22
<PAGE> 25
as of August 20, 1996 (the "Administration Agreement"). The Administrator
assists in supervising all operations of each Fund (other than those performed
by the Adviser under the Investment Advisory Agreement, by the Sub-Advisers
under the Sub-Advisory Agreements, by The Fifth Third Bank 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, assist the Group or its designee in the preparation
of, 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 each Fund, 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 Sub-Advisers under the Sub-Investment Advisory Agreements, by
The Fifth Third Bank under the Custody Agreement and by BISYS Fund Services,
Inc. under the Transfer Agency and Fund Accounting Agreements. 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 twenty one-hundredths of one percent (.20%) of that Fund's average daily net
assets.
For the fiscal period ended June 30, 1997, the Administrator earned and
voluntarily waived the amounts indicated below with respect to its services to
the indicated Funds pursuant to the Administration Agreement:
B-23
<PAGE> 26
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
-------------------
Fees Fees
Earned Waived
<S> <C> <C>
Diversified Equity Fund $105,323 --
Income Equity Fund 51,936 --
Special Equity Fund 41,685 $2,171
Income Fund 76,430 --
- ----------------------
<FN>
1 Commenced operations September 23, 1996, September 25, 1996, September
20, 1996 and September 24, 1996, respectively.
</TABLE>
Unless sooner terminated as provided therein, the Administration
Agreement has an initial term expiring on August 20, 1999. The Administration
Agreement 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 particular
Fund only upon mutual agreement of the parties to the Administration Agreement
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
any 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.
Distributor
- -----------
BISYS serves as agent for each of the Funds in the distribution of its
Shares pursuant to a Distribution Agreement dated as of August 20, 1996 (the
"Distribution Agreement"). Unless otherwise terminated, the Distribution
Agreement will continue in effect until August 20, 1998, and year to year
thereafter for successive annual periods ending on August 20, if, as to each
Fund, such continuance is approved at least annually by (i) by the Group's Board
of Trustees or by the vote of a majority of the outstanding shares of that Fund,
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
B-24
<PAGE> 27
approval. The Distribution Agreement may be terminated 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 may retain all or a portion of the
sales charge imposed upon sales of Shares of each of the Funds.
As described in the Prospectus, the Group has adopted a Distribution
and Shareholder Service Plan (the "Plan") with respect to the Funds pursuant to
Rule 12b-1 under the 1940 Act under which each Fund is authorized to pay BISYS
in an amount not in excess, on an annual basis, of 0.25% of the average daily
net asset value of the Shares of that Fund (the "12b-1 Fee"). Payments of the
12b-1 Fee to BISYS will be used (i) to compensate Participating Organizations
(as defined below) for providing distribution assistance relating to a Fund's
Shares, (ii) for promotional activities intended to result in the sale of Shares
and distribution of prospectuses to other than current shareholders, and (iii)
to compensate Participating Organizations for providing shareholder services
with respect to their customers who are, from time to time, beneficial and
record holders of Shares. Participating Organizations include banks (including
affiliates of the Adviser), broker-dealers, the Adviser, BISYS and other
institutions. Payments to such Participating Organizations may be made pursuant
to agreements entered into with BISYS.
As required by Rule 12b-1, the Plan was approved by the initial
Shareholder of each of the Funds and by the Board of Trustees, including a
majority of the Trustees who are not interested persons of any of the Funds and
who have no direct or indirect financial interest in the operation of the Plan
(the "Independent Trustees"). The Plan may be terminated as to a Fund by vote of
a majority of the Independent Trustees, or by vote of majority of the
outstanding Shares of that Fund. Any change in the Plan that would materially
increase the distribution cost to a Fund requires Shareholder approval. The
Trustees review quarterly a written report of such costs and the purposes for
which such costs have been incurred. The Plan may be amended by vote of the
Trustees including a majority of the Independent Trustees, cast in person at a
meeting called for that purpose. For so long as the Plan is in effect, selection
and nomination of those Trustees who are not interested persons of the Group
shall be committed to the discretion of such disinterested persons. All
agreements with any person relating to the implementation of the Plan may be
terminated at any time on 60 days' written notice without payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of the
majority of the outstanding Shares of the Fund. The Plan will continue in effect
for successive one-year periods, provided that each such continuance is
specifically approved (i) by
B-25
<PAGE> 28
the vote of a majority of the Independent Trustees, and (ii) by a vote of a
majority of the entire Board of Trustees cast in person at a meeting called for
that purpose. The Board of Trustees has a duty to request and evaluate such
information as may be reasonably necessary for them to make an informed
determination of whether the Plan should be implemented or continued. In
addition the Trustees in approving the Plan must determine that there is a
reasonable likelihood that the Plan will benefit each Fund and its Shareholders.
The Board of Trustees of the Group believes that the Plan is in the
best interests of each Fund since it encourages Fund growth and maintenance of
Fund assets. As a Fund grows in size, certain expenses, and therefore total
expenses per Share, may be reduced and overall performance per Share may be
improved.
BISYS may enter into, from time to time, Rule 12b-1 Agreements with
selected dealers pursuant to which such dealers will provide certain services in
connection with the distribution of a Fund's Shares including, but not limited
to, those discussed above.
For the fiscal period ended June 30, 1997, the Funds incurred the
following amounts pursuant to the Plan for payments to have been made to BISYS
for certain distribution and shareholder services described above, all of which
were voluntarily waived by BISYS:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
-------------------
Fees Incurred
<S> <C>
Diversified Equity Fund $131,653
Income Equity Fund 64,713
Special Equity Fund 52,106
Income Fund 95,550
- ----------------------
<FN>
1 Commenced operations September 23, 1996, September 25, 1996, September
20, 1996 and September 24, 1996, respectively.
</TABLE>
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
correspondent and affiliated 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 a Fund. Payments
to such Service Organizations are made pursuant to Servicing Agreements
B-26
<PAGE> 29
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 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, the Group has not entered into any such servicing agreements.
Custodian
- ---------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263
(the "Custodian"), has been selected to serve as the Funds' custodian pursuant
to the Custody Agreement dated as of August 20, 1996. The Custodian's
responsibilities include safeguarding and controlling the Funds' cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on the Funds' investments.
Transfer Agency and Fund Accounting Services
- --------------------------------------------
BISYS Fund Services, Inc. serves as transfer agent and dividend
disbursing agent (the "Transfer Agent") for all of the Funds pursuant to the
Transfer Agency Agreement dated as of August 20, 1996. Pursuant to such
Agreement, the Transfer Agent, among other things, performs the following
services in connection with each Fund's shareholders of record: maintenance of
shareholder records for each of the Fund's 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
B-27
<PAGE> 30
solicitation materials. For such services the Transfer Agent receives a fee
based on the number of shareholders of record.
For the fiscal period ended June 30, 1997, the Transfer Agent received
the following fees for services as transfer agent for the Funds:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
-------------------
<S> <C>
Diversified Equity Fund $28,892
Income Equity Fund 23,797
Special Equity Fund 22,347
Income Fund 26,460
- ----------------------
<FN>
1 Commenced operations September 23, 1996, September 25, 1996, September
20, 1996 and September 24, 1996, respectively.
</TABLE>
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to the Funds pursuant to a Fund Accounting Agreement dated as of August
20, 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) $50,000 minus the fee paid by such Fund under its Management and
Administration Agreement with BISYS of the same date. Under such Agreement,
BISYS Fund Services, Inc. maintains the accounting books and records for each
Fund, 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 Fund, 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 Fund's custodian,
affirmation to the Fund's custodian of all portfolio trades and cash
settlements, verification and reconciliation with the Fund's 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 each Fund.
B-28
<PAGE> 31
For the fiscal period ended June 30, 1997, BISYS Fund Services, Inc.
received the fees indicated below with respect to its fund accounting services
to the indicated Funds:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
-------------------
<S> <C>
Diversified Equity Fund $15,798
Income Equity Fund 7,790
Special Equity Fund 6,757
Income Fund 11,464
- ----------------------
<FN>
1 Commenced operations September 23, 1996, September 25, 1996, September
20, 1996 and September 24, 1996, respectively.
</TABLE>
Auditors
- --------
The financial statements for each of the Funds as of June 30, 1997, and
for the periods indicated therein, appearing in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., 100 East Broad
Street, Columbus, Ohio 43215, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report and on the authority of
such firm as experts in auditing and accounting.
Legal Counsel
- -------------
Baker & Hostetler LLP, 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 17 series of
shares, one of which represents interests in the Diversified Equity Fund, one of
which represents interests in the Income Equity Fund, one of which represents
interests in the Special Equity Fund and one of which represents interests in
the Income 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
B-29
<PAGE> 32
respects their respective preferences, conversion or other rights, voting
powers, 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 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 approval of principal underwriting contracts and the election
of Trustees may be effectively acted upon by shareholders of the Group voting
without regard to series.
As of October 16, 1997, the following is the only entity known to the
Group who owns of record or beneficially 5% or more of the outstanding Shares of
any Fund: 1st Source Bank, P. O. Box 1602, South Bend, Indiana 46634 owned of
record and beneficially 97.26% of the issued and outstanding Shares of the
Income Fund, 96.47% of the issued and outstanding Shares of the Income Equity
Fund, 98.00% of the issued and outstanding Shares of the Diversified Equity Fund
and 95.53% of the issued and outstanding Shares of the Special Equity Fund.
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 Share-
B-30
<PAGE> 33
holders of that Fund present at a meeting at which the holders of more than 50%
of the votes attributable to Shareholders of record of that 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 Tax Information
- --------------------------
Each of the Funds 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, each Fund must, among other things:
diversify its investments within certain prescribed limits; 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; and, in taxable years
beginning on or before August 5, 1997, 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. In addition, to
utilize the tax provisions specially applicable to regulated investment
companies, each Fund must distribute to its Shareholders at least 90% of its
investment company taxable income for the year. In general, a Fund's investment
company taxable income will be its taxable income subject to certain adjustments
and excluding the excess of any net mid-term or 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, a 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
B-31
<PAGE> 34
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 the 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.
Distribution by a Fund of the excess of net mid-term or net long-term
capital gain over net short-term capital loss is taxable to Shareholders as
mid-term or long-term capital gain, respectively, 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.
Long-term capital gains of individuals are subject to a maximum tax
rate of 20% (or 10% for individuals in the 15% ordinary income tax bracket).
Mid-term capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on mid-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. The holding period for mid-term capital gains is
more than one year but not more than eighteen months; the holding period for
long-term capital gains is more than eighteen months.
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
B-32
<PAGE> 35
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. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by the
Fund for its taxable year that qualifies for the dividends received deduction.
Because all of the Income Fund's net investment income is expected to be derived
from earned interest, it is anticipated that no distributions from those Funds
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, if any. Since less than 50% in
value of any one 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 foreign taxes paid by the Fund. These taxes will be taken as a
deduction by such Fund.
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 a Fund, if such Shareholder (1) fails to furnish the
Group with a correct taxpayer identification number, (2) under-reports dividend
or interest income, or (3) fails to certify to the Group that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.
GENERAL. 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 a Fund. No attempt has been made to present a detailed explanation
of the Federal income tax treatment of a Fund or its 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
B-33
<PAGE> 36
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.
Information as to the Federal income tax status of all distributions
will be mailed annually to each Shareholder.
Yield
- -----
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," yields of the Funds will be computed by annualizing net investment
income per share for a recent 30-day period and dividing that amount by a 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 will vary from
time to time depending upon market conditions, the composition of the particular
Fund's portfolio and operating expenses of the Group allocated to each Fund.
These factors and possible differences in the methods used in calculating yield
should be 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 each of
the Funds.
For the 30-day period ended June 30, 1997, the yields for the Income
Equity Fund and the Income Fund were 1.78% and 5.38%, respectively, assuming the
imposition of the maximum sales charge, and 1.88% and 5.60%, respectively,
excluding the effect of any sales charge.
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 the 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 that Fund 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
B-34
<PAGE> 37
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.
For the one year, five year and ten year periods ended June 30, 1997,
and the respective periods from commencement of operations to June 30, 1997, the
average annual total returns for the Diversified Equity Fund, the Income Equity
Fund, the Special Equity Fund and the Income Fund are set forth in the following
table. Such performance information includes the prior performance of the
respective CIFs for such Funds during those periods which had been restated to
reflect the estimated fees for those Funds.
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
With Maximum Sales Load(1) Without Sales Load
-------------------------- ------------------
Since Since
Fund 1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
---- ------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified 16.23% 15.06% 11.40% 11.78% 22.52% 16.26% 11.96% 12.27%
Equity2
Income 20.98% 17.07% 11.52% 13.38% 27.42% 18.32% 12.09% 13.91%
Equity3
Special -8.10% 16.11% 12.49% 12.88% -3.27% 17.27% 13.04% 13.37%
Equity3
Income2 2.63% 5.08% 6.77% 7.11% 6.84% 5.96% 7.21% 7.56%
<FN>
1 The maximum sales load for the Diversified Equity, Income Equity and
Special Equity Funds is 5.00%. For the Income Fund, the maximum sales
load is 4.00%.
2 Commenced operations June 30, 1985.
3 Commenced operations November 30, 1985.
</TABLE>
Of course, past performance is no guarantee as to future performance.
Distribution Rates
- ------------------
Each of the Funds 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
B-35
<PAGE> 38
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
periodicals. In addition to performance information, general information about
these 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 banking 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 one or more of the Funds within the Group;
(5) descriptions of investment strategies for one or more of such 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 one
or more of the Funds. 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 any
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 such Fund. Fees imposed upon Customer accounts by the
Adviser or its affiliated or correspondent banks for cash management 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
B-36
<PAGE> 39
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 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.
B-37
<PAGE> 40
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
B-38
<PAGE> 41
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND FUND FUND FUND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost $56,066,526; $22,355,918;
$52,284,186; and $29,485,277, respectively)................. $70,087,039 $24,881,284 $52,174,044 $37,599,831
Repurchase agreements (cost $5,116,881; 5,954,715; $1,942,995;
and $1,560,619, respectively)............................... 5,116,881 5,954,715 1,942,995 1,560,619
----------- ----------- ----------- -----------
Total Investments....................................... 75,203,920 30,835,999 54,117,039 39,160,450
Interest and dividends receivable............................. 47,851 4,560 735,682 123,871
Receivable from brokers for investments sold.................. 567,808 -- -- --
Unamortized organization costs................................ 11,757 4,099 9,274 5,889
Prepaid expenses and other assets............................. 300 16 203 419
----------- ----------- ----------- -----------
Total Assets............................................ 75,831,636 30,844,674 54,862,198 39,290,629
----------- ----------- ----------- -----------
LIABILITIES:
Payable to brokers for investments purchased.................. 709,206 271,755 -- --
Options written, at value (premiums received $11,193)......... -- -- -- 33,000
Accrued expenses and other payables:
Investment advisory fees.................................. 66,831 19,612 24,030 25,192
Administration fees....................................... 1,640 657 1,199 856
Custodian fees............................................ 2,156 1,084 1,312 1,058
Accounting fees........................................... 817 513 236 128
Trustees' fees............................................ 989 385 2,120 2,180
Legal fees................................................ 4,247 688 1,064 2,288
Audit fees................................................ 7,481 6,028 6,102 4,781
Printing fees............................................. 25,824 8,793 15,855 13,786
Transfer agent fees....................................... 2,445 252 2,325 1,529
Registration and filing fees.............................. 20,479 10,547 19,427 10,248
Other..................................................... 12 119 -- 34
----------- ----------- ----------- -----------
Total Liabilities....................................... 842,127 320,433 73,670 95,080
----------- ----------- ----------- -----------
NET ASSETS:
Capital....................................................... 54,626,028 29,049,845 55,066,773 28,373,212
Undistributed (distribution in excess of) net investment
income...................................................... (1,421) 3,400 47,620 29,381
Net unrealized appreciation (depreciation) on investments..... 14,020,513 2,525,366 (110,142) 8,092,747
Accumulated undistributed net realized gains (losses) on
investment transactions..................................... 6,344,389 (1,054,370) (215,723) 2,700,209
----------- ----------- ----------- -----------
Net Assets................................................ $74,989,509 $30,524,241 $54,788,528 $39,195,549
=========== =========== =========== ===========
Outstanding units of beneficial interest (shares)............. 6,355,147 3,181,817 5,408,293 3,190,928
=========== =========== =========== ===========
Net asset value -- redemption price per share................. $ 11.80 $ 9.59 $ 10.13 $ 12.28
=========== =========== =========== ===========
Maximum Sales Charge.......................................... 5.00% 5.00% 4.00% 5.00%
=========== =========== =========== ===========
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of
net asset value adjusted to nearest cent) per share......... $ 12.42 $ 10.09 $ 10.55 $ 12.93
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
B-39
<PAGE> 42
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
STATEMENTS OF OPERATIONS
FOR PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND(a) FUND(a) FUND(a) FUND(a)
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income............................. $ 52,441 $ 178,759 $2,434,665 $ 164,121
Dividend income............................. 744,988 120,869 149,797 807,825
----------- --------- ---------- ----------
Total Income.............................. 797,429 299,628 2,584,462 971,946
----------- --------- ---------- ----------
EXPENSES:
Investment advisory fees.................... 579,272 166,740 210,181 207,742
Administration fees......................... 105,323 41,685 76,430 51,936
12b-1 fees.................................. 131,653 52,106 95,550 64,713
Custodian fees.............................. 21,575 6,885 4,686 4,169
Accounting fees............................. 23,318 8,178 15,380 9,424
Trustees' fees and expenses................. 5,703 2,070 5,368 5,145
Legal fees.................................. 13,914 6,510 6,433 9,287
Audit fees.................................. 13,101 11,648 11,722 10,401
Printing costs.............................. 32,579 11,501 21,039 18,852
Organization costs.......................... 3,818 1,410 2,895 1,848
Transfer agent fees......................... 28,892 22,347 26,460 23,797
Registration and filing fees................ 22,037 11,794 20,815 11,396
Other....................................... 1,987 804 919 1,529
----------- --------- ---------- ----------
Total expenses.............................. 983,172 343,678 497,878 420,239
Less: expenses voluntarily reduced..... (131,653) (54,277) (95,550) (64,714)
----------- --------- ---------- ----------
Net expenses................................ 851,519 289,401 402,328 355,525
----------- --------- ---------- ----------
Net investment income (loss)................ (54,090) 10,227 2,182,134 616,421
----------- --------- ---------- ----------
REALIZED/UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses) on investment
transactions.............................. 7,722,828 (253,355) (215,572) 2,858,798
Change in unrealized
appreciation/depreciation on
investments............................... 5,132,388 304,921 790,234 4,364,604
----------- --------- ---------- ----------
Net realized/unrealized gains (losses) on
investments............................... 12,855,216 51,566 574,662 7,223,402
----------- --------- ---------- ----------
Change in net assets resulting from
operations................................ $12,801,126 $ 61,793 $2,756,796 $7,839,823
=========== ========= ========== ==========
</TABLE>
- ---------
(a) Commencement of operations of the Funds began September 23, 1996, September
20, 1996, September 24, 1996, and September 25, 1996, respectively.
See notes to financial statements.
B-40
<PAGE> 43
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY FUND EQUITY FUND INCOME FUND EQUITY FUND
------------ ------------ ------------ ------------
FOR PERIOD FOR PERIOD FOR PERIOD FOR PERIOD
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997(a) 1997(a) 1997(a) 1997(a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income(loss)............................. $ (54,090) $ 10,227 $ 2,182,134 $ 616,421
Net realized gains (losses) on investment
transactions.......................................... 7,722,828 (253,355) (215,572) 2,858,798
Net change in unrealized appreciation/depreciation on
investments........................................... 5,132,388 304,921 790,234 4,364,604
------------ ------------ ------------ ------------
Change in net assets resulting from operations............ 12,801,126 61,793 2,756,796 7,839,823
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income.............................. -- (10,227) (2,141,355) (590,716)
In excess of net investment income...................... -- (337) -- --
From net realized gains on investments.................. (1,332,828) -- (158,589)
In excess of net realized gains on investments.......... -- (801,015) --
------------ ------------ ------------ ------------
Change in net assets from shareholder distributions....... (1,332,828) (811,579) (2,141,355) (749,305)
------------ ------------ ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued............................. 84,469,233 38,050,281 66,488,773 42,293,659
Dividends reinvested.................................... 1,332,616 811,083 2,132,592 746,329
Cost of shares redeemed................................. (22,280,638) (7,587,337) (14,448,278) (10,934,957)
------------ ------------ ------------ ------------
Change in net assets from capital transactions............ 63,521,211 31,274,027 54,173,087 32,105,031
------------ ------------ ------------ ------------
Change in net assets...................................... 74,989,509 30,524,241 54,788,528 39,195,549
NET ASSETS:
Beginning of period..................................... 0 0 0 0
------------ ------------ ------------ ------------
End of period........................................... $ 74,989,509 $ 30,524,241 $54,788,528 $ 39,195,549
============ ============ ============ ============
SHARE TRANSACTIONS:
Issued.................................................. 8,361,129 3,865,762 6,626,551 4,149,432
Reinvested.............................................. 125,956 83,724 210,754 68,376
Redeemed................................................ (2,131,938) (767,669) (1,429,012) (1,026,880)
------------ ------------ ------------ ------------
Change in shares.......................................... 6,355,147 3,181,817 5,408,293 3,190,928
============ ============ ============ ============
</TABLE>
- ---------
(a) Commencement of operations of the Funds began September 23, 1996, September
20, 1996, September 24, 1996, and September 25, 1996, respectively.
See notes to financial statements.
B-41
<PAGE> 44
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS (92.4%):
Aerospace/Defense--Equipment (1.9%)
22,100 Boeing Co..................... $ 1,172,681
3,500 Raytheon Co................... 178,500
800 Textron, Inc.................. 53,100
------------
1,404,281
------------
Apparel (1.1%)
5,300 Russell Corp.................. 157,013
7,100 Talbots, Inc.................. 241,400
5,300 VF Corp....................... 449,175
------------
847,588
------------
Automotive Parts (1.0%)
4,500 Dana Corp..................... 171,000
3,600 Eaton Corp.................... 314,325
5,000 TRW, Inc...................... 284,063
------------
769,388
------------
Banking (3.2%)
5,500 Bank of New York, Inc......... 239,250
3,900 Chase Manhattan Corp.......... 378,544
2,600 Crestar Financial Corp........ 101,075
6,400 First Union Corp.............. 592,000
4,800 Mellon Bank Corp.............. 216,600
7,400 NationsBank Corp.............. 477,300
2,200 Republic New York Corp........ 236,500
5,100 Signet Banking Corp........... 183,600
------------
2,424,869
------------
Beverages (0.6%)
11,900 Pepsico Inc................... 446,994
------------
Building Materials (0.3%)
5,700 Owens Corning................. 245,813
------------
Chemicals (3.5%)
5,700 Cabot Corp.................... 161,738
1,900 Dow Chemical Co............... 165,538
3,700 E. I. du Pont de Nemours &
Co.......................... 232,638
3,500 FMC Corp.(b).................. 278,031
7,500 Great Lakes Chemical Corp..... 392,813
3,400 IMC Global, Inc............... 119,000
22,500 Monsanto Corp................. 968,905
3,200 Rohm & Haas Co................ 288,200
------------
2,606,863
------------
Commercial Goods & Services (2.0%)
58,950 CUC International, Inc.(b).... 1,521,647
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Computer Software (3.7%)
4,500 3COM Corp.(b)................. $ 202,500
7,100 Cisco Systems, Inc.(b)........ 476,588
8,300 Computer Associates
International, Inc.......... 462,206
8,800 McAfee Associates(b).......... 555,500
8,600 Microsoft Corp.(b)............ 1,086,825
------------
2,783,619
------------
Computers (8.3%)
5,500 Compaq Computer Corp.(b)...... 545,875
6,300 Dell Computer Corp.(b)........ 739,856
15,000 EMC Corp(b)................... 585,000
22,900 HBO & Co...................... 1,577,237
6,500 Honeywell, Inc................ 493,188
6,200 Intel Corp.................... 879,237
7,200 International Business
Machines Corp............... 649,350
9,500 Seagate Technology, Inc.(b)... 334,281
1,200 Stratus Computer, Inc.(b)..... 60,000
8,600 Western Digital(b)............ 271,975
------------
6,135,999
------------
Consumer Goods & Services (0.3%)
5,600 Newell........................ 221,900
------------
Diversified Products (1.9%)
12,400 Aeroquip-Vickers Inc.......... 585,900
9,600 General Electric.............. 627,600
8,600 Westinghouse Electric Corp.... 198,875
------------
1,412,375
------------
Electrical Equipment (0.1%)
1,600 Arrow Electronics, Inc.(b).... 85,000
0 Molex Inc.(c)................. 9
------------
85,009
------------
Electronic Components (2.0%)
7,800 LSI Logic Corp.(b)............ 249,600
7,600 Solectron Corp.(b)............ 532,475
4,100 Tektronix, Inc................ 246,000
2,300 Texas Instruments............. 193,344
6,100 Xilinx Incorporated(b)........ 299,281
------------
1,520,700
------------
Engines--Internal Combustion (1.0%)
10,800 Cummins Engine Co., Inc....... 762,075
------------
</TABLE>
Continued
B-42
<PAGE> 45
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Environmental Services (1.0%)
12,900 Browning-Ferris Industries,
Inc......................... $ 428,925
10,300 Waste Management Inc.......... 330,888
------------
759,813
------------
Financial Services (4.5%)
6,600 Associates First Capital
Corp........................ 366,300
6,100 Capital One Financial Corp.... 230,275
2,300 Citicorp...................... 277,294
4,200 Federal National Mortgage
Assoc....................... 183,225
6,800 Merrill Lynch & Co., Inc...... 405,450
15,900 MGIC Investment Corp.......... 762,205
17,000 Schwab, Charles Corp.......... 691,688
7,400 Washington Mutual, Inc........ 442,150
------------
3,358,587
------------
Food & Related (0.8%)
6,200 Archer-Daniels-Midland Co..... 145,700
8,100 IBP, Inc...................... 188,325
6,000 Universal Foods Corp.......... 228,750
------------
562,775
------------
Forest & Paper Products (0.3%)
2,500 Georgia Pacific Corp.......... 213,438
------------
Funeral Services (0.6%)
14,400 Service Corp. International... 473,400
------------
Hospital Supply & Management (0.5%)
4,700 Columbia/HCA Healthcare
Corp........................ 184,769
3,100 Oxford Health Plans,
Inc.(b)..................... 222,425
------------
407,194
------------
Household--General Products (0.4%)
4,800 Premark International, Inc.... 128,400
5,000 Tupperware Corp............... 182,500
------------
310,900
------------
Human Resources (0.5%)
4,800 Manpower Inc.................. 213,600
6,700 Olsten Corp................... 130,231
------------
343,831
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Insurance (6.3%)
1,650 AEGON N.V..................... $ 115,603
2,200 Aetna Services, Inc........... 225,225
14,600 Allstate Corp................. 1,065,799
4,800 American General Corp......... 229,200
4,200 American International Group,
Inc......................... 627,375
3,200 Chubb Corp.................... 214,000
4,900 Conseco Inc................... 181,300
7,300 Everest Reinsurance Holdings,
Inc......................... 289,263
11,700 Exel Ltd...................... 617,175
2,200 Hartford Financial Services
Group....................... 182,050
6,500 Old Republic International
Corp........................ 197,031
3,800 Providian Corp................ 122,075
3,400 ReliaStar Financial Corp...... 248,625
4,500 TIG Holdings Inc.............. 140,625
900 Torchmark Corp................ 64,125
2,100 Transatlantic Holdings,
Inc......................... 208,425
------------
4,727,896
------------
Linen Supply & Related Items (0.2%)
2,600 Cintas Corp................... 178,750
------------
Machine Tools & Related Products (0.5%)
9,200 Kennametal, Inc............... 395,600
------------
Machinery & Equipment (2.9%)
9,000 Case Corp..................... 619,875
1,800 Caterpillar, Inc.............. 193,275
7,000 Deere & Co.................... 384,125
8,000 Harnischfeger Industries,
Inc......................... 332,000
4,600 Tecumseh Products Co.,........ 275,425
11,500 Thermo Electron Corp.(b)...... 395,313
------------
2,200,013
------------
Manufacturing (0.4%)
4,500 Parker-Hannifin Corp.......... 273,094
------------
Medical Services & Supplies (1.0%)
28,700 HEALTHSOUTH Corp.(b).......... 715,706
------------
Medical--HMO (0.5%)
8,840 Foundation HealthCorp. A(b)... 267,962
4,900 Maxicare Health Plans,
Inc.(b)..................... 109,638
------------
377,600
------------
</TABLE>
Continued
B-43
<PAGE> 46
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Medical--Instruments/Products (2.9%)
7,300 Beckman Instruments Inc....... $ 352,225
7,700 Boston Scientific Corp.(b).... 473,069
7,600 Guidant Corp.................. 646,000
6,100 Mallinckrodt, Inc............. 231,800
3,600 Medtronic, Inc................ 291,600
9,600 Nellcor Puritan Bennett,
Inc.(b)..................... 174,000
------------
2,168,694
------------
Medical--Wholesale Drug Distribution (0.3%)
3,950 Cardinal Health, Inc.......... 226,138
------------
Motor Vehicles (1.5%)
18,300 Ford Motor Co................. 690,825
7,300 General Motors Corp........... 406,519
------------
1,097,344
------------
Office Supplies & Forms (0.1%)
3,400 Standard Register Co.......... 104,125
------------
Oil & Gas--Domestic (0.4%)
3,300 Amoco Corp.................... 286,894
------------
Oil & Gas--Exploration/Production (2.3%)
16,400 Anadarko Petroleum Corp....... 984,000
15,400 Cross Timbers Oil Co.......... 296,450
5,800 Repsol SA..................... 246,138
5,400 Ultramar Diamond Shamrock
Corp........................ 176,175
------------
1,702,763
------------
Oil--Gas Services (5.4%)
21,200 Baker Hughes, Inc............. 820,175
2,700 El Paso Natural Gas Co........ 148,500
7,900 Halliburton Co................ 626,075
29,100 Rowan Cos., Inc.(b)........... 820,256
9,800 Schlumberger Ltd.............. 1,224,999
14,000 Tosco Corp.................... 419,125
------------
4,059,130
------------
Oil--Integrated Companies (1.7%)
3,800 Atlantic Richfield Co......... 267,900
4,600 British Petroleum Co., Plc.... 344,425
4,500 Phillips Petroleum Co......... 196,875
15,200 USX -- Marathon Group......... 438,900
------------
1,248,100
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Pharmaceuticals (6.3%)
4,100 Amgen, Inc.(b)................ 238,313
9,625 Bergen Brunswig Corp. Class
A........................... 268,297
2,700 Bristol-Myers Squibb Co....... 218,700
13,200 Lilly, Eli & Co............... 1,442,924
9,300 Pfizer Inc.................... 1,111,350
11,200 Somatogen, Inc.(b)............ 51,800
11,400 Warner Lambert................ 1,416,449
------------
4,747,833
------------
Pipelines (0.3%)
7,600 MAPCO, Inc.................... 239,400
------------
Railroad (0.4%)
1,800 Burlington Northern Santa
Fe.......................... 161,775
3,100 CSX Corp...................... 172,050
------------
333,825
------------
Restaurants (1.6%)
24,800 Starbucks Corp.(b)............ 965,650
9,200 Wendy's International, Inc.... 238,625
------------
1,204,275
------------
Retail (5.6%)
20,500 Borders Group(b).............. 494,562
5,700 CVS Corporation............... 292,125
5,700 Dillards Inc., Class A........ 197,363
12,600 Home Depot, Inc............... 868,612
6,400 Kohls Corporation(b).......... 338,800
47,200 PETsMART, Inc.(b)............. 542,799
11,500 Price/Costco Inc.(b).......... 378,063
5,800 Safeway, Inc.(b).............. 267,525
17,600 Staples, Inc.(b).............. 409,200
16,400 TJX Cos., Inc................. 432,550
------------
4,221,599
------------
Telecommunications (6.5%)
8,900 America Online(b)............. 495,063
14,750 Andrew Corp.(b)............... 414,844
9,700 Ascend Communications,
Inc.(b)..................... 381,938
7,050 Glenayre Technologies,
Inc.(b)..................... 115,444
6,500 Lucent Technologies, Inc...... 468,406
7,600 Motorola, Inc................. 577,600
17,100 NEXTEL Communications(b)...... 323,831
6,400 QUALCOMM, Inc.(b)............. 325,600
18,100 Tele-Communications,
Inc.(b)..................... 269,238
14,200 Tellabs, Inc.(b).............. 793,424
22,700 WorldCom, Inc.(b)............. 726,399
------------
4,891,787
------------
</TABLE>
Continued
B-44
<PAGE> 47
THE SESSIONS GROUP
1ST SOURCE MONOGRAM DIVERSIFIED EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Textile (0.2%)
3,100 Springs Industries, Inc....... $ 163,525
------------
Tires & Rubber Products (0.8%)
9,300 Goodyear Tire & Rubber Co..... 588,806
------------
Tobacco (2.3%)
30,600 Philip Morris Cos., Inc....... 1,357,875
11,300 RJR Nabisco Holdings Corp..... 372,900
------------
1,730,775
------------
Toys (0.4%)
8,000 Toys "R" Us, Inc.(b).......... 280,000
------------
Transportation--Air (0.6%)
2,300 AMR Corp. Del(b).............. 212,750
2,800 UAL Corp.(b).................. 200,375
------------
413,125
------------
Utilities--Electric (1.0%)
4,400 Central Maine Power Co........ 54,450
3,100 CINergy Corp.................. 107,919
4,800 DTE Energy Co................. 132,600
2,611 Duke Energy Corp.............. 125,165
5,600 Entergy Corp.................. 153,300
4,600 GPU, Inc...................... 165,025
------------
738,459
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Gas & Pipeline (0.5%)
6,700 Sonat, Inc.................... 343,375
------------
Total Common Stocks........... 69,277,689
------------
PREFERRED STOCKS (1.1%)
Forest & Paper Products (0.2%)
4,000 Westvaco Corp................. 125,750
------------
Oil & Gas (0.4%)
8,800 YPF Sociedad Anonima-Spondored
ADR......................... 270,600
------------
Utilities-Telephone (0.5%)
5,600 Nokia Corp-Sponsored ADR...... 413,000
------------
Total Preferred Stocks........ 809,350
------------
REPURCHASE AGREEMENTS (6.8%)
$ 5,116,881 Fifth Third Bank Repurchase
Agreement, 5.07%, 7/1/97
(Collateralized by
$5,220,000 FHLMC Pool
#G10452, 7.00%, 2/1/11,
market value--$5,221,632)... 5,116,881
------------
Total Repurchase Agreements... 5,116,881
------------
Total (Cost--$61,183,407)
(a)......................... $ 75,203,920
============
</TABLE>
- ---------
Percentages indicated are based on net assets of $74,989,509.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $36,096.
Cost for federal income tax purposes differs from market value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $15,081,166
Unrealized depreciation.......................... (1,096,749)
-----------
Net unrealized appreciation...................... $13,984,417
===========
</TABLE>
(b) Represents non-income producing securities
(c) Amount owned is a fractional share.
See notes to financial statements.
B-45
<PAGE> 48
THE SESSIONS GROUP
1ST SOURCE MONOGRAM SPECIAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS (80.4%)
Aerospace/Defense--Equipment (0.8%)
7,500 AAR Corp...................... $ 242,344
-----------
Air Transportation (3.0%)
11,000 Atlas Air, Inc.(b)............ 379,500
21,000 Southwest Airlines Co......... 543,375
-----------
922,875
-----------
Apparel Manufacturers (1.7%)
16,650 Wolverine World Wide.......... 505,744
-----------
Automotive Parts (1.5%)
11,000 Tower Automotive(b)........... 473,000
-----------
Banking (2.9%)
11,000 Bank United Corp., Class A.... 418,000
29,000 Commonwealth Bancorp, Inc..... 474,875
-----------
892,875
-----------
Beer, Wine & Distilled Beverages (0.6%)
20,000 Boston Beer Co., Inc.(b)...... 197,500
-----------
Commercial Goods & Services (3.3%)
22,000 ABR Information Services,
Inc.,(b).................... 638,000
36,000 Warrentec Corp.(b)............ 373,500
-----------
1,011,500
-----------
Communications Equipment (3.7%)
37,000 CCC Information Services
Group(b).................... 721,500
12,500 Sawtek, Inc.(b)............... 421,875
-----------
1,143,375
-----------
Computer Software (11.4%)
24,800 Citrix Systems, Inc.(b)....... 1,088,099
55,000 Dataware Technologies
Inc.(b)..................... 165,000
11,000 Great Plains Software,
Inc.(b)..................... 297,000
15,100 I2 Technologies Inc(b)........ 468,100
17,000 JDA Software Group Inc,(b).... 580,125
36,000 Microware Systems Corp.(b).... 319,500
17,000 Netscape Communications
Corp.(b).................... 545,063
-----------
3,462,887
-----------
Electronic Components (5.9%)
36,000 S 3, Inc.(b).................. 396,000
60,200 Sonic Solutions, Inc.(b)...... 308,525
21,000 Triquint Semiconductor,
Inc.(b)..................... 721,875
11,750 Vitesse Semiconductor(b)...... 384,078
-----------
1,810,478
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Emerging Technology (0.4%)
19,000 Electric Fuel Corp.(b)........ $ 125,875
-----------
Financial Services (6.6%)
23,000 Aames Financial Corp.......... 425,500
18,000 ITLA Capital Corp(b).......... 292,500
30,000 Long Beach Financial
Corp(b)..................... 262,500
15,000 Mego Mortgage Corp.(b)........ 150,000
22,500 Ocwen Asset Investment
Corp.(b).................... 455,625
7,000 Washington Mutual, Inc........ 418,250
-----------
2,004,375
-----------
Human Resources (1.1%)
21,900 SOS Staffing Services,
Inc.(b)..................... 339,450
-----------
Leisure & Recreational Products (2.1%)
17,600 Cannondale Corp.(b)........... 312,400
18,200 North Face, Inc.(b)........... 332,150
-----------
644,550
-----------
Medical Services & Supplies (10.3%)
9,400 Agouron Pharmaceuticals,
Inc.(b)..................... 760,225
24,000 Columbia Laboratories
Inc.(b)..................... 393,000
28,000 HEALTHSOUTH Corp.(b).......... 698,250
29,000 ICOS Corp.(b)................. 239,250
21,000 Martek Bioscience Corp.(b).... 246,750
33,000 Vivus, Inc.(b)................ 785,812
-----------
3,123,287
-----------
Medical--Biotechnology (0.9%)
18,000 Alkermes(b)................... 261,000
-----------
Medical--Hosp Management Services (2.0%)
34,000 Orthodontic Centers Of
America, Inc.,(b)........... 618,375
-----------
Medical--Hospitals (0.3%)
49,000 Integrated Medical
Resources(b)................ 101,063
-----------
Oil--Field Services (0.8%)
9,700 Pride International,
Inc.(b)..................... 232,800
-----------
Oil--Gas Services (2.4%)
21,600 Newpark Resources(b).......... 729,000
-----------
Pharmaceuticals (1.3%)
18,300 Zonagen(b).................... 400,313
-----------
Publishing (0.7%)
18,500 UOL Publishing(b)............. 226,625
-----------
Real Estate Investment Trust (1.0%)
22,000 Prime Retail.................. 295,625
-----------
</TABLE>
Continued
B-46
<PAGE> 49
THE SESSIONS GROUP
1ST SOURCE MONOGRAM SPECIAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
-----------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Retail (2.6%)
11,500 Casey's General Stores........ $ 247,609
30,000 Oakley, Inc.(b)............... 421,875
5,000 Regis Corp.................... 118,125
-----------
787,609
-----------
Savings & Loans (7.6%)
18,000 Dime Community Bancorp,
Inc......................... 360,000
13,300 First Bell Bancorp, Inc....... 222,775
14,000 Home Bancorp of Elgin, Inc.... 231,000
15,000 Life Bancorp Inc.............. 388,125
6,000 Mercantile Bankshares......... 240,000
10,000 Peoples Heritage Bancorp...... 378,750
14,625 St. Paul Bancorp, Inc......... 484,452
-----------
2,305,102
-----------
Telecommunications (2.0%)
7,500 Echostar Communications(b).... 117,188
30,000 Glenayre Technologies,
Inc.(b)..................... 491,250
-----------
608,438
-----------
Textile (1.6%)
30,000 Sport-Haley, Inc.(b).......... 502,500
-----------
Tobacco (1.9%)
20,000 General Cigar Holdings(b)..... 588,750
-----------
Total Common Stocks........... 24,557,315
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
OPTIONS (1.1%)
Multi-Industry (1.1%)
80 Amex Computer Technology
Index....................... $ 201,000
85 Amex Computer Technology
Index....................... 122,188
-----------
Total Options................. 323,188
-----------
WARRANTS (0.0%)
5,000 Alza Corp. (b)................ 781
-----------
Total Warrants................ 781
-----------
REPURCHASE AGREEMENTS (19.5%)
$ 5,954,715 Fifth Third Bank Repurchase
Agreement, 5.07%, 7/1/97
(Collateralized by
$6,072,000 FHLMC Pool
#G10452, 7.00%, 2/1/11,
market value--$6,073,900)... 5,954,715
-----------
Total Repurchase Agreements... 5,954,715
-----------
Total (Cost--$28,310,633)
(a)......................... $30,835,999
===========
</TABLE>
- ---------
Percentages indicated are based on net assets of $30,524,241.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $56,091.
Cost for federal income tax purposes differs from market value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $ 4,419,447
Unrealized depreciation.......................... (1,950,172)
-----------
Net unrealized appreciation...................... $ 2,469,275
===========
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
B-47
<PAGE> 50
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COLLATERALLIZED MORTGAGE OBLIGATIONS (3.6%)
2,000,000 First Union Residential
Securitization.............. $ 1,983,740
------------
Total Collaterallized Mortgage
Obligations................. 1,983,740
------------
CORPORATE BONDS (31.0%)
Banking (1.8%)
1,000,000 Firstar Corp., 7.15%, 9/1/00,
Callable 9/1/98 @ 100....... 1,004,729
------------
Financial Services (10.0%)
1,000,000 Associates Corp., 6.75%,
7/15/01..................... 1,001,418
1,000,000 Bear Stearns Co.,Inc., 7.63%,
4/15/00..................... 1,024,494
1,250,000 General Electric Capital
Corp., 8.65%, 5/15/09,
Callable 5/15/97 @ 100...... 1,420,187
1,000,000 Salomon, Inc., 7.00%,
1/20/98..................... 1,004,830
1,000,000 Smith Barney Holdings, Inc.,
7.88%, 10/1/99.............. 1,027,239
------------
5,478,168
------------
Industrial Goods & Services (10.1%)
1,000,000 Honeywell, 7.13%, 4/15/08..... 1,006,052
1,500,000 Smithkline Beecham Corp.,
7.50%, 5/1/02............... 1,515,357
2,000,000 Texas Instruments, Inc.,
6.88%, 7/15/00.............. 2,020,187
1,000,000 Union Pacific Resources,
7.00%, 10/15/06............. 999,318
------------
5,540,914
------------
Motor Vehicles (3.7%)
2,000,000 Ford Motor Co., 7.25%,
10/1/08..................... 2,011,120
------------
Paper Products (1.8%)
1,000,000 International Paper Co.,
7.00%, 6/1/01............... 1,006,299
------------
Tobacco (3.6%)
2,000,000 Philip Morris Cos., Inc.,
6.80%, 12/1/03.............. 1,966,470
------------
Total Corporate Bonds 17,007,700
------------
PREFERRED STOCKS (5.5%)
Banking (0.9%)
20,000 Banker's Trust, 8.125%,
2/1/37...................... 506,250
------------
Electrical & Electronic (1.9%)
40,000 Southwestern Public Services,
Series A, 7.85%, 10/21/01,
Callable 10/21/01 @ 25.00... 1,010,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
PREFERRED STOCKS, CONTINUED:
Financial Services (0.9%)
20,000 Ml Capital Trust, 8.00%,
3/30/07..................... $ 507,500
------------
Food & Related (1.8%)
40,000 McDonald's Corp., 7.50%,
9/30/36, Callable 12/31/01 @
25.00....................... 995,000
------------
Total Preferred Stocks........ 3,018,750
------------
U.S. TREASURY OBLIGATIONS (22.1%)
3,000,000 5.63%, 11/30/98............... 2,985,939
2,000,000 5.88%, 11/15/99............... 1,986,876
2,000,000 6.25%, 5/31/00................ 2,001,250
3,000,000 7.75%, 2/15/01................ 3,138,750
2,000,000 6.50%, 10/15/06............... 1,991,250
------------
Total U.S. Treasury
Obligations................. 12,104,065
------------
U.S. GOVERNMENT AGENCIES (33.0%)
Federal Home Loan Bank (3.7%)
2,000,000 5.88%, 2/26/98................ 2,000,310
------------
Federal Home Loan Mortgage Corporation (12.8%)
1,000,000 8.41%, 12/7/01................ 1,021,960
1,000,000 8.63%, 11/29/04, Callable
11/29/99 @100............... 1,037,552
3,000,000 6.89%, 9/26/05................ 2,979,266
1,000,000 7.00%, 8/15/07................ 996,870
1,000,000 6.50%, 2/15/08................ 973,865
------------
7,009,513
------------
Federal National Mortgage Association (16.5%)
3,000,000 6.25%, 8/12/03................ 2,923,938
2,000,000 6.97%, 4/8/04................. 2,033,282
3,000,000 8.63%, 11/10/04............... 3,103,362
1,000,000 7.02%, 4/10/06................ 989,384
------------
9,049,966
------------
Total U.S. Government
Agencies.................... 18,059,789
------------
REPURCHASE AGREEMENTS (3.5%)
$ 1,942,995 Fifth Third Bank Repurchase
Agreement, 5.07%, 7/1/97
(Collateralized by
$1,982,000 FHLMC Pool
#G10452, 7.00%, 2/1/11,
market value--$1,982,620)... 1,942,995
------------
Total Repurchase Agreements... 1,942,995
------------
Total (Cost--$54,227,181)
(a)......................... $ 54,117,039
============
</TABLE>
Continued
B-48
<PAGE> 51
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
- ---------
Percentages indicated are based on net assets of $54,788,528.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized from
financial reporting in excess of federal income tax reporting of $46,563.
Cost for federal income tax purposes differs from market value by net
unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $ 261,212
Unrealized depreciation.......................... (417,917)
---------
Net unrealized depreciation...................... $(156,705)
=========
</TABLE>
See notes to financial statements.
B-49
<PAGE> 52
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS (82.2%)
Aerospace/Defense -- Equipment (4.4%)
11,000 General Motors Corp. -- Class
H........................... $ 635,250
8,000 Raytheon Co................... 408,000
12,500 Sundstrand Corp............... 675,000
------------
1,718,250
------------
Automotive Parts (1.4%)
28,000 Excel Industries, Inc......... 546,000
------------
Banking (1.6%)
18,000 Magna Group, Inc.............. 625,500
------------
Chemicals (4.4%)
10,000 Great Lakes Chemical Corp..... 523,750
25,000 Hanna (M. A.) Co.............. 720,312
11,000 Lubrizol Corp................. 461,313
------------
1,705,375
------------
Communications Equipment (1.3%)
6,000 Harris Corp................... 504,000
------------
Computer Services (1.2%)
11,000 Electronic Data Systems
Corp........................ 451,000
------------
Computers (1.2%)
10,000 Amdahl Corp.(b)............... 87,500
10,000 Sun Microsystems, Inc.(b)..... 372,188
------------
459,688
Construction -- Engineering (2.4%)
10,000 Fluor Corporation............. 551,875
10,000 Foster Wheeler Corp........... 405,000
------------
956,875
------------
Cosmetics & Toiletries (1.4%)
8,000 Avon Products, Inc............ 564,500
------------
Electrical Equipment (4.9%)
12,000 AMP, Inc...................... 501,000
12,400 Emerson Electric Co........... 682,775
21,000 Esterline Technologies,
Corp.(b).................... 748,125
------------
1,931,900
------------
Environmental Services (1.8%)
21,100 Browning-Ferris Industries,
Inc......................... 701,575
------------
Financial Services (2.4%)
20,000 Alliance Capital
Management-LP............... 585,000
10,000 Green Tree Financial Corp..... 356,250
------------
941,250
------------
Food & Related (2.4%)
20,000 Archer-Daniels-Midland Co..... 470,000
10,600 Quaker Oats Co................ 475,675
------------
945,675
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Furniture & Furnishings (0.7%)
20,000 Shelby Williams Industries.... $ 272,500
------------
Hospital Supply & Management (0.8%)
18,000 Angelica Corp................. 315,000
------------
Hotels & Motels (0.6%)
12,000 Signature Inns................ 222,000
------------
Insurance (6.5%)
20,000 La Salle RE Holdings.......... 589,999
9,000 Lincoln National Corp......... 579,375
20,000 Sotheby's Holdings Services... 337,500
13,000 Travelers/Aetna Property
Casualty-Class A............ 518,375
22,000 USF&G Corp.................... 528,000
------------
2,553,249
------------
Medical Equipment & Supplies (0.9%)
10,000 Bard (C. R.), Inc............. 363,125
------------
Mining (3.0%)
10,000 Cleveland Cliffs, Inc......... 407,500
11,000 IMC Global Strypes............ 412,500
5,000 Potash Corp. of Saskatchewan,
Inc......................... 375,313
------------
1,195,313
------------
Motor Vehicles (1.4%)
15,000 Ford Motor Co................. 566,250
------------
Office Equipment & Services (0.9%)
10,000 Donnelley R R & Sons Co....... 366,250
------------
Oil -- Integrated Companies (4.5%)
8,000 Atlantic Richfield Co......... 564,000
15,000 Phillips Petroleum Co......... 656,250
19,000 USX -- Marathon Group......... 548,625
------------
1,768,875
------------
Pharmaceuticals (6.3%)
9,000 Abbott Laboratories........... 600,750
8,750 Bergen Brunswig Corp. Class
A........................... 243,906
10,000 Bristol-Myers Squibb Co....... 810,000
8,000 Merck & Co., Inc.............. 828,000
------------
2,482,656
------------
Pipelines (1.2%)
15,000 MAPCO, Inc.................... 472,500
------------
Publishing (3.3%)
17,000 American Greetings Corp....... 631,125
14,000 Tribune Co.................... 672,875
------------
1,304,000
------------
</TABLE>
Continued
B-50
<PAGE> 53
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Railroad (2.4%)
14,500 Kansas City Southern
Industries, Inc............. $ 935,250
------------
Real Estate Investment Trust (6.4%)
22,000 Burnham Pacific Properties,
Inc......................... 302,500
14,875 Equity Residential Property... 706,562
12,000 Hospitality Properties
Trust....................... 367,500
21,000 Prentiss Properties Trust..... 538,125
24,000 Thornburg Mortgage Asset
Corp........................ 516,000
5,950 Wellsford Real Properties
Trust(b).................... 65,450
------------
2,496,137
------------
Retail (1.3%)
20,000 Long's Drug Stores, Inc....... 523,750
------------
Steel (1.2%)
10,000 Carpenter Technology Corp..... 457,500
------------
Telecommunications (2.8%)
16,500 Andrew Corp.(b)............... 464,063
17,000 US West Communications,
Inc......................... 640,687
------------
1,104,750
------------
Tires & Rubber Products (1.4%)
25,000 Cooper Tire & Rubber Co....... 550,000
------------
Transportation-Misc. (1.3%)
22,200 Sea Containers Class A........ 502,275
------------
Utilities-Electric (3.6%)
13,000 American Electric Power,
Co.......................... 546,000
16,000 Houston Industries, Inc....... 343,000
22,000 Montana Power Co.............. 510,125
------------
1,399,125
------------
Utilities-Telephone (0.9%)
10,000 AT & T Corp................... 350,625
------------
Total Common Stocks........... 32,252,718
------------
PREFERRED STOCKS (3.1%)
Industrials (1.6%)
8,000 Airtouch Communications,
Series B, 6.00%, 8/16/99.... $ 228,000
14,000 Snyder Oil Corp., Callable
3/31/97 @ 25.90............. 353,500
------------
581,500
------------
Merchandising (0.8%)
6,000 K Mart Preferred, 7.75%,
6/15/16, Callable 6/17/99 @
52.71....................... 329,250
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ----------- ------------------------------ ------------
<S> <C> <C>
PREFERRED STOCKS, CONTINUED:
Performance Equity-Linked Quarterly (0.7%)
8,000 Morgan Stanley -- Advanced
Micro Devices, 10% PERQS.... 293,000
------------
Total Preferred Stocks........ 1,203,750
------------
CONVERTIBLE BONDS (10.6%)
Electrical & Electronic (1.6%)
500,000 Itron Inc., 6.75%, 3/31/04.... 638,125
------------
Industrial Goods & Services (7.0%)
600,000 General Instrument Corp.,
5.00%, 6/15/00, Callable
6/15/97 @ 102.14............ 684,749
450,000 Integrated Device Technology
5.50%, 6/1/02, Callable
6/2/98 @ 102.75............. 381,938
150,000 IVAX Corp. 6.50%, 11/15/01,
Callable 11/15/97 @
100.93...................... 133,313
450,000 Mascotech 4.50%, 12/15/03,
Callable 12/15/97, @
102.50...................... 408,938
285,000 Oryx Energy Co. 7.50%,
5/15/14, Callable 5/15/98 @
101.50...................... 279,300
400,000 Park Electrochem 5.50%,
3/1/06, Callable 3/1/99 @
102.75...................... 357,000
500,000 Telxon Cvt. 5.75%, 1/1/03,
Callable 1/5/99 @ 103.29.... 455,000
------------
2,700,238
------------
Metals & Mining (0.9%)
400,000 Coeur D'Alene Mines Corp.
6.38%, 1/31/04, Callable
1/31/97 @ 103.64............ 365,000
------------
Restaurants (1.1%)
500,000 Boston Chicken, 7.75%,
5/1/04...................... 440,000
------------
Total Convertible Bonds....... 4,143,363
------------
REPURCHASE AGREEMENTS (4.0%)
1,560,619 Fifth Third Bank Repurchase
Agreement, 5.07%, 7/1/97
(Collateralized by
$1,592,000 FHLMC Pool
#G10452, 7.00%, 2/1/11,
market value --
$1,592,498)................. 1,560,619
------------
Total Repurchase Agreements... 1,560,619
------------
Total (Cost -- $31,045,896)
(a)......................... $ 39,160,450
============
</TABLE>
- ---------
Percentages indicated are based on net assets of $39,195,549.
Continued
B-51
<PAGE> 54
THE SESSIONS GROUP
1ST SOURCE MONOGRAM INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $ 8,532,909
Unrealized depreciation.......................... (440,162)
-----------
Net unrealized appreciation...................... $ 8,092,747(c)
===========
</TABLE>
(b) Represents non-income producing securities.
Footnote to Schedule of Investments
(c) The unrealized depreciation was increased $21,807 due to a decrease in
market value of the written covered call option on Electronic Data Services
Corp.
See notes to financial statements.
B-52
<PAGE> 55
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION:
The Sessions Group (the "Group") was organized on April 25, 1988 as an Ohio
business trust, and is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company.
The Group is authorized to issue an unlimited number of shares which are
units of beneficial interest without par value. The Group offers shares of
a number of different series or portfolios including the following series
for which 1st Source Bank serves as investment adviser: the 1st Source
Monogram Diversified Equity Fund, 1st Source Monogram Special Equity Fund,
1st Source Monogram Income Fund, and 1st Source Monogram Income Equity Fund
(collectively, the "Funds" and individually, a "Fund").
The investment objective for each of the Diversified Equity Fund and the
Special Equity Fund is capital appreciation. The investment objectives of
the Income Equity Fund are capital appreciation with current income as a
secondary objective. The investment objectives of the Income Fund are
current income consistent with preservation of capital.
Sales of shares of the Funds may be made by the Groups distributor BISYS
Fund Services Limited Partnership d/b/a BISYS Fund Services to customers of
1st Source Bank and its affiliates, to all accounts of correspondent banks
of 1st Source Bank and to the general public.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of income
and expenses for the period. Actual results could differ from those
estimates.
Securities Valuation:
Investments in common and preferred stocks, corporate bonds, commercial
paper, municipal securities and U.S. Government securities of the
Diversified Equity Fund, the Special Equity Fund, the Income Fund, and the
Income Equity Fund are valued at their market values determined on the
basis of the latest available bid quotation in the principal market
(closing sales prices if the principal market is an exchange or NASDAQ
National Market) in which such securities are normally traded. Investments
in investment companies are valued at their net asset values as reported by
such companies. Other securities for which quotations are not readily
available are valued at their fair value under procedures established by
the Group's Board of Trustees. The differences between the cost and market
values of investments held by the Funds are reflected as either unrealized
appreciation or depreciation.
Continued
B-53
<PAGE> 56
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the amortization of
premium or discount. Dividend income is recorded on the ex-dividend
date. Gains or losses realized on sales of securities are determined by
comparing the identified cost of the security lot sold with the net
sales proceeds.
REPURCHASE AGREEMENTS:
The Funds may acquire repurchase agreements from financial institutions
such as banks and broker dealers which 1st Source Bank deems
creditworthy under guidelines approved by the Board of Trustees, subject
to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price generally equals the
price paid by each 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, is required to maintain the value of collateral held pursuant
to the agreement at not less than the repurchase price (including
accrued interest). Securities subject to repurchase agreements are held
by the Funds' custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by the Funds under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS:
The Funds may borrow for temporary purposes by entering into reverse
repurchase agreements. 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 places in a segregated custodial account assets having a
value equal to the repurchase price (including accrued interest), and
will continually monitor the account to ensure such equivalent value is
maintained at all times. Reverse repurchase agreements are considered to
be borrowing by the Funds under the 1940 Act.
DERIVATIVES:
A derivative is defined as a financial instrument whose value is derived
from the performance of underlying assets, interest rate and currency
exchange rates, or indices, and include (but are not limited to)
structured debt obligations, interest rate and currency swaps, futures
contracts, options, and forward currency contracts. The Funds may invest
in structured debt obligations for the purpose of mitigating interest
rate risk in the portfolio. Such structured debt obligations have
floating interest rates that reset to various indices, and which reset
at periodic intervals, as disclosed in the accompanying Schedules of
Portfolio Investments. Risks of entering into such transactions include
the potential inability of the dealer to meet their obligations and
unanticipated movements in the value of the security or the underlying
assets or indices. It is possible that the Funds will incur a loss
Continued
B-54
<PAGE> 57
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
as a result of their investments in derivative instruments. It is the
Funds' policy, to the extent that there exists no readily available
market for such securities, that the investment will be treated as an
illiquid security for purposes of calculating the Funds' limitation on
investments in illiquid securities as set forth in the Funds' investment
restrictions.
DIVIDENDS TO SHAREHOLDERS:
A dividend for each of the Funds, other than the Special Equity Fund, is
declared monthly at the close of business on the day of declaration and
is paid monthly. A dividend for the Special Equity Fund is declared
quarterly at the close of business on the day of declaration and is paid
quarterly. Distributable net realized capital gains for each fund, if
any, are distributed at least annually. Each such dividend consists of
an amount of accumulated undistributed net investment income of that
Fund as determined necessary or appropriate by the officers of the
Group.
Dividends from net investment income and net realized capital gains are
determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences
are primarily due to differing treatments for net investment losses,
expiring capital loss carry forwards, and deferral of certain losses.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or
substantially all, Federal income taxes.
ORGANIZATION COSTS:
All expenses in connection with each Fund's organization and
registration under the 1940 Act and the Securities Act of 1933 were paid
by the Funds. Such expenses are amortized over a period of five years
commencing with the date of the initial public offering.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1997 are as follows (commencement of operations for
the Funds are September 23, 1996, September 20, 1996, September 24, 1996,
and September 25, 1996 respectively):
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Diversified Equity Fund........................................ $50,518,479 $48,070,875
Special Equity Fund............................................ 46,947,681 32,849,196
Income Fund.................................................... 61,544,273 53,965,465
Income Equity Fund............................................. 17,433,402 12,475,125
</TABLE>
Continued
B-55
<PAGE> 58
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Funds by 1st Source Bank.
Under the terms of the investment advisory agreement, 1st Source Bank is
entitled to receive fees based on a percentage of the average net assets of
each Fund. 1st Source Bank has agreed that if the aggregate expenses of the
Funds, as defined, for any fiscal year exceed limitations of any state
having jurisdiction over the Funds, 1st Source Bank will reimburse to the
Funds, or otherwise bear, such excess. Such limitation did not affect the
calculation of the investment advisory fees during the period ended June
30, 1997.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership, and BISYS Fund Services, Inc.
("BISYS Services") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Funds as administrator and distributor. Such officers and
trustees are paid no fees directly by the Funds for serving as officers and
trustees of the Group. Under the terms of the administration agreement,
BISYS's fees are computed daily as a percentage of the average net assets
of each Fund. BISYS Fund Services, Inc. serves the Funds as transfer agent
and mutual fund accountant.
The Group has adopted a Distribution and Shareholder Service Plan in
accordance with Rule 12b-1 under the 1940 Act, pursuant to which each Fund
is authorized to pay or reimburse BISYS, as distributor, a periodic amount,
calculated at an annual rate not to exceed 0.25% of the average net assets
of each Fund. These fees are used by BISYS to pay banks, including 1st
Source Bank, broker dealers and other institutions, or to reimburse BISYS
or its affiliates, for distribution and shareholder services in connection
with the distribution of Fund shares.
The Group has adopted an Administrative Services Plan, pursuant to which
each Fund is authorized to pay compensation to banks and other financial
institutions, which may include 1st Source Bank, its correspondent and
affiliated banks and BISYS, for providing ministerial, record keeping
and/or administrative support services to their customers who are the
beneficial or record owners of a Fund. The compensation which may be paid
under the Administrative Services Plan is a fee computed daily at an annual
rate of up to 0.25% of the average net asset, of each Fund. The Funds have
not implemented such a plan as of June 30, 1997.
BISYS is also entitled to receive commissions on sales of shares of the
Funds. For the period ended June 30, 1997, BISYS received $8,879 from
commissions earned on sales of shares of the Funds, of which $989 was
reallowed to broker/dealers, affiliated with 1st Source Bank.
Continued
B-56
<PAGE> 59
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
Fees may be voluntarily reduced to assist the Funds in maintaining
competitive expense ratios. Information regarding these transactions is as
follows for the period ended June 30, 1997:
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND FUND FUND FUND
----------- ------- ------- -------
<S> <C> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........ 1.10% .80% .55% .80%
ADMINISTRATION FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........ .20% .20% .20% .20%
Voluntary fee reductions.................... -- $ 2,171 -- --
12B-1 FEES:
Annual fee before voluntary fee reductions
(percentage of average net assets)........ .25% .25% .25% .25%
Voluntary fee reductions.................... $ 131,653 $52,106 $95,550 $64,714
FUND ACCOUNTING FEES........................ $ 15,798 $ 6,757 $11,464 $ 7,790
TRANSFER AGENT FEES......................... $ 28,892 $22,347 $26,460 $23,797
</TABLE>
5. FEDERAL INCOME TAX INFORMATION (UNAUDITED):
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occuring on the first day of the following fiscal
year. As of June 30, 1997 the Special Equity and Income Funds had deferred
losses of $1,131,589 and $75,294, respectively, which will be treated as
arising on the first day of the fiscal year ending June 30, 1998. At June
30, 1997 the Income Fund has a capital loss carryforward of $93,866 which
is available to offset future capital gains until June 30, 2005.
During the period ended June 30, 1997, the following Funds declared
long-term capital gain distributions in the following amounts:
<TABLE>
<CAPTION>
FUND AMOUNT
---- --------
<S> <C>
Diversified Equity............................................................ $742,374
--------
Special Equity................................................................ $146,202
--------
</TABLE>
Continued
B-57
<PAGE> 60
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
The Trust designates the following percentage of distributions eligible for
the dividends received deductions for corporations.
<TABLE>
<CAPTION>
FUND PERCENTAGE
---- ----------
<S> <C>
Diversified Equity......................................... 18.37%
Special Equity............................................. 6.49%
Income Equity.............................................. 28.52%
Income Fund................................................ 3.83%
</TABLE>
6. FINANCIAL INSTRUMENTS:
Investing in financial instruments such as written options involves risk in
excess of the amounts reflected in the Statements of Assets and
Liabilities. The face or contract amounts reflect the extent of the
involvement the Fund have in the particular class of instruments. Risks
associated with these instruments include an imperfect correlation between
the movements in the price of the instruments and the price of the
underlying securities. The Fund enter into these contracts primarily as a
means to hedge against adverse fluctuation in the value of securities.
The following is a summary of written option activity for the period ended
June 30, 1997 by the Income Equity Fund (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNTS
OF CONTRACTS PREMIUMS
------------ ----------
<S> <C> <C>
Balance at beginning of period................................. -- $ --
Option written................................................. 110 11,193
Options closed................................................. -- --
Options exercised.............................................. -- --
--- ----------
Options outstanding at end of period........................... 110 $ 11,193
=== ==========
</TABLE>
<TABLE>
<CAPTION>
SHARES
SUBJECT
TO CONTRACT VALUE
------------ ----------
<S> <C> <C>
Covered Call Options
Options outstanding at end of period consist of:
Electronic Data Systems, $40, August 1997................... 110 $ 33,000
=== ==========
</TABLE>
Continued
B-58
<PAGE> 61
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
7. ACQUISITION OF COMMON TRUST FUNDS:
On September 23, 1996, September 20, 1996, September 24, 1996, and
September 25, 1996, the Diversified Equity, Special Equity, Income, and
Income Equity Funds, respectively, acquired all of the assets of the Common
Trust Funds of 1st Source Bank, in a tax-free conversion. The following is
a summary of shares issued, net assets acquired, net asset value per share
and unrealized appreciation (depreciation) as of the respective acquisition
dates:
<TABLE>
<CAPTION>
DIVERSIFIED SPECIAL INCOME
EQUITY EQUITY INCOME EQUITY
FUND FUND FUND FUND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares................................ 6,620,301 2,687,767 4,788,285 3,096,895
Net assets............................ $66,203,008 $26,877,666 $47,882,850 $30,968,953
Net asset value....................... 10.00 10.00 10.00 10.00
Unrealized appreciation
(depreciation)...................... 8,888,125 2,220,445 (900,376) 3,728,143
</TABLE>
Continued
B-59
<PAGE> 62
THE SESSIONS GROUP
1ST SOURCE MONOGRAM FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DIVERSIFIED
EQUITY SPECIAL EQUITY INCOME INCOME EQUITY
---------------- ---------------- ---------------- ----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
ENDED ENDED ENDED ENDED
JUNE 30, 1997(a) JUNE 30, 1997(a) JUNE 30, 1997(a) JUNE 30, 1997(a)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- --------
INVESTMENT ACTIVITIES
Net investment income.................... (0.01) -- 0.44 0.20
Net realized and unrealized
gains(losses) on investments........... 2.03 (0.10)(d) 0.12 2.32
-------- -------- -------- --------
Total from Investment Activities....... 2.02 (0.10) 0.56 2.52
-------- -------- -------- --------
DISTRIBUTIONS
Net investment income.................... -- -- (0.43) (0.19)
Net realized gains....................... (0.22) -- -- (0.05)
In excess of realized gains.............. -- (0.31) -- --
-------- -------- -------- --------
Total Distributions.................... (0.22) (0.31) (0.43) (0.24)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD............. $ 11.80 $ 9.59 $ 10.13 $ 12.28
-------- -------- -------- --------
Total Return (excludes sales charge)....... 20.42%(b) -1.03%(b) 5.71%(b) 25.58%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (000)....... $ 74,990 $ 30,524 $ 54,789 $ 39,196
Ratio of expenses to average net
assets................................. 1.62%(c) 1.39%(c) 1.05%(c) 1.37%(c)
Ratio of net investment income
to average net assets.................. -0.10%(c) 0.05%(c) 5.71%(c) 2.38%(c)
Ratio of expenses to average net
assets*................................ 1.87%(c) 1.65%(c) 1.30%(c) 1.62%(c)
Ratio of net investment income
to average net assets*................. -0.35%(c) -0.21%(c) 5.46%(c) 2.13%(c)
Portfolio Turnover Rate.................. 76.54% 152.81% 118.33% 38.49%
Average Broker Commission Paid........... $ 0.0572(e) $ 0.0941(e) -- $ 0.0988(e)
</TABLE>
- ---------
* During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occured, the ratios would have been as indicated.
(a) Commencement of operations of the Funds began September 23, 1996, September
20, 1996, September 24, 1996, and September 25, 1996 respectively.
(b) Not annualized
(c) Annualized
(d) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio of
securities during the period because of the timing of sales and purchases of
Fund shares in relation to fluctuating market values during the period.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged. Pertains to fund with greater than
10% investments in equity.
See notes to financial statements.
B-60
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
1st Source Monogram Funds
We have audited the accompanying statements of assets and liabilities of the 1st
Source Monogram Funds (comprising, respectively, the Diversified Equity Fund,
Special Equity Fund, Income Fund and Income Equity Fund), including the
schedules of portfolio investments, as of June 30, 1997, and the related
statements of operations, statements of changes in net assets, and financial
highlights for the period then ended. These financial statements and financial
highlights are the responsibility of 1st Source Monogram Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1997, by correspondence with the custodian and brokers or other auditing
procedures where confirmations from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective funds comprising the 1st Source Monogram Funds as of June 30,
1997, and the results of their operations, the changes in their net assets and
the financial highlights for the period then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Columbus, Ohio
August 22, 1997
B-61
<PAGE> 64
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. Commercial paper rated A-3 by S&P
indicates adequate capacity for timely payment. Such paper is, however, more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Commercial paper rated B by S&P is regarded as
having only speculative capacity for timely payment. Commercial paper rated C by
S&P is regarded as short-term obligations with a doubtful capacity for payment.
Commercial paper rated D by S&P is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
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.
Issuers rated Prime-3 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. The effects of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate
A-1
<PAGE> 65
alternate liquidity is maintained. Issuers rated Not Prime do not fall within
any of the Prime rating categories.
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. Commercial paper rated F-3 by Fitch is
regarded as having characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes could cause these
securities to be rated below investment grade. Commercial paper rated F-S by
Fitch is regarded as having characteristics suggesting a minimal degree of
assurance for timely payment and is vulnerable to near term adverse changes in
financial and economic conditions. Commercial paper rated D by Fitch is in
actual or imminent payment default.
The description of the three 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 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. Duff 3 is regarded as having
a satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected. Duff 4 is considered as having
speculative investment characteristics. Liquidity is not sufficient to insure
against disruption in debt service. Operating factors and market access may be
subject to a high degree of variation. Duff 5 indicates that the issuer has
failed to meet scheduled principal and/or interest payments.
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
A-2
<PAGE> 66
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. Obligations rated A3 are supported by a satisfactory capacity for
timely repayment. Obligations rated B are those for which there is an
uncertainty as to the capacity to ensure timely repayment. Obligations rated C
are those for which there is a high risk of default or which are currently in
default.
The following summarizes the description of the three 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." TBW-3 is the lowest investment grade category and indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate. TBW-4 is the lowest rating category and
is regarded as non-investment grade and therefore speculative.
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.
The following summarizes the three 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
A-3
<PAGE> 67
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.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds
rated Aa through A. The modifier 1 indicates that the bond being rated ranks in
the higher end of its generic rating category; the modifier 2 indicates a
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 three highest long-term debt ratings by
Duff. Debt rated AAA has the highest credit quality. 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.
To provide more detailed indications of credit quality, the ratings
from AA to A 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 three 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.
The following summarizes IBCA's three 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
A-4
<PAGE> 68
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.
The following summarizes Thomson's description of its three 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.
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.
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<PAGE> 69
"SP-3": Speculative capacity to pay principal and interest.
The following summarizes the three 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
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.
The following summarizes the three 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.
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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 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
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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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Rule 497(c)
File No. 811-5545
Registration No. 33-21489
THE KEYPREMIER PRIME MONEY MARKET FUND
THE KEYPREMIER PENNSYLVANIA MUNICIPAL BOND FUND
THE KEYPREMIER ESTABLISHED GROWTH FUND
THE KEYPREMIER INTERMEDIATE TERM INCOME FUND
THE KEYPREMIER AGGRESSIVE GROWTH FUND
THE KEYPREMIER U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
THE KEYPREMIER LIMITED DURATION GOVERNMENT SECURITIES FUND
Seven Investment Portfolios of
THE SESSIONS GROUP
Statement of Additional Information
October 31, 1997
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the prospectuses (the "Prospectuses") of The
KeyPremier Prime Money Market Fund (the "Prime Money Market Fund"), The
KeyPremier Pennsylvania Municipal Bond Fund (the "Pennsylvania Bond Fund"), The
KeyPremier Established Growth Fund (the "Established Growth Fund"), The
KeyPremier Intermediate Term Income Fund (the "Income Fund"), The KeyPremier
Aggressive Growth Fund (the "Aggressive Growth Fund"), The KeyPremier U.S.
Treasury Obligations Money Market Fund (the "Treasury Money Market Fund") and
The KeyPremier Limited Duration Government Securities Fund (the "Government
Securities Fund"), each dated as of the date hereof. The Prime Money Market
Fund, the Pennsylvania Bond Fund, the Established Growth Fund, the Income Fund,
the Aggressive Growth Fund, the Treasury Money Market Fund and the Government
Securities Fund are hereafter collectively referred to as the "Funds" and
individually as a "Fund." The Funds are seven of seventeen funds of The Sessions
Group, an Ohio business trust (the "Group"). This Statement of Additional
Information is incorporated in its entirety into each Fund's Prospectus. Copies
of the Funds' Prospectuses may be obtained by writing the Group at 3435 Stelzer
Road, Columbus, Ohio 43219, or by telephoning toll free (800) 766-3960.
<PAGE> 73
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-19
Portfolio Turnover.......................................................................... B-21
NET ASSET VALUE...................................................................................... B-21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................... B-22
MANAGEMENT AND SERVICE PROVIDERS OF THE GROUP........................................................ B-23
Trustees and Officers....................................................................... B-23
Investment Adviser.......................................................................... B-26
Portfolio Transactions...................................................................... B-27
Glass-Steagall Act.......................................................................... B-30
Administrator............................................................................... B-31
Distributor................................................................................. B-33
Administrative Services Plan................................................................ B-34
Custodian................................................................................... B-34
Transfer Agency and Fund Accounting Services................................................ B-34
Auditors.................................................................................... B-37
Legal Counsel............................................................................... B-37
ADDITIONAL INFORMATION............................................................................... B-37
Description of Shares....................................................................... B-37
Vote of a Majority of the Outstanding Shares................................................ B-38
Additional General Tax Information.......................................................... B-39
Additional Tax Information With Respect to
the Pennsylvania Bond Fund.................................................................. B-42
Seven-Day and 30-Day Yields of the Prime Money Market
Fund and the Treasury Money Market Fund..................................................... B-47
30-Day Yield of the Funds................................................................... B-47
Calculation of Total Return................................................................. B-49
Distribution Rates.......................................................................... B-51
Performance Comparisons..................................................................... B-51
Miscellaneous............................................................................... B-52
FINANCIAL STATEMENTS................................................................................. B-53
APPENDIX............................................................................................. A-1
</TABLE>
<PAGE> 74
STATEMENT OF ADDITIONAL INFORMATION
THE SESSIONS GROUP
The Sessions Group (the "Group") is an open-end management investment
company which currently offers seventeen separate investment portfolios. This
Statement of Additional Information covers seven of those portfolios, the Prime
Money Market Fund, the Established Growth Fund, the Income Fund, the Aggressive
Growth Fund, the Treasury Money Market Fund and the Government Securities Fund,
each of which is considered to be a diversified portfolio, and the Pennsylvania
Bond Fund, which is considered to be a non-diversified portfolio.
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectuses. Capitalized
terms not defined herein are defined in the relevant Prospectus. No investment
in Shares of any Fund should be made without first reading such Fund's
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 their respective Prospectuses.
BANK OBLIGATIONS. Each Fund, other than the Treasury Money Market Fund
and the Government Securities 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
<PAGE> 75
instrument is insured in full by the Federal Deposit Insurance Corporation.
The Prime Money Market Fund may also invest in Eurodollar Certificates
of Deposit, which are U.S. dollar denominated certificates of deposit issued by
offices of foreign and domestic banks located outside the United States; Yankee
Certificates of Deposit, which are certificates of deposit issued by a U.S.
branch of a foreign bank denominated in U.S. dollars and held in the United
States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; and Canadian Time
Deposits, which are basically the same as ETDs except they are issued by
Canadian offices of major Canadian banks.
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 commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Funds, other than the Treasury Money Market Fund and the Government
Securities Fund, 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
("S&P") and Moody's Investors Service, Inc. ("Moody's")) in one of the two
highest rating categories for short-term debt obligations. Each such 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. The Prime Money Market Fund may also invest, subject to the foregoing
quality criteria, in Canadian Commercial Paper, which is commercial paper issued
by a Canadian corporation or a Canadian counterpart of a U.S. corporation
("CCP"), and in Europaper, which is U.S. dollar denominated commercial paper of
a foreign issuer.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes in which the Prime Money Market Fund, the Pennsylvania Bond Fund and 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 a Fund and the issuer, they are not normally
traded. Although there is no secondary market in the notes, the Fund may demand
payment of principal and accrued interest at any time within 30 days. While such
notes are not typically rated by
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<PAGE> 76
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 a 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. A Fund will acquire such securities only when the
Adviser believes the risks associated with such investments are minimal.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
although the Treasury Money Market Fund currently expects to invest only in
those obligations which are backed by the full faith and credit of the U.S.
Government. 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,
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<PAGE> 77
"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.
EXEMPT SECURITIES. As stated in its Prospectus, the assets of the
Pennsylvania Bond Fund will be primarily invested in Exempt Securities. Under
normal market conditions, at least 80% of the net assets of the Pennsylvania
Bond Fund will be invested in Exempt Securities and 65% of the Pennsylvania Bond
Fund's net assets will be invested in Pennsylvania Exempt Securities.
Exempt Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Exempt Securities, ONLY if the interest paid
thereon is exempt from both Pennsylvania income taxes and federal taxes,
although such interest may be treated as a preference item for purposes of the
federal alternative minimum tax.
Among other types of Exempt Securities, the Pennsylvania Bond Fund may
purchase short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, Project Notes, Tax-Exempt
Commercial Paper, Construction Loan Notes and other forms of short-term
tax-exempt loans. Such instruments are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In addition, the Pennsylvania Bond Fund may invest in other
types of tax-exempt instruments, such as municipal bonds, private activity
bonds, and pollution control bonds.
Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to
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<PAGE> 78
its Project Notes, they are also secured by the full faith and credit of the
United States through agreements with the issuing authority which provide that,
if required, the federal government will lend the issuer an amount equal to the
principal of and interest on the Project Notes.
As described in the Prospectus of the Pennsylvania Bond Fund, the two
principal classifications of Exempt Securities consist of "general obligation"
and "revenue" issues. The Pennsylvania Bond Fund may also acquire "moral
obligation" issues, which are normally issued by special purpose authorities.
There are, of course, variations in the quality of Exempt Securities, both
within a particular classification and between classifications, and the yields
on Exempt Securities depend upon a variety of factors, including the financial
condition of the issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. Ratings represent the opinions of an NRSRO as to the quality of
Exempt Securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and Exempt Securities with the same
maturity, interest rate and rating may have different yields, while Exempt
Securities of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to purchase, an issue of Exempt Securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase. The Adviser will consider such an event in determining whether the
Pennsylvania Bond Fund should continue to hold the obligation.
An issuer's obligations under its Exempt Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Exempt Securities may be materially
adversely affected by litigation or other conditions.
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 or amortized cost, as the case may be. 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
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<PAGE> 79
approximates its par value or amortized cost, as the case may be. Such
securities, that are not obligations of the U.S. Government or its agencies or
instrumentalities, are frequently not rated by credit rating agencies; however,
unrated variable and floating rate securities purchased by 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.
Variable or floating rate securities invested in by the Prime Money
Market Fund and the Treasury Money Market Fund may have maturities of more than
397 days, as follows:
1. An instrument that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days is deemed by the Fund to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is scheduled on
the face of the instrument to be paid in 397 calendar days or less, is deemed by
the Fund to have a maturity equal to the earlier of the period remaining until
the next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
3. A variable rate note that is subject to a demand feature is deemed
by the Fund to have a maturity equal to the longer of the period remaining until
the next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
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<PAGE> 80
4. A floating rate note which has a remaining maturity of 397 days or
less is deemed by the Fund to have a maturity of one day. A floating rate note
that has a remaining maturity of more than 397 days and is subject to a demand
feature is deemed by the Fund to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the security either at any time
on no more than thirty days' notice or at specific intervals not exceeding 397
days and upon no more than 30 days' notice.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations or installment
purchase contract obligations (collectively, "lease obligations") have special
risks not ordinarily associated with Exempt Securities. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation ordinarily is
based by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
The staff of the Commission currently considers certain lease obligations to be
illiquid. Determination as to the liquidity of such securities is made in
accordance with guidelines established by the Group's Board of Trustees.
Pursuant to such guidelines, the Board of Trustees has directed the Adviser to
monitor carefully the Pennsylvania Bond Fund's investment in such securities
with particular regard to (1) the frequency of trades and quotes for the lease
obligation; (2) the number of dealers willing to purchase or sell the lease
obligations and the number of other potential buyers; (3) the willingness of
dealers to undertake to make a market in the lease obligation; (4) the nature of
the marketplace trades including the time needed to dispose of the lease
obligation, the method of soliciting offers and the mechanics of transfer; and
(5) such other factors concerning the trading market for the lease obligation as
the Adviser may deem relevant. In addition, in evaluating the liquidity and
credit quality of a lease obligation that is unrated, the Group's Board of
Trustees has directed the Adviser to consider (a) whether the lease can be
cancelled; (b) what assurance there is that the assets represented by the lease
can be sold; (c) the strength of the lessee's general credit (e.g., its debt,
administrative, economic and financial characteristics); (d) the likelihood that
the municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the
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operations of the municipality (e.g., the potential for an event of
"non-appropriation"); (e) the legal recourse in the event of failure to
appropriate; and (f) such other factors concerning credit quality as the Adviser
may deem relevant. The Pennsylvania Bond Fund will not invest more than 15% of
the value of its net assets in lease obligations that are illiquid and in other
illiquid securities.
RESTRICTED SECURITIES. Securities in which the Income Fund and the
Aggressive Growth 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 a 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 a 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 and the Aggressive Growth Fund
will each limit its investment in Section 4(2) securities to not more than 10%
and 5%, respectively, of its net assets.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Income Fund and the
Government Securities Fund may, consistent with its investment objective and
policies, invest in mortgage-related securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. In addition, the Income Fund
may also invest in mortgage-related securities issued by non-governmental
entities.
Mortgage-backed securities, for purposes of the Income Fund's and the
Government Securities Fund's 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 in the
case of the Income
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Fund. 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 a 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 a 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 a 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 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
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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 a 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 a 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 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
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prepayments on fixed rate mortgage loans will increase during a period of
declining interest rates. Accordingly, amounts available for reinvestment by a
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 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
obligations. 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
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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 Prospectuses, 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 Fund's investment objectives and policies and not for investment
leverage. If the Pennsylvania Bond Fund sells a "when-issued" or
"delayed-delivery" security before delivery, any gain would not be tax-exempt.
REAL ESTATE INVESTMENT TRUSTS. The Aggressive Growth Fund may invest in
equity REITs. REITs pool investors' funds for investment primarily in commercial
real estate properties. Investment in REITs may subject the Aggressive Growth
Fund to certain risks. REITs may be affected by changes in the value of the
underlying property owned by the trust. REITs are dependent upon specialized
management skill, may not be diversified and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self liquidation and the possibility of failing to
qualify for the beneficial tax treatment
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available to REITs under the Internal Revenue Code and to maintain its exemption
from the 1940 Act. As a shareholder in a REIT, the Aggressive Growth Fund would
bear, along with other shareholders, its pro rata portion of the REIT's
operating expenses. These expenses would be in addition to the advisory and
other expenses the Aggressive Growth Fund bears directly in connection with its
own operations.
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 Prospectuses, 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 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.
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Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act and therefore a form of leveraging.
LOWER RATED BONDS. The Pennsylvania Bond Fund and the Income Fund are
each 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. A 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, such Funds anticipate 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 that
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 such
a Fund to obtain accurate market quotations for purposes of valuing that 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.
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The Income and Pennsylvania Funds may acquire these bonds during an
initial offering. Such securities may involve special risks because they are new
issues. Such Funds have 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 such Funds may invest. Zero
coupon bonds carry an additional risk in that, unlike bonds which pay interest
through the period to maturity, a Fund will realize no cash until the cash
payment date unless a portion of such securities are sold and, if the issuer
defaults, the Fund may obtain no return at all on its investment.
SHORT SALES. Each of the Pennsylvania Bond Fund, the Income Fund and
the Government Securities Fund may from time to time sell securities short.
Short sales are effected when it is believed that the price of a particular
security will decline, and involves the sale of a security which the Fund does
not own in the hope of purchasing the same security at a later date at a lower
price. To make delivery to the buyer, the Fund must borrow the security, and the
Fund is obligated to return the security to the lender, which is accomplished by
a later purchase of the security by that Fund. The frequency of short sales will
vary substantially in different periods, and it is not intended that any
specified portion of a Fund's assets will as a matter of practice be invested in
short sales.
At any time that a Fund has an open short sale position, such Fund is
required to segregate with its custodian (and to maintain such amount until the
Fund replaces the borrowed security) an amount of cash or U.S. Government
securities or other liquid securities equal to the difference between (i) the
current market value of the securities sold short and (ii) any cash or
securities required to be deposited with the broker in connection with the short
sale (not including the proceeds from the short sale). As a result of these
requirements, a Fund will not gain any leverage merely by selling short, except
to the extent that it earns interest on the immobilized cash or securities while
also being subject to the possibility of gain or loss from the securities sold
short. The total amount of cash or liquid securities deposited with the broker
(not including the proceeds of the short sale) and segregated by the Fund with
such Fund's custodian may not at any time be more than 25% of that Fund's net
assets. These deposits do not have the effect of limiting the amount of money
the Fund may lose on a short sale -- a Fund's possible losses may exceed the
total amount of deposits.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale
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and the date on which the Fund purchases the security to replace the borrowed
security. A Fund will realize a gain if the security declines in price between
those dates. The amount of any gain will be decreased and the amount of any loss
increased by any premium or interest the Fund may be required to pay in
connection with a short sale. It should be noted that possible losses from short
sales differ from those that could arise from a cash investment in a security in
that the former may be limitless while the latter can only equal the total
amount of the Fund's investment in the security. For example, if a Fund
purchases a $10 security short, the most that can be lost is $10. However, if a
Fund sells a $10 security short, it may have to purchase the security for return
to the lender when the market value is $50, thereby incurring a loss of $40.
HEDGING TRANSACTIONS. Hedging transactions, including the use of
options and futures, in which certain of the Funds are authorized to engage as
described in their respective Prospectuses, 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 and certain
over-the-counter options may have no markets. 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.
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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 in the applicable Prospectuses and 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 options 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 a Fund 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
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require such Fund to hold a security or instrument which it might otherwise have
sold. With respect to put options written by a Fund, such Fund will place liquid
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 Prospectuses, the Pennsylvania
Bond Fund, the Established Growth Fund, the Income Fund and the Aggressive
Growth Fund may each 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 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 securities equal to the value of such
contracts.
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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.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
securities issued by other investment companies. In addition, each Fund, other
than the Prime Money Market Fund and the Treasury Money Market Fund, may invest
in money market funds advised by the Adviser. 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 Prospectuses, 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 its respective
Prospectus, each Fund may not:
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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; and
2. Mortgage or hypothecate the Fund's assets in excess of one-third of
such Fund's total assets.
In addition, none of the Prime Money Market Fund, the Established
Growth Fund, the Aggressive Growth Fund or the Treasury Money Market Fund may
engage in any short sales. However, each of the Pennsylvania Bond Fund, the
Income Fund and the Government Securities Fund may not engage in short sales of
any securities at any time if, immediately after and as a result of the short
sale, the market value of securities sold short by such Fund would exceed 25% of
the value of that 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
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soon as reasonably practicable. In such an event, however, no Fund 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.
Because the Prime Money Market Fund and the Treasury Money Market Fund
each intend to invest substantially all of its assets in securities with
maturities of less than one year and because the Commission requires such
securities to be excluded from the calculation of portfolio turnover rate, the
portfolio turnover with respect to such Funds is expected to be no greater than
10%. The portfolio turnover rates for the Pennsylvania Bond Fund, the
Established Growth Fund, the Income Fund and the Aggressive Growth Fund for
their first fiscal period ended June 30, 1997, are as follows:
<TABLE>
<CAPTION>
Period Ended
June 30, 1997
-------------
<S> <C>
Pennsylvania Bond Fund 98%
Established Growth Fund 1%
Income Fund 329%
Aggressive Growth Fund 2%
</TABLE>
The portfolio turnover rate for the Government Securities Fund for its
first fiscal period ending June 30, 1998, is 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.
NET ASSET VALUE
The Prime Money Market Fund and the Treasury Money Market Fund
(collectively, the "Money Market Funds" and individually, a "Money Market Fund")
have each elected to use the amortized cost method of
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valuation pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an
instrument at its cost initially and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Money Market Fund would receive if it sold the instrument.
The value of securities in a Money Market Fund can be expected to vary inversely
with changes in prevailing interest rates.
Pursuant to Rule 2a-7, each Money Market Fund will maintain a
dollar-weighted average portfolio maturity appropriate to the Money Market
Fund's objective of maintaining a stable net asset value per share, provided
that neither Money Market Fund will purchase any security with a remaining
maturity of more than 397 days (thirteen months) (securities subject to
repurchase agreements may bear longer maturities) nor maintain a dollar-weighted
average portfolio maturity which exceeds 90 days. The Group's Board of Trustees
has also undertaken to establish procedures reasonably designed, taking into
account current market conditions and the investment objective of the Money
Market Funds, to stabilize the net asset value per share of each Money Market
Fund for purposes of sales and redemptions at $1.00. These procedures include
review by the Trustees, at such intervals as they deem appropriate, to determine
the extent, if any, to which the net asset value per share of the Money Market
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one-half of one percent, Rule 2a-7
requires that the Board of Trustees promptly consider what action, if any,
should be initiated. If the Trustees believe that the extent of any deviation
from a Money Market Fund's $1.00 amortized cost price per Share may result in
material dilution or other unfair results to new or existing investors, they
will take such steps as they consider appropriate to eliminate or reduce, to the
extent reasonably practicable, any such dilution or unfair results. These steps
may include selling portfolio instruments prior to maturity, shortening the
average portfolio maturity, withholding or reducing dividends, reducing the
number of the Money Market Fund's outstanding Shares without monetary
consideration, or utilizing a net asset value per share determined by using
available market quotations.
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 or correspondents
B-22
<PAGE> 96
(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.
MANAGEMENT AND SERVICE PROVIDERS OF THE GROUP
Trustees and Officers
- ---------------------
Overall responsibility for management of the Group rests with its Board
of Trustees. 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 Principal Occupation
Name, Address and Age With the Group During Past 5 Years
- --------------------- -------------- -------------------
<S> <C> <C>
Walter B. Grimm* Chairman, From June, 1992 to present,
3435 Stelzer Road President and employee of BISYS Fund
Columbus, Ohio 43219 Trustee Services Limited
Age: 52 Partnership.
Nancy E. Converse* Trustee and Since July, 1990, employee
3435 Stelzer Road Assistant of BISYS Fund Services
Columbus, Ohio 43219 Secretary Limited Partnership.
Age: 48
Maurice G. Stark Trustee Consultant with Battelle
505 King Avenue Memorial Institute; from 1979
Columbus, Ohio 43201 to December, 1994, Vice
Age: 62 President-Finance and Chief
Financial Officer, Battelle
Memorial Institute
(scientific research and
development service
corporation).
James H. Woodward, Ph.D. Trustee Since July 1989, Chancellor
The University of North of The University of North
Carolina at Charlotte Carolina at Charlotte.
Charlotte, NC 28223
Age: 57
</TABLE>
B-23
<PAGE> 97
<TABLE>
<S> <C> <C>
Chalmers P. Wylie Trustee From April, 1993 to present,
754 Stonewood Court of Counsel with Kegler,
Columbus, Ohio 43235 Brown, Hill & Ritter (law
Age: 76 firm); from January, 1993 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.
J. David Huber Vice President Since January, 1996,
3435 Stelzer Road President of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 51 Partnership; from June, 1987
to December, 1995, employee
of BISYS Fund Services
Limited Partnership.
William J. Tomko Vice President From April, 1987 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 39 Partnership.
Thresa B. Dewar Treasurer From March, 1997 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 43 Partnership; prior thereto,
Vice President and
Controller of Federated
Administrative Services, Inc.
(investment management firm).
George L. Stevens Secretary From September, 1996 to
3435 Stelzer Road present, employee of BISYS
Columbus, Ohio 43219 Fund Services Limited
Age: 46 Partnership; from September,
1995 to August, 1996,
consultant on bank
investment products and
activities; from June, 1980
to September, 1995, employee
of AmSouth Bank.
Alaina V. Metz Assistant From June, 1995 to present,
3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, Ohio 43219 Services Limited
Age: 30 Partnership; prior to June,
1995, supervisor of Blue
Sky Compliance at Alliance
Capital Management, L.P.
(investment management
firm).
<FN>
- -------------------
*Mr. Grimm and Ms. Converse are each considered to be an "interested
person" of the Group as defined in the 1940 Act.
</TABLE>
B-24
<PAGE> 98
As of the date of this Statement of Additional Information, the Group's
officers and trustees, as a group, own less than 1% of any 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, may
receive fees pursuant to the Administrative Services Plan described
below and may retain all or a portion of any sales load imposed
upon purchases of Shares. BISYS Fund Services, Inc. receives fees
from the Funds for acting as transfer agent and for providing
certain fund accounting services. Messrs. Grimm, Huber, Tomko and
Stevens, Ms. Converse, Ms. Dewar 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, 1997. The Group
has no pension or retirement plans.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate Total Compensation
Name and Position Compensation From the Group
With the Group From the Group and the Fund Complex*
- -------------- -------------- ---------------------
<S> <C> <C>
Walter B. Grimm $0 $0
Trustee
Nancy E. Converse $0 $0
Trustee
Maurice G. Stark $14,473 $14,473
Trustee
James H. Woodward, Ph.D. $16,162 $16,162
Trustee
Chalmers P. Wylie $14,973 $14,973
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.
</TABLE>
B-25
<PAGE> 99
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 June 30, 1997.
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
Prime Money Market Fund and the Treasury Money Market Fund each pay 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 such
Fund; the Pennsylvania Bond Fund, the Income Fund and the Government Securities
Fund each pay 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 such Fund; the Established 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
Established Growth Fund; and the Aggressive Growth Fund pays the Adviser a fee,
computed daily and paid monthly, at the annual rate of one percent (1.00%) of
the average daily net assets of the Aggressive Growth 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, 1997, the Adviser earned and voluntarily waived
the amounts indicated below with respect to its investment advisory services to
the indicated Funds pursuant to the Investment Advisory Agreement:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
----------------
Fees Earned Fees Waived
----------- -----------
<S> <C> <C>
Prime Money Market Fund $282,882 $236,280
Pennsylvania Bond Fund 506,296 420,686
Established Growth Fund 735,635 558,942
Income Fund 680,552 529,626
Aggressive Growth Fund 385,280 263,486
<FN>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, October 1, 1996,
December 2, 1996, December 2, 1996, and February 3, 1997, respectively.
</TABLE>
For the fiscal year ended June 30, 1997, the Adviser had not received
any compensation under the Investment Advisory Agreement
B-26
<PAGE> 100
with respect to either the Treasury Money Market Fund or the Government
Securities Fund since neither of those Funds 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 at least 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."
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 each of the Funds,
other than the Established Growth Fund and the Aggressive Growth 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
B-27
<PAGE> 101
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 Established
Growth Fund and the Aggressive 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 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 it believes is fair and
equitable to the Group and the Funds.
The Adviser may direct brokerage transactions on behalf of the
Established Growth Fund and the Aggressive Growth Fund to Boston
B-28
<PAGE> 102
Institutional in return for research services relating to equity securities
including equity universe analysis from Chicago Investment Analytics, market
information from Bloomberg Financial Markets, equity analysis from Financial
Statement Alert Service and Zacks Software for equity analysis. For the fiscal
period ended June 30, 1997, the amount of such transactions and related
commissions on behalf of the Established Growth Fund were $3,903,504 and
$7,570, respectively, and on behalf of the Aggressive Growth Fund were
$1,488,612 and $4,140, respectively.
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.
For the fiscal period ended June 30, 1997, the Group paid the following
brokerage commissions on behalf of the Established Growth Fund and the
Aggressive Growth Fund:
<TABLE>
<CAPTION>
Fiscal Period Ended June 30, 1997
<S> <C>
Established Growth Fund $19,776
Aggressive Growth Fund 6,878
</TABLE>
During the past fiscal period, no brokerage commissions were paid by
the Group on behalf of the Prime Money Market Fund, the Pennsylvania Bond Fund
or the Income 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
B-29
<PAGE> 103
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 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.
For the fiscal period ended June 30, 1997, the Established Growth Fund
held securities of its regular brokers or dealers, as defined in Rule 10b-1
under the 1940 Act, or their parent companies. As of June 30, 1997, such Fund
held $130,000 of common stock of Morgan Stanley, Dean Witter, Discover & Co.
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
B-30
<PAGE> 104
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 relevant Prospectuses, 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 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 June 30, 1997 (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
B-31
<PAGE> 105
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; determine the actual variance from $1.00 of the Prime
Money Market Fund's and the Treasury Money Market Fund's net asset value per
share; 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 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 period ended June 30, 1997, the Administrator earned the
following amounts with respect to its administrative services to the Funds
indicated below pursuant to the Administration Agreement:
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
----------------
<S> <C>
Prime Money Market Fund $ 81,328
Pennsylvania Bond Fund 97,040
Established Growth Fund 112,311
Income Fund 129,863
Aggressive Growth Fund 44,692
<FN>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, October 1, 1996,
December 2, 1996, December 2, 1996, and February 3, 1997, respectively.
</TABLE>
B-32
<PAGE> 106
For the fiscal year ended June 30, 1997, the Administrator had not
received any compensation under the Administration Agreement with respect to the
Treasury Money Market Fund or the Government Securities Fund since those Funds
had not 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.
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 June
30, 1997 (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
B-33
<PAGE> 107
Group but retains all or a portion of any sales charge imposed upon a purchase
of the Shares.
Administrative Services Plan
- ----------------------------
As described in the Prospectuses, 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 affiliated and 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 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.
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 June 30, 1997. 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.
B-34
<PAGE> 108
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 June 30, 1997. 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 period ended June 30, 1997, the Transfer Agent earned
the amounts indicated below with respect to its transfer agency services to the
indicated Funds.
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
----------------
<S> <C>
Prime Money Market Fund $ 19,648
Pennsylvania Bond Fund 21,322
Established Growth Fund 20,282
Income Fund 19,824
Aggressive Growth Fund 11,099
<FN>
- -------------------------
(1) Such Funds commenced operations October 7, 1996, October 1, 1996,
December 2, 1996, December 2, 1996, and February 3, 1997, respectively.
</TABLE>
For the fiscal year ended June 30, 1997, the Transfer Agent received no
compensation from the Group for services as transfer agent for the Treasury
Money Market Fund or the Government Securities Fund since such 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 Accounting Agreement dated July
9, 1996, as amended as of June 30, 1997. 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 ($35,000 for the
Pennsylvania Bond Fund). 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
B-35
<PAGE> 109
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, and 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.
For the fiscal period ended June 30, 1997, BISYS Fund Services, Inc.
earned the amounts indicated below with respect to its fund accounting services
to the indicated Funds.
<TABLE>
<CAPTION>
Fiscal Period Ended
June 30, 1997(1)
----------------
<S> <C>
Prime Money Market Fund $ 21,776
Pennsylvania Bond Fund 30,096
Established Growth Fund 31,176
Income Fund 35,604
Aggressive Growth Fund 13,033
</TABLE>
B-36
<PAGE> 110
- -------------------------
(1) Such Funds commenced operations October 7, 1996, October 1, 1996,
December 2, 1996, December 2, 1996, and February 3, 1997, respectively.
For the fiscal year ended June 30, 1997, BISYS Fund Services, Inc.
earned no fees with respect to its fund accounting services to the Treasury
Money Market Fund and the Government Securities Fund since such Funds had not
yet commenced operations.
Auditors
- --------
The financial statements for the Prime Money Market, Pennsylvania Bond,
Established Growth, Income and Aggressive Growth Funds as of June 30, 1997, and
for the periods indicated therein, appearing in the Statement of Additional
Information have been audited by KPMG Peat Marwick LLP, Two Nationwide Plaza,
Columbus, Ohio 43215, as set forth in their report appearing with the
aforementioned financial statements included herein, and are included in
reliance upon such report and on the authority of such firm as experts in
auditing and accounting.
Legal Counsel
- -------------
Baker & Hostetler LLP, 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 seventeen series
of shares, seven of which represent interests in the Funds. The other ten 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, 1st Source Monogram Diversified Equity Fund, 1st
Source Monogram Income Equity Fund, 1st Source Monogram Special Equity Fund and
1st Source Monogram Income 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
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<PAGE> 111
its discretion. When issued for payment as described in the applicable
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 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 a fundamental
investment policy would be effectively acted upon with respect to a fund only if
approved by a majority of the outstanding shares of such fund. However, 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 October 16, 1997, the following is the only entity known to the
Group who owns of record or beneficially 5% or more of the outstanding Shares of
any of the Funds: Keystone Financial, Inc., 1315 Eleventh Avenue, P. O. Box
2450, Altoona, Pennsylvania 16601 owned beneficially and of record 71.99% of the
issued and outstanding Shares of the Prime Money Market Fund, 97.49% of the
issued and outstanding Shares of Pennsylvania Bond Fund, 96.57% of the issued
and outstanding Shares of the Established Growth Fund, 98.33% of the issued and
outstanding Shares of Income Fund, 95.51% of the issued and outstanding Shares
of the Aggressive Growth Fund, 66.83% of the issued and outstanding Shares of
the Treasury Money Market Fund, and 99.39% of the issued and outstanding Shares
of the Government Securities Fund.
Vote of a Majority of the Outstanding Shares
- --------------------------------------------
As used in the Prospectuses 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
B-38
<PAGE> 112
holders of more than 50% of the outstanding votes of Shareholders
of that Fund.
Additional General Tax Information
- ----------------------------------
Each of the seventeen 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, among other things: diversify its investments within certain
prescribed limits; 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; and, in taxable years beginning on or before August 5, 1997, 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. 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 mid-term or 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
B-39
<PAGE> 113
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.
Distribution by a Fund of the excess of net mid-term or net long-term
capital gain over net short-term capital loss, if any, is taxable to
Shareholders as mid-term or long-term capital gain, respectively, 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 effective 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.
Long-term capital gains of individuals are subject to a maximum tax
rate of 20% (10% for individuals in the 15% ordinary income tax bracket).
Mid-term capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on mid-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. The holding period for mid-term capital gains is
more than one year but not more than eighteen months; the holding period for
long-term capital gains is more than eighteen months.
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.
B-40
<PAGE> 114
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. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by that
Fund for its taxable year that qualifies for the dividends received deduction.
Because all of the Prime Money Market Fund's, the Pennsylvania Bond Fund's, the
Income Fund's, the Treasury Money Market Fund's and the Government Securities
Fund's net investment income is expected to be derived from earned interest and
short term capital gains, it is anticipated that no distributions from such
Funds 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 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
B-41
<PAGE> 115
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 a 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, a 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, that 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.
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 Prospectuses 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 Prospectuses and this Statement of
Additional Information is based on tax laws and regulations which are in effect
on the date of the Prospectuses and this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action.
Information as to the federal income tax status of all distributions
will be mailed annually to each Shareholder.
B-42
<PAGE> 116
Additional Tax Information With Respect to the Pennsylvania Bond Fund
- ---------------------------------------------------------------------
The Pennsylvania Bond Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Pennsylvania Bond Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans, and individual retirement
accounts, since such plans and accounts are generally tax-exempt and, therefore,
would not gain any additional benefit from all or a portion of the Pennsylvania
Bond Fund's dividends being tax-exempt and such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the
Pennsylvania Bond Fund may not be an appropriate investment for entities which
are "substantial users," or "related persons" thereof, of facilities financed by
private activity bonds held by the Pennsylvania Bond Fund.
The Code permits a regulated investment company which invests in Exempt
Securities to pay to its Shareholders "exempt-interest dividends," which are
excluded from gross income for federal income tax purposes, if at the close of
each quarter of its taxable year at least 50% of its total assets consist of
Exempt Securities.
An exempt-interest dividend is any dividend or part thereof (other than
a capital gain dividend) paid by the Pennsylvania Bond Fund that is derived from
interest received by the Pennsylvania Bond Fund that is excluded from gross
income for federal income tax purposes, net of certain deductions, provided the
dividend is designated as an exempt-interest dividend in a written notice mailed
to Shareholders not later than sixty days after the close of the Pennsylvania
Bond Fund's taxable year. The percentage of the total dividends paid by the
Pennsylvania Bond Fund during any taxable year that qualifies as exempt-interest
dividends will be the same for all Shareholders of the Pennsylvania Bond Fund
receiving dividends during such year. Exempt-interest dividends shall be treated
by the Pennsylvania Bond Fund's Shareholders as items of interest excludable
from their gross income for Federal income tax purposes under Section 103(a) of
the Code. However, a Shareholder is advised to consult his tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Section
103(a) of the Code if such Shareholder is a "substantial user" or a "related
person" to such user under Section 147(a) of the Code with respect to any of the
Exempt Securities held by the Pennsylvania Bond Fund. If a Shareholder receives
an exempt- interest dividend with respect to any Share and such Share is held by
the Shareholder for six months or less, any loss on the sale or exchange of such
Share shall be disallowed to the extent of the amount of such exempt-interest
dividend.
B-43
<PAGE> 117
In general, interest on indebtedness incurred or continued by a
Shareholder to purchase or carry Shares is not deductible for federal income tax
purposes if the Pennsylvania Bond Fund distributes exempt-interest dividends
during the Shareholder's taxable year. A Shareholder of the Pennsylvania Bond
Fund that is a financial institution may not deduct interest expense
attributable to indebtedness incurred or continued to purchase or carry Shares
of the Pennsylvania Bond Fund if the Pennsylvania Bond Fund distributes
exempt-interest dividends during the Shareholder's taxable year. Certain federal
income tax deductions of property and casualty insurance companies holding
Shares of the Pennsylvania Bond Fund and receiving exempt-interest dividends may
also be adversely affected. In certain limited instances, the portion of Social
Security benefits received by a Shareholder which may be subject to federal
income tax may be affected by the amount of tax-exempt interest income,
including exempt-interest dividends received by Shareholders of the Pennsylvania
Bond Fund.
In the event the Pennsylvania Bond Fund realizes mid-term or long-term
capital gains, the Pennsylvania Bond Fund intends to distribute any realized net
mid-term or net long-term capital gains annually. If the Pennsylvania Bond Fund
distributes such gains, the Pennsylvania Bond Fund will have no tax liability
with respect to such gains, and the distributions will be taxable to
Shareholders as mid-term or long-term capital gains, respectively, regardless of
how long the Shareholders have held their Shares. Any such distributions will be
designated as a capital gain dividend in a written notice mailed by the
Pennsylvania Bond Fund to the Shareholders not later than sixty days after the
close of the Pennsylvania Bond Fund's taxable year. It should be noted, however,
that long-term capital gains of individuals are subject to a maximum tax rate of
20% (or 10% for individuals in the 15% ordinary income tax bracket) and mid-term
capital gains are taxed like ordinary income except that net capital gains of
individuals are subject to a maximum federal income tax rate of 28%. Any net
short-term capital gains are taxed at ordinary income tax rates. If a
Shareholder receives a capital gain dividend with respect to any Share and then
sells the Share before he has held it for more than six months, any loss on the
sale of the Share is treated as long-term capital loss to the extent of the
capital gain dividend received.
Interest earned on certain municipal obligations issued on or after
August 8, 1986, to finance certain private activities will be treated as a tax
preference item in computing the alternative minimum tax. Since the Pennsylvania
Bond Fund may invest up to 20% of its net assets in municipal securities the
interest on which may be treated as a tax preference item, a portion of the
exempt- interest dividends received by Shareholders from the Pennsylvania Bond
Fund may be treated as tax preference items in computing the alternative minimum
tax to the extent that distributions by the
B-44
<PAGE> 118
Pennsylvania Bond Fund are attributable to such obligations. Also, a portion of
all other interest excluded from gross income for federal income tax purposes
earned by a corporation may be subject to the alternative minimum tax as a
result of the inclusion in alternative minimum taxable income of 75% of the
excess of adjusted current earnings and profits over pre-book alternative
minimum taxable income. Adjusted current earnings and profits would include
exempt-interest dividends distributed by the Pennsylvania Bond Fund to corporate
Shareholders. For individuals the alternative minimum tax rate is 26% on
alternative minimum taxable income up to $175,000 and 28% on the excess of
$175,000; for corporations the alternative minimum tax rate is 20%.
For taxable years of corporations beginning before 1996, the Superfund
Revenue Act of 1986 imposes an additional tax (which is deductible for federal
income tax purposes) on a corporation at a rate of 0.12 of one percent on the
excess over $2,000,000 of such corporation's "modified alternative minimum
taxable income", which would include a portion of the exempt-interest dividends
distributed by the Pennsylvania Bond Fund to such corporation. In addition,
exempt-interest dividends distributed to certain foreign corporations doing
business in the United States could be subject to a branch profits tax imposed
by Section 884 of the Code.
Distributions of exempt-interest dividends by the Pennsylvania Bond
Fund may be subject to state and local taxes even though a substantial portion
of such distributions may be derived from interest on obligations which, if
received directly, would be exempt from such taxes. The Pennsylvania Bond Fund
will report to its Shareholders annually after the close of its taxable year the
percentage and source, on a state-by-state basis, of interest income earned on
municipal obligations held by the Pennsylvania Bond Fund during the preceding
year. Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes.
As indicated in the Prospectus, the Pennsylvania Bond Fund may acquire
rights regarding specified portfolio securities under puts. See "INVESTMENT
OBJECTIVES AND POLICIES -- Additional Information on Portfolio Instruments -
Puts" in this Statement of Additional Information. The policy of the
Pennsylvania Bond Fund is to limit its acquisition of puts to those under which
it will be treated for federal income tax purposes as the owner of the Exempt
Securities acquired subject to the put and the interest on the Exempt Securities
will be tax-exempt to it. Although the Internal Revenue Service has issued a
published ruling that provides some guidance regarding the tax consequences of
the purchase of puts, there is currently no guidance available from the Internal
Revenue Service that definitively establishes the tax consequences of many of
the types of puts that the Pennsylvania Bond Fund could acquire under the 1940
Act. Therefore, although the Pennsylvania Bond Fund
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<PAGE> 119
will only acquire a put after concluding that it will have the tax consequences
described above, the Internal Revenue Service could reach a different
conclusion.
Under Section 1256 of the Code, gain or loss realized by the
Pennsylvania Bond 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 the Pennsylvania Bond Fund's taxable
year will be treated as sold for their then fair market value, resulting in
additional gain or loss to the Pennsylvania Bond Fund characterized in the
manner described above.
Offsetting positions held by the Pennsylvania Bond 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 the Pennsylvania Bond 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. The
Pennsylvania Bond 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 the Pennsylvania Bond Fund, losses realized by the
Pennsylvania Bond 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 Pennsylvania Bond 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
Pennsylvania Bond 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 Pennsylvania
B-46
<PAGE> 120
Bond 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.
Income itself exempt from Federal income taxation may be considered in
addition to taxable income when determining whether Social Security payments
received by a Shareholder are subject to federal income taxation.
Seven-Day and 30-Day Yields of the Prime Money Market Fund and the Treasury
- ---------------------------------------------------------------------------
Money Market Fund
- -----------------
The standardized seven-day yield for the Prime Money Market Fund and
the Treasury Money Market Fund is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical preexisting account
in that Fund having a balance of one Share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from Shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7). The net change in the account
value of the Fund includes the value of additional Shares purchased with
dividends from the original Share, dividends declared on both the original Share
and any such additional Shares, and all fees, other than nonrecurring account or
sales charges, that are charged to all Shareholder accounts in proportion to the
length of the base period and assuming such Fund's average account size. The
capital changes to be excluded from the calculation of the net change in account
value are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The 30-day yield is calculated as described above
except that the base period is 30 days rather than seven days.
The effective yield for the Prime Money Market Fund and the Treasury
Money Market Fund is computed by compounding the base period return, as
calculated above, by adding 1 to the base period return raising the sum to a
power equal to 365 divided by seven and subtracting 1 from the result.
For the seven-day period ended June 30, 1997, the Prime Money Market
Fund's seven-day yield and seven-day effective yield were 5.09% and 5.22%,
respectively. For the 30-day period ended June 30, 1997, the yield and effective
yield for the Prime Money Market Fund were 5.11% and 5.23%, respectively.
For the seven-day period ended September 30, 1997, the Treasury Money
Market Fund's seven-day yield and seven-day effective yield were 4.65% and
4.75%, respectively. For the 30-day period ended September 30, 1997, the yield
and effective yield for the Treasury Money Market Fund were 4.62% and 4.72%,
respectively.
B-47
<PAGE> 121
30-Day Yield of the Funds
- -------------------------
As summarized in the Prospectuses 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 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.
In addition, tax equivalent yields are computed by dividing that
portion of the Pennsylvania Bond Fund's yield (as computed above) which is
tax-exempt by one minus a stated income tax rate and adding that result to that
portion, if any, of the yield of the Pennsylvania Bond Fund which is not
tax-exempt.
For the 30-day period ended June 30, 1997, the yields for the
Pennsylvania Bond Fund and the Income Fund were 3.91% and 6.12%, respectively,
assuming the imposition of the maximum sales charge, and 4.10% and 6.41%,
respectively, excluding the effect of a sales charge. For the same period, the
tax equivalent yields for the Pennsylvania Bond Fund, assuming a 39.6% federal
tax rate, were 6.47%, assuming the imposition of the maximum sales charge, and
6.79%, excluding the effect of a sales charge.
For the 30-day period ended September 30, 1997, the yields for the
Government Securities Fund were 5.23% assuming the imposition of the maximum
sales charge, and 5.39% excluding the effect of a sales charge.
B-48
<PAGE> 122
Calculation of Total Return
- ---------------------------
As summarized in the Prospectuses 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 or in lieu of average
annual total return. Aggregate total return
B-49
<PAGE> 123
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.
For the one year period ended June 30, 1997, and the period from
commencement of operations to June 30, 1997, the average annual total returns
for the Funds (other than the Treasury Money Market Fund and the Government
Securities Fund), including the performance of any Fund's predecessor CIFs
(which performance has been restated to reflect the estimated fees for such Fund
for the current fiscal year), are as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Fund With Maximum Sales Load(1) Without Sales Load
---- -------------------------- ------------------
Since Since
1 Year Inception(2) 1 Year Inception(2)
------ --------- ------ ---------
<CAPTION>
<S> <C> <C> <C> <C>
Prime Money Market -- 3.73% -- 3.73%
Pennsylvania Bond -- -0.69% -- 3.98%
Established Growth 21.96% 28.64% 27.60% 31.05%
Income -- -3.16% -- 1.40%
Aggressive Growth 10.36% 18.81% 15.52% 20.63%
<FN>
- -----------------------
1 The maximum sales load for the Pennsylvania Bond Fund, the Established
Growth Fund, the Income Fund, and the Aggressive Growth Fund is 4.50%.
2 Commenced operations October 7, 1996, October 1, 1996, January 1, 1995
(the Established Growth Fund's predecessor CIF), December 2, 1996, and
July 1, 1994 (the Aggressive Growth Fund's predecessor CIF),
respectively.
The Prime Money Market Fund has no sales load.
</TABLE>
For the one year period ended September 30, 1997, and the period from
commencement of operations to September 30, 1997, the average annual returns for
the Treasury Money Market Fund and the Government Securities Fund (including the
performance of the Government Securities Fund's predecessor CFS, which
performance has been restated to reflect the estimated fees for such Fund for
the current fiscal year), are as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Fund With Maximum Sales Load(3) Without Sales Load
---- -------------------------- ------------------
Since Since
1 Year Inception(4) 1 Year Inception(4)
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Treasury Money Market -- 1.20% -- 1.20%
Government Securities 1.97% 3.31% 5.17% 4.97%
<FN>
- -----------------------
3 The maximum sales load for the Government Securities Fund is 3.00%. The
Treasury Money Market Fund has no sales load.
4 The Treasury Money Market Fund commenced operations July 1, 1997. The
Government Securities Fund's predecessor CF commenced operations
October 31, 1995.
</TABLE>
B-50
<PAGE> 124
Performance figures for periods prior to a Fund's commencement of
operations are for such Fund's predecessor CIFs and not those of the Fund. And,
of course, past performance is no guarantee as to future performance.
For the period from commencement of operations (October 1, 1996 and
December 2, 1996, respectively) to June 30, 1997, the aggregate total returns
for the Pennsylvania Bond Fund and the Income Fund were -0.69% and -3.16%,
respectively, reflecting the imposition of the maximum sales load, and 3.98% and
1.40%, respectively, assuming no sales load.
Distribution Rates
- ------------------
The Funds 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 S&P 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 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
B-51
<PAGE> 125
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 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 Prospectuses 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 Prospectuses 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 Prospectuses and this Statement of Additional Information.
B-52
<PAGE> 126
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following unaudited financial statements for the period ended
September 30, 1997, for the Treasury Money Market Fund and the Government
Securities Fund reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Of course, there can be no guarantee that such results will be reflected in the
financial statements as of June 30, 1998.
B-53
<PAGE> 127
THE SESSIONS GROUP
KeyPremier Funds
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
September 30, 1997
(Unaudited)
Limited Duration U.S. Treasury
Government Obligations
Securities Money Market
Fund Fund
------------------------- -------------------------
<S> <C> <C>
ASSETS:
Investments, at value (cost $36,093,647 and $14,006,019) $ 36,092,457 $ 14,006,019
Repurchase agreements (cost $3,136,000 and $9,539,000) 3,136,000 9,539,000
------------------------- -------------------------
Total Investments 39,228,457 23,545,019
Cash 419 918
Interest and dividends receivable 308,958 338,476
Unamortized organization costs 2,255 7,223
Prepaid expenses and other assets 1,012 789
------------------------- -------------------------
Total Assets 39,541,101 23,892,425
------------------------- -------------------------
LIABILITIES:
Dividends payable 167,575 86,239
Payable to brokers for investments purchased 3,474,267 ---
Accrued expenses and other payables:
Investment advisory fees --- ---
Administration fees 452 305
Accounting fees 863 513
Custodian fees 1,288 2,116
Trustees' fees 136 82
Audit fees 2,852 2,760
Legal fees 6,999 7,057
Printing 2,760 2,668
Transfer agent fees 2,936 2,587
Registration and filing fees 3,588 3,220
Other 10,559 118
------------------------- -------------------------
Total Liabilities 3,674,275 107,665
------------------------- -------------------------
NET ASSETS:
Capital 35,862,102 23,784,760
Net unrealized appreciation on investments (1,190) ---
Accumulated undistributed net
realized gains on investment transactions 5,914 ---
------------------------- -------------------------
Net Assets $ 35,866,826 $ 23,784,760
========================= =========================
Outstanding units of beneficial interest (shares) 3,588,962 23,784,760
========================= =========================
Net asset value - redemption price per share $ 9.99 $ 1.00
========================= =========================
Maximum Sales Charge 3.00% -
========================= =========================
Maximum Offering Price (100%/(100%-Maximum Sales
Charge) of net asset value adjusted to nearest
cent) per share $ 10.30 $ 1.00
========================= =========================
</TABLE>
See notes to financial statements.
B-54
<PAGE> 128
THE SESSIONS GROUP
KeyPremier Funds
<TABLE>
<CAPTION>
Statements of Operations
For Period Ended September 30, 1997
(Unaudited)
Limited Duration U.S. Treasury
Government Obligations
Securities Money Market
Fund (a) Fund (a)
------------------------- -------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 570,391 $ 285,612
Dividend income 5,531 2,647
------------------------- -------------------------
Total Income 575,922 288,259
------------------------- -------------------------
EXPENSES:
Investment advisory fees 54,138 21,704
Administration fees 10,376 6,240
Accounting fees 8,205 7,745
Custodian fees 1,288 2,116
Audit fees 2,852 2,760
Legal fees 7,452 7,452
Organization costs 6,256 1,288
Trustees' fees and expenses 368 276
Transfer agent fees 6,532 6,164
Registration and filing fees 3,588 3,220
Printing costs 3,036 3,036
Other 277 184
------------------------- -------------------------
Total Expenses 104,368 62,185
Less: Expenses voluntarily reduced (54,138) (21,704)
------------------------- -------------------------
Net Investment Income 525,692 247,778
------------------------- -------------------------
REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on investment
transactions 5,914 ---
Change in unrealized appreciation/depreciation
on investments (37,006) ---
------------------------- -------------------------
Net realized/unrealized gains (losses) on investments (31,092) ---
------------------------- -------------------------
Change in net assets resulting from
operations $ 494,600 $ 247,778
========================= =========================
</TABLE>
(a) Commencement of the Funds began July 1, 1997.
See notes to financial statements.
B-55
<PAGE> 129
THE SESSIONS GROUP
KeyPremier Funds
<TABLE>
<CAPTION>
Statement of Change in Net Assets
(Unaudited)
Limited Duration U.S. Treasury
Government Obligations
Securities Money Market
Fund Fund
--------------------- -------------------
For Period For Period
Ended Ended
September 30, September 30,
1997 (a) 1997 (a)
--------------------- -------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 525,692 $ 247,778
Net realized gains
on investments transactions 5,914 ---
Increase in unrealized depreciation
on investments (37,006) ---
--------------------- -------------------
Net increase in net assets resulting
from operations 494,600 247,778
--------------------- -------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (525,692) (247,778)
--------------------- -------------------
Change in net assets from
shareholder distributions (525,692) (247,778)
--------------------- -------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 40,002,831 32,648,568
Dividends reinvested 435 0
Cost of shares redeemed (4,105,348) (8,863,808)
--------------------- -------------------
Change in net assets
from capital transactions 35,897,918 23,784,760
--------------------- -------------------
Change in net assets 35,866,826 23,784,760
NET ASSETS:
Beginning of period --- ---
--------------------- -------------------
End of period $ 35,866,826 $ 23,784,760
===================== ===================
SHARE TRANSACTIONS:
Issued 3,999,290 32,648,568
Reinvested 44 ---
Redeemed (410,372) (8,863,808)
--------------------- -------------------
Change in shares 3,588,962 23,784,760
===================== ===================
</TABLE>
(a) Commencement of the Funds began July 1, 1997.
See notes to financial statements.
B-56
<PAGE> 130
THE SESSIONS GROUP
KeyPremier Funds
<TABLE>
<CAPTION>
Financial Highlights
U.S. Treasury
Limited Duration Obligations
Government Securities Money Market
--------------------- ------------
For Period For Period
Ended Ended
September 30, September 30,
1997 (a) 1997 (a)
------------------ ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 1.00
------------------ ----------------
Investment Activities
Net investment income 0.15 0.01
Net realized and unrealized
gains (losses) on investments (0.01) ---
------------------ ----------------
Total from Investment Activities 0.14 0.01
------------------ ----------------
Distributions
Net investment income (0.15) (0.01)
------------------ ----------------
Total Distributions (0.15) (0.01)
------------------ ----------------
------------------ ----------------
Net Asset Value, End of Period $ 9.99 $ 1.00
================== ================
Total Return (excludes sales charge) 1.36%(b) 1.20%(b)
Ratios/Supplemental Data:
Net Assets, at end of period (000) $ 35,867 $ 23,785
Ratio of expenses to
average net assets 0.56%(c) 0.75%(c)
Ratio of net investment income
to average net assets 5.83%(c) 4.57%(c)
Ratio of expenses to
average net assets* 1.16%(c) 1.15%(c)
Ratio of net investment income
to average net assets* 5.23%(c) 4.17%(c)
Portfolio Turnover 315.89% ---
Average Commission Rate Paid --- ---
----------
</TABLE>
* During the period certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Commencement of the Funds began July 1, 1997.
(b) Not Annualized
(c) Annualized
See notes to financial statements.
B-57
<PAGE> 131
KEYPREMIER LIMITED DURATION GOVERNMENT SECURITIES FUND
Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C>
U.S. TREASURY OBLIGATIONS (72.3%)
1,000,000 6.00%, 12/31/97 $ 1,001,950
1,500,000 5.63%, 1/31/98 1,501,200
9,400,000 5.75%, 12/31/98 9,404,606
1,000,000 5.88%, 3/31/99 1,001,620
12,000,000 5.75%, 9/30/99 11,986,440
1,000,000 6.63%, 2/15/27 1,023,520
---------
TOTAL U.S. TREASURY OBLIGATIONS 25,919,336
----------
U.S. GOVERNMENT AGENCIES (28.4%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (4.8%)
1,500,000 5.24%, 7/15/98 1,497,586
94 10.00%, 10/1/00 99
218,410 7.95%, 3/25/20 218,888
-------
1,716,573
---------
U.S. GOVERNMENT AGENCY - DISCOUNT (23.6%)
Student Loan Mortgage Assoc.
5,000,000 6.00%, 11/27/98 5,001,400
Federal Home Loan Mortgage Corp.
3,248,876 9.00%, 4/1/16 3,455,147
---------
8,456,547
---------
TOTAL U.S. GOVERNMENT AGENCIES 10,173,120
----------
INVESTMENT COMPANIES (0.0%)
1 Federated Government Obligation 1
TOTAL INVESTMENT COMPANIES 1
REPURCHASE AGREEMENTS (8.7%)
3,136,000 Merrill Tri-Party Agreement, 6.10%, 10/1/97 3,136,000
(Collateralized by GMNA's ranging from 7.00% ---------
to 9.00%) 32 issues included in the collateral
report, par value equal to $15,276,429.
TOTAL REPURCHASE AGREEMENTS 3,136,000
---------
</TABLE>
See notes to financial statements.
B-58
<PAGE> 132
KEYPREMIER LIMITED DURATION GOVERNMENT SECURITIES FUND
Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
<S> <C>
TOTAL (COST-$39,229,647)(a) $ 39,228,457
============
</TABLE>
Percentages indicated are based on net assets of $35,866,829.
(a) Represents cost for federal income tax purposes and differs from value
by net unrealized depreciation of securities as follows:
Unrealized appreciation.............. $ 28,395
Unrealized depreciation.............. (29,585)
Net Unrealized depreciation.......... $ (1,190)
See notes to financial statements.
B-59
<PAGE> 133
KEYPREMIER U.S. TREASURY OBLIGATIONS MONEY MARKET FUND
Schedule of Investments
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
<S> <C>
REPURCHASE AGREEMENTS (40.1%)
4,539,000 Merrill Tri-Party Repurchase Agreement, $ 4,539,000
6.10%, 10/1/97 (Collateralized by GMNA's
ranging from 6.50% to 9.50%.) 28 issues
included in the collateral report, market
value equal to $5,493,350.
5,000,000 Yamachi Repurchase Agreement, 5.95%, 10/1/97 5,000,000
(Collateralized by 4,680,000 U.S. Treasury ---------
Note 7.25%, 5/15/04 Market Value equal to
$5,103,962)
TOTAL REPURCHASE AGREEMENTS 9,539,000
---------
U.S. TREASURY OBLIGATIONS (58.9%)
14,000,000 5.75%, 10/31/97 14,006,019
----------
TOTAL U.S. TREASURY OBLIGATIONS 14,006,019
----------
TOTAL (COST-$23,545,019)(a) $ 23,545,019
===========
</TABLE>
Percentages indicated are based on net assets of $23,784,760.
(a) Cost for federal income tax and financial reporting purposes
are the same.
See notes to financial statements.
B-60
<PAGE> 134
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION:
The Sessions Group (the "Group") was organized on April 25, 1988 as
an Ohio business trust, and is registered under the Investment Company
Act of 1940 as amended, (the "1940 Act"), as an open-end
management investment company. The Group is authorized to issue
an unlimited number of shares which are units of beneficial
interest, without par value. The Group offers shares of a number
of different series or portfolios, including the following series
for which Martindale Andres & Company, Inc., a wholly owned
subsidiary of Keystone Financial Inc., serves as investment adviser:
shares of the KeyPremier Limited Duration Government Securities Fund
and KeyPremier U.S. Treasury Obligations Money Market Fund and
(individually, a "Fund" and collectively, the "Funds").
The investment objectives of the Limited Duration Government Securities
Fund is to seek current income with preservation of capital as a
secondary objective. The investment objectives of the U.S. Treasury
Obligations Money Market Fund are to seek current income with liquidity
and stability of principal.
Shares of the Funds may be sold to customers by the Group's
distributor, BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services (the "Distributor") and its affiliates, to all accounts of
correspondent banks of Keystone Financial, Inc. and to the general
public.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed
by the Group in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting
principles. The preparation of financial statements requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses for the period. Actual results
could differ from those estimates.
SECURITIES VALUATION:
Investments of the U.S. Treasury Obligations Money Market Fund are
valued at either amortized cost, which approximates market value, or at
original cost, which combined with accrued interest, approximates
market value. Under the amortized cost method, discount or premium is
amortized on a constant basis to the maturity of the security. In
addition, the Fund may not a) purchase any instrument with a remaining
maturity greater than 397 calendar days unless such investment is
subject to a demand feature, or b) maintain a dollar-weighted average
portfolio maturity which exceeds 90 days.
Investments in corporate bonds, commercial paper, municipal securities
and U.S. Government securities of the Limited Duration Government
Securities Fund, (collectively, "the variable net asset value fund"),
are valued at their market values determined on the basis of the latest
available bid quotation in the principal market (closing sales prices
if the principal market is an exchange or NASDAQ National Market) in
which such securities are normally traded. The variable net asset value
funds may also use an independent pricing service approved by the
Board of Trustees to value certain other securities. Such prices
reflect market values which may be established through the use of
electronic and matrix techniques. Investments in investment companies
are valued at their net asset values as reported by such companies.
Other securities for which quotations are not readily available are
valued at their fair value under procedures established by the Group's
Board of Trustees. The differences between the cost and market values
of investments held by the variable net asset value fund are reflected
as either
(Continued)
B-61
<PAGE> 135
unrealized appreciation or depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the amortization of
premium or discount. Dividend income is recorded on the ex-dividend
date. Gains or losses realized on sales of securities are determined by
comparing the identified cost of the security lot sold with the net
sales proceeds.
REPURCHASE AGREEMENTS:
The Funds may acquire repurchase agreements from financial institutions
such as banks and broker dealers which Martindale Andres & Company,
Inc. deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase
price generally equals the price paid by each 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, is required to maintain the value
of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). Securities subject to
repurchase agreements are held by the Funds' custodian or another
qualified custodian or in the Federal Reserve/Treasury book-entry
system. Repurchase agreements are considered to be loans by the Funds
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS:
The Funds may borrow for temporary purposes by entering into reverse
repurchase agreements. 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 places in a segregated custodial account assets having a
value equal to the repurchase price (including accrued interest), and
will continually monitor the account to ensure such equivalent value is
maintained at all times. Reverse repurchase agreements are considered
to be borrowing by the Funds under the 1940 Act.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid
monthly and distributable net realized capital gains, if any, are
declared and distributed at least annually for the U.S. Treasury
Obligations Money Market Fund. Dividends from net investment income are
declared and paid monthly and distributable net realized capital gains,
if any, are declared and distributed annually for the Limited Duration
Government Securities Fund.
Dividends from net investment income and net realized capital gains are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatments for net operating losses,
expiring capital loss carry forwards, and deferral of certain losses.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to qualify or continue to qualify
as a regulated investment company by complying with the provisions
available to certain investment companies, as defined in applicable
sections of the Internal Revenue Code, and to make distributions of net
investment income and net realized capital gains sufficient to relieve
it from all, or substantially all, Federal income taxes.
(Continued)
B-62
<PAGE> 136
ORGANIZATION COSTS:
All expenses in connection with each Fund's organization and
registration under the 1940 Act and the Securities Act of 1933 were
paid by the Fund. Such expenses are amortized over a period of five
years commencing with the date of the initial public offering.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of portfolio securities (excluding short-term
securities) for the variable net asset value fund for the period ended
September 30, 1997, are as follows (commencement of operations of such
fund was July 1, 1997):
<TABLE>
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Limited Duration Government Securities Fund $91,511,375 $70,022,507
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Funds by Martindale
Andres & Company, Inc. Under the terms of the investment advisory
agreement, Martindale Andres & Company, Inc. is entitled to receive
fees based on a percentage of the average net assets of each Fund.
Martindale Andres & Company, Inc. has agreed that if the aggregate
expenses of the Funds, as defined, for any fiscal year exceed
limitations of any state having jurisdiction over the Funds, Martindale
Andres & Company, Inc. will refund to the Funds, or otherwise bear,
such excess. Such limitation did not affect the calculation of the
investment advisory fees during the period ended September 30, 1997.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership, and BISYS Fund Services Ohio,
Inc. ("BISYS Services") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are
affiliated, serves the Funds as administrator and distributor. Such
officers and trustees are paid no fees directly by the Funds for
serving as officers and trustees of the Group. Under the terms of the
administration agreement, BISYS's fees are computed daily as a
percentage of the average net assets of each Fund. BISYS Services, Inc.
serves the Funds as transfer agent and mutual fund accountant.
The Group has adopted an Administrative Services Plan, pursuant to
which each Fund is authorized to pay compensation to banks and other
financial institutions, which may include Martindale Andres & Company,
Inc., and Keystone Financial, Inc., and its correspondent and
affiliated banks and BISYS, for providing ministerial, record keeping
and/or administrative support services to their customers who are the
beneficial or record owners of a Fund. The compensation which may be
paid under the Administrative Services Plan is a fee computed daily at
an annual rate of up to 0.25% of the average daily net asset value of a
Fund. The Group has not implemented such a plan as of September 30,
1997.
BISYS is also entitled to receive commissions on sales of shares of
the variable net asset value funds. For the period ended September 30,
1997, BISYS received no commissions earned on sales of shares of the
variable net asset value funds.
Fees may be voluntarily reduced to assist the Funds in maintaining
competitive expense ratios.
(Continued)
B-63
<PAGE> 137
Information regarding these transactions is as follows for the period
ended September 30, 1997:
<TABLE>
<CAPTION>
Limited U.S. Treasury
Duration Obligations
Government Money
Securities Market
Fund Fund
---- ----
<S> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary
fee reductions (percentage
of average net assets) .60% .40%
Voluntary fee reductions $54,138 $21,704
ADMINISTRATION FEES:
Annual fee before voluntary
fee reductions (percentage
of average net assets) .115% .115%
Voluntary fee reductions --- ---
FUND ACCOUNTANT FEES $8,205 $7,745
TRANSFER AGENT FEES $6,532 $6,164
</TABLE>
5. ACQUISITION OF COMMON/COLLECTIVE TRUST FUNDS:
On July 1, 1997, the Limited Duration Government Securities Fund acquired
all of the assets of various common and collective trust funds maintained by
affiliates of Martindale Andres & Co., Inc. The following is a summary of shares
issued, net assets acquired, net asset value per shares and unrealized
appreciation as of the dates acquired:
<TABLE>
<CAPTION>
Limited Duration
Government
Securities
Fund
----
<S> <C>
Shares 3,467,684
Net Assets $ 34,676,843
Net Asset Value $ 10.00
Unrealized Appreciation/Depreciation $ 35,816
</TABLE>
(Continued)
B-64
<PAGE> 138
THE SESSIONS GROUP
KEYPREMIER FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA ESTABLISHED INTERMEDIATE AGGRESSIVE
MONEY MARKET MUNICIPAL GROWTH TERM INCOME GROWTH
FUND BOND FUND FUND FUND FUND
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost $96,191,524;
$118,836,308; $111,896,923;
$205,828,614; and $70,402,857,
respectively)......................... $96,191,524 $120,336,065 $191,422,209 $206,506,708 $105,262,604
----------- ------------ ------------ ------------ ------------
Cash.................................... 42,694 -- -- -- --
Interest and dividends receivable....... 45,133 1,931,885 232,429 2,519,582 98,324
Receivable from brokers for investments
sold.................................. -- 3,372,810 -- -- 12,879
Receivable for capital shares issued.... -- 9,548 7,533 2,837 --
Unamortized organization costs.......... 18,659 20,321 25,290 32,856 4,895
Prepaid expenses and other assets....... 567 -- 3,098 7,693 245
----------- ------------ ------------ ------------ ------------
Total Assets.......................... 96,298,577 125,670,629 191,690,559 209,069,676 105,378,947
----------- ------------ ------------ ------------ ------------
LIABILITIES:
Dividends payable....................... 399,942 407,216 479,221 1,113,477 29,005
Payable for capital shares redeemed..... -- -- -- -- 8,413
Payable to brokers for investments
purchased............................. -- 2,000,000 187,475 -- --
Accrued expenses and other payables:
Investment advisory fees.............. 15,665 30,215 62,532 51,334 43,048
Administration fees................... 1,204 1,559 2,412 2,634 1,312
Custodian fees........................ 1,612 1,072 1,367 1,105 329
Accounting fees....................... 645 2,019 4,017 3,970 4,688
Trustees' fees........................ -- 28 3,903 1,716 920
Legal fees............................ 4,645 7,989 7,865 7,389 6,171
Audit fees............................ 7,031 8,416 8,979 11,737 7,409
Printing.............................. 11,978 11,947 10,482 11,467 7,641
Transfer agent fees................... 937 1,196 -- -- 353
Registration and filing fees.......... 3,769 3,591 6,700 4,654 10,306
Other................................. 791 922 1,366 1,311 1,532
----------- ------------ ------------ ------------ ------------
Total Liabilities..................... 448,219 2,476,170 776,319 1,210,794 121,127
----------- ------------ ------------ ------------ ------------
NET ASSETS:
Capital................................. 95,847,274 121,945,921 110,833,331 210,358,664 69,318,302
Undistributed net investment income..... 3,084 256,668 4,340 (57,092) 7,833
Net unrealized appreciation
(depreciation) on investments......... -- 1,499,757 79,525,286 678,094 34,859,747
Accumulated undistributed net realized
gains (losses) on investment
transactions.......................... -- (507,887) 551,283 (3,120,784) 1,071,938
----------- ------------ ------------ ------------ ------------
Net Assets............................ $95,850,358 $123,194,459 $190,914,240 $207,858,882 $105,257,820
=========== ============ ============ ============ ============
Outstanding units of beneficial interest
(shares).............................. 95,850,207 11,974,426 17,152,829 21,269,558 10,280,303
=========== ============ ============ ============ ============
Net asset value -- redemption price per
share................................. $ 1.00 $ 10.29 $ 11.13 $ 9.77 $ 10.24
=========== ============ ============ ============ ============
Maximum Sales Charge.................... -- 4.50% 4.50% 4.50% 4.50%
=========== ============ ============ ============ ============
Maximum Offering Price (100%/(100%-
Maximum Sales Charge) of net asset
value adjusted to nearest cent) per
share................................. $ 1.00 (a) 10.77 $ 11.65 $ 10.23 $ 10.72
=========== ============ ============ ============ ============
</TABLE>
- ---------------
(a) Offering price and redemption price are the same for the Money Market Fund.
See notes to financial statements.
B-65
<PAGE> 139
THE SESSIONS GROUP
KEYPREMIER FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA ESTABLISHED INTERMEDIATE AGGRESSIVE
MONEY MARKET MUNICIPAL BOND GROWTH TERM INCOME GROWTH
FUND(A) FUND(A) FUND(A) FUND(A) FUND(A)
------------ -------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income................ $3,806,220 $4,040,237 $ -- $7,412,243 $ --
Dividend income................ -- 50,652 1,795,211 325,799 363,444
---------- ---------- ----------- ---------- ----------
Total Income................. 3,806,220 4,090,889 1,795,211 7,738,042 363,444
---------- ---------- ----------- ---------- ----------
EXPENSES:
Investment advisory fees....... 282,882 506,296 735,635 680,552 385,280
Administration fees............ 81,328 97,040 112,311 129,863 44,692
Custodian fees................. 17,048 4,425 14,130 13,071 8,212
Accounting fees................ 21,776 30,096 31,176 35,604 13,033
Legal fees..................... 17,269 21,690 15,838 16,874 10,048
Audit fees..................... 9,018 10,508 11,061 13,943 7,409
Organization costs............. 4,255 3,682 1,946 2,058 2,070
Trustees' fees and expenses.... 5,331 5,461 8,346 6,823 2,417
Transfer agent fees............ 19,648 21,322 20,282 19,824 11,099
Registration and filing fees... 8,702 5,264 10,273 7,352 13,143
Printing costs................. 22,413 21,721 20,622 20,042 19,397
Other.......................... 3,859 3,439 4,822 5,384 1,571
---------- ---------- ----------- ---------- ----------
Total Expenses................. 493,529 730,944 986,442 951,390 518,371
Less: Expenses voluntarily
reduced................... (236,280) (420,686) (558,942) (529,626) (263,486)
---------- ---------- ----------- ---------- ----------
Net Expenses................... 257,249 310,258 427,500 421,764 254,885
---------- ---------- ----------- ---------- ----------
Net Investment Income.......... 3,548,971 3,780,631 1,367,711 7,316,278 108,559
---------- ---------- ----------- ---------- ----------
REALIZED/UNREALIZED GAINS ON
INVESTMENTS:
Net realized gains (losses) on
investment transactions...... 151 (500,308) 551,283 (3,180,967) 1,071,938
Change in unrealized
appreciation/depreciation on
investments.................. -- 1,013,284 19,134,379 (1,083,860) 2,060,746
---------- ---------- ----------- ---------- ----------
Net realized/unrealized gains
(losses) on investments...... 151 512,976 19,685,662 (4,264,827) 3,132,684
---------- ---------- ----------- ---------- ----------
Change in net assets resulting
from operations.............. $3,549,122 $4,293,607 $21,053,373 $3,051,451 $3,241,243
========== ========== =========== ========== ==========
</TABLE>
- ---------------
(a) Commencement of the Funds began October 7, 1996, October 1, 1996, December
2, 1996, December 2, 1996, and February 3, 1997, respectively.
See notes to financial statements.
B-66
<PAGE> 140
THE SESSIONS GROUP
KEYPREMIER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA ESTABLISHED INTERMEDIATE
MONEY MARKET MUNICIPAL GROWTH TERM AGGRESSIVE
FUND BOND FUND FUND INCOME FUND GROWTH FUND
------------- ------------ ------------ ------------ ------------
FOR THE FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997(A) 1997(A) 1997(A) 1997(A) 1997(A)
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income............. $ 3,548,971 $ 3,780,631 $ 1,367,711 $ 7,316,278 $ 108,559
Net realized gains (losses) on
investments transactions........ 151 (500,308) 551,283 (3,180,967) 1,071,938
Net change in unrealized
appreciation/ depreciation on
investments..................... -- 1,013,284 19,134,379 (1,083,860) 2,060,746
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from
operations........................ 3,549,122 4,293,607 21,053,373 3,051,451 3,241,243
------------- ------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........ (3,548,971) (3,525,784) (1,367,711) (7,316,278) (108,559)
In excess of net realized gains on
investments..................... -- (7,490) -- -- --
------------- ------------ ------------ ------------ ------------
Change in net assets from
shareholder distributions......... (3,548,971) (3,533,274) (1,367,711) (7,316,278) (108,559)
------------- ------------ ------------ ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued....... 277,292,433 138,218,349 184,221,521 233,118,215 107,127,261
Dividends reinvested.............. 97,461 22,466 6,152 47,928 1,009
Cost of shares redeemed........... (181,539,687) (15,806,689) (12,999,095) (21,042,434) (5,003,134)
------------- ------------ ------------ ------------ ------------
Change in net assets from capital
transactions...................... 95,850,207 122,434,126 171,228,578 212,123,709 102,125,136
------------- ------------ ------------ ------------ ------------
Change in net assets................ 95,850,358 123,194,459 190,914,240 207,858,882 105,257,820
NET ASSETS:
Beginning of period............... -- -- -- -- --
------------- ------------ ------------ ------------ ------------
End of period..................... $ 95,850,358 $123,194,459 $190,914,240 $207,858,882 $105,257,820
============= ============ ============ ============ ============
SHARE TRANSACTIONS:
Issued............................ 277,292,433 13,502,154 18,435,219 23,412,762 10,794,978
Reinvested........................ 97,461 2,191 628 4,916 113
Redeemed.......................... (181,539,687) (1,529,919) (1,283,018) (2,148,120) (514,788)
------------- ------------ ------------ ------------ ------------
Change in shares.................... 95,850,207 11,974,426 17,152,829 21,269,558 10,280,303
============= ============ ============ ============ ============
</TABLE>
- ---------------
(a) Commencement of the Funds began October 7, 1996, October 1, 1996, December
2, 1996, December 2, 1996, and February 3, 1997, respectively.
See notes to financial statements.
B-67
<PAGE> 141
THE SESSIONS GROUP
KEYPREMIER PRIME MONEY MARKET FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL SECURITY AMORTIZED
AMOUNT DESCRIPTION COST
- ----------- ------------------------------ -------------
<C> <S> <C>
COMMERCIAL PAPER (52.4%):
Automotive (4.7%):
$ 4,500,000 Ford Motor Company, 5.50%,
7/17/97..................... $ 4,489,000
-------------
Beverages (4.2%):
4,000,000 Pepsico, Inc., 5.50%,
7/16/97..................... 3,990,833
-------------
Energy (12.9%):
4,500,000 Consolidated Natural Gas,
5.55%, 7/7/97............... 4,495,838
1,783,000 National Power, 5.60%,
7/9/97...................... 1,780,781
4,500,000 Potomac Electric Power, 5.53%,
7/11/97..................... 4,493,088
1,000,000 Virginia Electric Power
Company, 5.58%, 7/8/97...... 998,915
700,000 West Penn Power, 6.25%,
7/1/97...................... 700,000
-------------
12,468,622
-------------
Entertainment (4.7%):
4,500,000 Walt Disney Company, 6.10%,
7/1/97...................... 4,500,000
-------------
Financial Services (7.8%):
4,500,000 GTE Funding, 5.54%, 7/21/97... 4,486,150
3,000,000 IBM Credit, 5.52%, 7/25/97.... 2,988,960
-------------
7,475,110
-------------
Industrials (4.7%):
4,500,000 Dresser Industries, 5.53%,
7/14/97..................... 4,491,014
-------------
Insurance (4.0%):
3,810,000 Southland, 5.58%, 7/8/97...... 3,805,866
-------------
COMMERCIAL PAPER, CONTINUED:
Machinery & Equipment(4.4%):
4,200,000 WW Grainger, 5.57%, 7/7/97.... $ 4,196,101
-------------
Telecommunications (5.0%):
4,800,000 NYNEX Corporation, 5.52%,
7/2/97...................... 4,799,264
-------------
Total Commercial Paper 50,215,810
-------------
CORPORATE BONDS (4.2%):
Private Placement-Variable (4.2%):
4,000,000 Asset Backed Securities
Investment Trust 1997 C,
5.69%, 6/15/98** (b)........ 4,000,000
-------------
Total Corporate Bonds 4,000,000
-------------
U.S. GOVERNMENT AGENCIES (40.7%):
Federal Agricultural Mortgage Corporation (31.3%):
20,000,000 5.40%, 7/1/97................. 20,000,000
5,000,000 5.44%, 7/14/97................ 4,990,178
5,000,000 5.44%, 7/15/97................ 4,989,422
-------------
29,979,600
-------------
Federal Home Loan Bank (9.4%):
9,000,000 5.34%, 7/3/97................. 8,997,330
-------------
Total U.S. Government Agencies 38,976,930
-------------
OTHER DEMAND INSTRUMENTS (3.1%):
3,000,000 Bank of America Floater,
5.69%, 4/16/98*............. 2,998,784
-------------
Total Other Demand Instruments 2,998,784
-------------
Total (Amortized Cost -- $96,191,524)(a) $96,191,524
=============
</TABLE>
- ---------
Percentages indicated are based on net assets of $95,850,358.
(a) Cost for federal income tax and financial reporting purposes are the same.
(b) Represents a restricted security, purchased under Rule 144A, which is exempt
from registration under the Securities Act of 1933, as amended. This
security is considered illiquid.
* Floating Rate Certificates are securities with interest rates that change
whenever a specific interest rate changes. The interest rate is based on an
index of market interest rates or other index. The rate reflected on the
Schedule of Portfolio Investments is the rate in effect on June 30, 1997.
** Variable Rate Certificates are securities with interest rates that change
periodically and are payable on different dates ranging from daily, weekly,
monthly, quarterly, or semi-annually. The rate reflected on the Schedule of
Portfolio Investments is the rate in effect on June 30, 1997.
See notes to financial statements.
B-68
<PAGE> 142
THE SESSIONS GROUP
KEYPREMIER PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ----------------------------------------------------------------------------------------- ------------
<C> <S> <C>
MUNICIPAL BONDS (97.4%):
Pennsylvania (91.9%):
$1,330,000 Berks County, Pennsylvania Municipal Authority, 7.10%, 5/15/22, Callable 5/15/04 @ 100... $ 1,514,538
1,000,000 Berks County, Pennsylvania Municipal Authority, Hospital Revenue, 5.00%, 10/1/02......... 1,018,750
1,000,000 Bethel Park, Pennsylvania School District, 5.40%, 8/1/00, Callable 8/1/99 @ 100.......... 1,021,250
1,000,000 Bethlehem, Pennsylvania Area School District, Series A, 6.50%, 9/1/00.................... 1,061,250
2,065,000 Bethlehem, Pennsylvania Water Authority, Series A, 6.30%, 11/15/15, Callable 11/15/02 @
100.................................................................................... 2,235,363
1,000,000 Bucks County, Pennsylvania Water & Sewer Authority, Series B, 6.50%, 12/1/12, Callable
12/1/02 @ 100.......................................................................... 1,092,500
5,000,000 Bucks County, Pennsylvania, 7.00%, 5/1/05................................................ 5,737,499
1,000,000 Bucks County, Pennsylvania, Series A, 6.00%, 3/1/01...................................... 1,051,250
1,900,000 Central Dauphin, Pennsylvania School District, 6.00%, 6/1/01............................. 2,004,500
1,875,000 Chester County, Pennsylvania, 5.60%, 12/15/08, Callable 12/15/03 @ 100................... 1,933,594
3,955,000 Delaware County, Pennsylvania, 6.00%, 11/15/22, Callable 11/15/02 @ 100.................. 4,212,075
9,000,000 Emmaus Pennsylvania General Authority, 4.45%, 12/1/28*................................... 8,999,999
4,000,000 Ephrata Pennsylvania Area School District, Series A, 6.80%, 4/15/11, Callable 4/15/01 @
100.................................................................................... 4,320,000
2,000,000 Geisinger, Pennsylvania Health Systems Authority, Series B, 7.38%, 7/1/02, Callable
7/1/99 @ 102........................................................................... 2,140,000
1,000,000 Hempfield, Pennsylvania School District, Lancaster County, 6.40%, 8/15/05, Callable
8/15/02 @ 100.......................................................................... 1,078,750
500,000 Lycoming County, Pennsylvania Hospital Authority, Series B, 7.40%, 7/1/99................ 530,000
600,000 Montgomery County, Pennsylvania Higher Education & Health Authority Revenue 4.45%,
8/1/21*................................................................................ 600,000
1,030,000 Northampton County, Pennsylvania Higher Education Authority, Lehigh University, 5.50%,
9/1/98................................................................................. 1,048,025
1,000,000 Northampton County, Pennsylvania Higher Education Authority, Lehigh University, 6.00%,
9/1/01................................................................................. 1,050,000
2,155,000 Northampton County, Pennsylvania Higher Education Authority, Lehigh University, 6.90%,
10/15/06, Callable 10/15/01 @ 102...................................................... 2,375,888
2,000,000 Pennsylvania Housing Finance Agency, 5.40%, 1/1/00....................................... 2,040,000
2,000,000 Pennsylvania Infrastructure Investment Authority, 6.00%, 9/1/03.......................... 2,145,000
3,325,000 Pennsylvania Infrastructure Investment Authority, 6.00%, 9/1/05.......................... 3,586,844
4,425,000 Pennsylvania Intergovernmental Cooperation Authority, 7.00%, 6/15/14, Callable 6/15/05 @
100.................................................................................... 5,072,156
2,000,000 Pennsylvania State First Service, 6.00%, 9/15/98......................................... 2,050,000
1,375,000 Pennsylvania State Higher Education Assistance Agency, Series A, 6.80%, 12/1/00.......... 1,462,656
1,000,000 Pennsylvania State Higher Education Facilities Authority, 7.00%, 5/1/02, Callable 5/1/00
@ 100.................................................................................. 1,070,000
375,000 Pennsylvania State Higher Education Facilities Authority, Series A, 6.88%, 7/1/99........ 393,281
2,000,000 Pennsylvania State Higher Education Facilities Authority, Series A, 5.90%, 8/15/00....... 2,090,000
3,925,000 Pennsylvania State Higher Education Facilities Authority, Series A, 5.35%, 1/1/08,
Callable 1/1/06 @ 101.................................................................. 4,008,406
1,750,000 Pennsylvania State Higher Education Facilities Authority, Series D, 7.15%, 6/15/15,
Callable 6/15/00 @ 100................................................................. 1,883,438
2,000,000 Pennsylvania State Higher Education, Duquesne University, Series A, 7.00%, 4/1/10........ 2,155,000
1,500,000 Pennsylvania State Industrial Development Authority, 5.00%, 7/1/00....................... 1,524,375
5,000,000 Pennsylvania State Referendum, 5.25%, 11/15/01........................................... 5,150,000
3,515,000 Pennsylvania State Referendum, 5.38%, 11/15/03........................................... 3,651,206
1,000,000 Pennsylvania State Turnpike, Series J, 6.40%, 12/1/00.................................... 1,062,500
1,000,000 Pennsylvania State Turnpike, Series P, 5.20%, 12/1/00.................................... 1,022,500
1,000,000 Pennsylvania State, Series A, 6.75%, 5/1/98.............................................. 1,023,490
3,500,000 Pennsylvania State, Series A, 6.70%, 1/1/02, Callable 1/1/01 @ 101.5..................... 3,797,500
2,000,000 Philadelphia, Pennsylvania Airport Revenue, Philadelphia Airport System, Series B, 5.00%,
6/15/05................................................................................ 2,000,000
</TABLE>
Continued
B-69
<PAGE> 143
THE SESSIONS GROUP
KEYPREMIER PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ----------------------------------------------------------------------------------------- ------------
<C> <S> <C>
MUNICIPAL BONDS, CONTINUED:
Pennsylvania, Continued:
$1,000,000 Philadelphia, Pennsylvania Gas Works, 5.50%, 7/1/04...................................... $ 1,043,750
1,000,000 Philadelphia, Pennsylvania Hospitals & Higher Education Facilities Authority, Series A,
6.50%, 2/15/21, Callable 2/15/02 @ 102................................................. 1,096,250
300,000 Philadelphia, Pennsylvania Municipal Authority Revenue, Justice Lease Series B, 7.10%,
11/15/06 Callable 11/15/01 @ 102....................................................... 336,000
2,800,000 Philadelphia, Pennsylvania Packaging Authority Airport, 5.75%, 9/1/07.................... 2,982,000
3,000,000 Philadelphia, Pennsylvania Series B, 8.13%, 8/1/97 @ 102................................. 3,069,660
1,000,000 Philadelphia, Pennsylvania Water & Wastewater, 6.25%, 8/1/02............................. 1,076,250
1,000,000 Pittsburgh, Pennsylvania Water & Sewer Authority, Series A, 6.00%, 9/1/16, Callable
9/1/01 @ 100........................................................................... 1,057,500
1,700,000 Sayre, Pennsylvania Health Care Facilities Authority, Series A, 6.60%, 3/1/01............ 1,814,750
2,200,000 Union County, Pennsylvania Higher Education Facilities Financing Authority, 5.75%,
4/1/00................................................................................. 2,274,250
1,000,000 West Shore, Pennsylvania School District, 6.40%, 9/1/01, Callable 9/1/98 @ 100........... 1,022,500
3,000,000 Westmoreland County, Pennsylvania, 6.70%, 8/1/09, Callable 8/1/01 @ 100.................. 3,247,500
1,850,000 York County, Pennsylvania Industrial Development Authority, 6.25%, 7/1/02................ 1,981,813
------------
113,215,806
------------
PUERTO RICO (5.5%):
1,445,000 Puerto Rico Electric Power Authority, Power Referendum Series K, 9.38%, 7/1/17, Callable
7/1/97 @ 102........................................................................... 1,473,900
5,000,000 Puerto Rico Public Building Authority, Series M, 5.70%, 7/1/09........................... 5,318,750
------------
6,792,650
------------
Total Municipal Bonds.................................................................... 120,008,456
===========
INVESTMENT COMPANIES (0.3%):
214,557 Federated Pennsylvania Municipal Cash Fund............................................... 214,557
113,052 Federated Pennsylvania Municipal Cash Trust Service Shares............................... 113,052
------------
Total Investment Companies............................................................... 327,609
------------
Total (Cost -- $118,836,308)(a).......................................................... $120,336,065
============
</TABLE>
- ---------
Percentages indicated are based on net assets of $123,194,459.
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $1,743,029
Unrealized depreciation.......................... 243,272
----------
Net unrealized appreciation...................... $1,499,757
==========
</TABLE>
* Variable Rate Certificates are securities with interest rates that change
periodically and are payable on different dates ranging from daily, weekly,
monthly, or semi-annually. The rate reflected on the Schedule of Portfolio
Investments is the rate in effect on June 30, 1997.
See notes to financial statements.
B-70
<PAGE> 144
THE SESSIONS GROUP
KEYPREMIER ESTABLISHED GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ---------- ------------------------------ -------------
<C> <S> <C>
COMMON STOCKS (95.9%):
Aerospace/Defense--Equipment (2.1%):
60,000 Textron, Inc.................. $ 3,982,500
-------------
Automotive Parts (3.5%):
34,100 AutoLiv, Inc.................. 1,334,163
24,000 Eaton Corp.................... 2,095,500
90,000 Echlin, Inc................... 3,240,000
-------------
6,669,663
-------------
Banks (3.8%):
72,000 Fleet Financial Group, Inc.... 4,554,000
10,000 Norwest Corp.................. 562,500
62,000 Signet Banking Corp........... 2,232,000
-------------
7,348,500
-------------
Beverages (3.4%):
94,000 Coca-Cola Co.................. 6,556,500
-------------
Chemicals (3.2%):
65,000 Hercules, Inc................. 3,111,875
100,000 Morton International, Inc..... 3,018,750
-------------
6,130,625
-------------
Computer Networks (3.0%):
30,000 Seagate Technology(b)......... 1,055,625
80,000 Silicon Graphics, Inc.(b)..... 1,200,000
40,000 Sun Microsystems, Inc.(b)..... 1,488,750
100,000 Tandem Computers, Inc.(b)..... 2,025,000
-------------
5,769,375
-------------
Computer Software (5.9%):
90,000 Automatic Data Processing,
Inc......................... 4,230,000
115,000 Computer Associates
International, Inc.......... 6,404,063
20,000 Netscape Communications
Corp.(b).................... 641,250
-------------
11,275,313
-------------
Diversified/Conglomerate (3.2%):
94,000 General Electric Co........... 6,145,250
-------------
Electronic Components (1.8%):
85,000 Micron Technology, Inc........ 3,394,688
-------------
Environmental Services (0.4%):
30,000 Republic Industries,
Inc.(b)..................... 727,500
-------------
Financial Services (10.0%):
62,000 Capital One Financial Corp.... 2,340,500
120,000 Federal National Mortgage
Assoc....................... 5,235,000
160,000 Green Tree Financial Corp..... 5,699,999
130,000 Morgan Stanley Dean Witter
Discover & Co............... 5,598,125
-------------
18,873,624
-------------
COMMON STOCKS, CONTINUED:
Food Processing & Packaging (2.6%):
76,000 ConAgra, Inc.................. $ 4,873,500
-------------
Furniture & Furnishings (3.8%):
50,000 Armstrong World Industries,
Inc......................... 3,668,750
75,000 Lancaster Colony Corp......... 3,628,125
-------------
7,296,875
-------------
Heating & Air Conditioning Equipment (1.3%):
45,000 Tecumseh Products Co., Class
B........................... 2,536,875
-------------
Household Products/Wares (3.3%):
45,000 Procter & Gamble Co........... 6,356,250
-------------
Insurance (2.9%):
13,000 Aetna, Inc.................... 1,330,875
80,000 United Health Care Corp....... 4,160,000
-------------
5,490,875
-------------
Medical & Hospital Management Services (0.9%):
50,000 Genesis Health Ventures(b).... 1,687,500
-------------
Medical Instruments (3.6%):
84,000 Medtronic, Inc................ 6,804,000
-------------
Mining (2.9%):
75,000 Potash Corp. of Saskatchewan,
Inc......................... 5,629,688
-------------
Motor Vehicles (1.7%):
100,000 Chrysler Corp................. 3,281,250
-------------
Oil & Gas (4.1%):
74,000 Coastal Corp.................. 3,935,875
55,000 Mobil Corp.................... 3,843,125
-------------
7,779,000
-------------
Pharmaceuticals (6.5%):
28,000 American Home Products
Corp........................ 2,142,000
30,000 Astra AB, Class A............. 570,000
36,000 Johnson & Johnson............. 2,317,500
154,000 Schering-Plough Corp.......... 7,372,749
-------------
12,402,249
-------------
Restaurants (2.1%):
155,000 Wendy's International, Inc.... 4,020,313
-------------
Retail -- Apparel (1.0%):
50,000 Gap, Inc...................... 1,943,750
-------------
Telecommunications (2.5%):
110,000 Loral Space &
Communications(b)........... 1,650,000
40,000 Motorola, Inc................. 3,040,000
-------------
4,690,000
-------------
</TABLE>
Continued
B-71
<PAGE> 145
THE SESSIONS GROUP
KEYPREMIER ESTABLISHED GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1997
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ---------- ------------------------------ -------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Textile (3.9%):
200,000 Unifi, Inc.................... $ 7,475,000
-------------
Tools (2.9%):
110,000 Danaher Corporation........... 5,589,375
-------------
Utilities -- Electric (2.8%):
100,000 Baltimore Gas & Electric
Co.......................... 2,668,750
88,000 Consolidated Edison Co. of New
York........................ 2,590,500
-------------
5,259,250
-------------
Utilities--Gas & Pipeline (4.3%):
75,000 Sonat, Inc.................... 3,843,750
100,000 Williams Cos., Inc............ 4,375,000
-------------
8,218,750
-------------
Utilities--Telecommunications (1.8%):
67,000 Sprint Corp................... 3,525,875
-------------
COMMON STOCKS, CONTINUED:
Wholesale (0.7%):
50,000 Ikon Office Solutions......... $ 1,246,875
-------------
Total Common Stocks 182,980,788
-------------
PREFERRED STOCKS (0.2%):
Insurance (0.2%):
4,419 Aetna Services, Inc........... 414,281
-------------
Total Preferred Stocks 414,281
-------------
INVESTMENT COMPANIES (4.2%):
6,396,669 Federated Government
Obligation Fund............. 6,396,669
1,630,471 Federated Prime Obligation
Fund........................ 1,630,471
-------------
Total Investment Companies 8,027,140
-------------
Total (Cost -- $111,896,923)(a) $191,422,209
=============
</TABLE>
- ---------
Percentages indicated are based on net assets of $190,914,240.
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $81,517,250
Unrealized depreciation.......................... 1,991,964
-----------
Net unrealized appreciation...................... $79,525,286
===========
</TABLE>
(b) Non-income producing
See notes to financial statements.
B-72
<PAGE> 146
THE SESSIONS GROUP
KEYPREMIER INTERMEDIATE TERM INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- ------------ ------------------------------ -------------
<C> <S> <C>
CORPORATE BONDS (34.4%):
Banks (9.5%):
$ 7,500,000 Bank of Montreal, 7.80%,
4/1/07...................... $ 7,818,750
6,000,000 Mercantile Bancorp, 7.30%,
6/15/07..................... 6,000,000
6,000,000 Wachovia, 6.61%, 10/1/25...... 5,880,000
------------
19,698,750
------------
Chemicals (3.0%):
6,000,000 Service Corp. International,
7.70%, 4/15/09.............. 6,165,000
------------
Consumer Goods and Services (2.8%):
6,000,000 Associates Corp., 6.88%,
11/15/08.................... 5,887,500
------------
Financial Services (10.1%):
2,000,000 American Express Global Bond,
6.75%, 6/23/04.............. 1,987,500
6,000,000 Dow Capital, 9.20%, 6/1/10.... 6,990,000
6,000,000 General Motors Acceptance
Corp., 6.63%, 10/1/02....... 5,925,000
6,000,000 Goldman Sachs, 7.25%,
10/1/05(b).................. 6,037,500
------------
20,940,000
------------
Pharmaceuticals (2.8%):
6,000,000 Eli Lilly, 7.13%, 6/1/25...... 5,850,000
------------
Telecommunications (3.0%):
6,000,000 Motorola, 7.50%, 5/15/25...... 6,135,000
------------
Transportation & Shipping (3.2%):
6,000,000 United Parcel Services, 8.38%,
4/1/20...................... 6,742,500
------------
Total Corporate Bonds 71,418,750
------------
U.S. TREASURY OBLIGATIONS (32.4%):
18,000,000 6.88%, 3/31/00................ 18,286,200
11,000,000 7.75%, 2/15/01................ 11,496,540
10,000,000 6.25%, 4/30/01................ 9,968,700
15,000,000 6.50%, 5/15/05................ 14,961,450
13,000,000 6.63%, 2/15/27................ 12,718,420
------------
Total U.S. Treasury Obligations 67,431,310
------------
U.S. GOVERNMENT AGENCIES (21.1%):
Federal Home Loan Mortgage Corporation (8.3%):
$ 5,000,000 6.87%, 3/3/03................. $ 5,050,200
5,000,000 6.80%, 12/1/03................ 5,041,050
7,000,000 8.00%, 6/1/17................. 7,205,450
------------
17,296,700
------------
Federal National Mortgage Association (8.1%):
3,911,622 7.50%, 1/1/27................. 3,920,149
6,052,914 7.50%, 1/1/27................. 6,066,109
6,578,975 9.00%, 5/1/27................. 6,935,884
------------
16,922,142
------------
Government National Mortgage Association (4.7%):
5,035,738 7.00%, 10/15/24, Pool
#780385..................... 4,968,511
4,526,841 8.50%, 7/20/26, Pool #2250.... 4,710,405
------------
9,678,916
------------
Total U.S. Government Agencies 43,897,758
------------
INVESTMENT COMPANIES (7.0%):
8,000,001 Federated Government
Obligation Fund............. 8,000,001
6,607,275 Federated Prime Obligation
Fund........................ 6,607,275
1 Federated Treasury Fund....... 1
------------
Total Investment Companies 14,607,277
------------
ASSET BACKED SECURITIES (4.4%):
$ 4,500,000 IMC Home Equity Loan Trust,
Series 97-1, Class A-3,
6.82%, 10/25/11............. 4,508,010
4,627,314 Toyota Auto Receivables
Grantor Trust, Series
1997-A, 6.45%, 4/15/02...... 4,643,603
------------
Total Asset Backed Securities 9,151,613
------------
Total (Cost -- $205,828,614)(a) $206,506,708
============
</TABLE>
- ---------
Percentages indicated are based on net assets of $207,858,882.
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $1,252,525
Unrealized depreciation.......................... 574,431
----------
Net unrealized appreciation...................... $ 678,094
==========
</TABLE>
(b) Represents a restricted security, purchased under Rule 144A, which is exempt
from registration under the Securities Act of 1933, as amended. This
security is considered illiquid.
See notes to financial statements.
B-73
<PAGE> 147
THE SESSIONS GROUP
KEYPREMIER AGGRESSIVE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ------------ ------------------------------ -------------
<C> <S> <C>
COMMON STOCKS (95.0%):
Aerospace/Defense -- Equipment (0.5%):
60,000 Liposome Co., Inc.(b)......... $ 536,250
-------------
Automotive Parts (2.5%):
72,000 Gentex Corp.(b)............... 1,422,000
60,000 Mascotech, Inc................ 1,252,500
-------------
2,674,500
-------------
Banks (2.4%):
66,000 First American Corp. --
Tennessee................... 2,532,750
-------------
Chemicals (5.3%):
128,000 Airgas, Inc.(b)............... 2,536,000
70,000 Lesco, Inc.................... 1,295,000
60,000 Valspar, Corp................. 1,777,500
-------------
5,608,500
-------------
Coal (0.6%):
55,000 Pittston Mineral Group........ 642,813
-------------
Communication -- Equipment (0.3%):
27,000 Transcrypt International(b)... 300,375
-------------
Computer Networks (2.9%):
130,000 Computer Network Tech
Corp.(b).................... 585,000
70,000 Seagate Technology(b)......... 2,463,125
-------------
3,048,125
-------------
Computer Software (9.3%):
71,000 Computer Data Systems, Inc.... 2,076,750
120,000 Compuware Corp.(b)............ 5,729,999
35,000 Dialogic Corp.(b)............. 931,875
150,000 PSC Inc.(b)................... 1,012,500
-------------
9,751,124
-------------
Computers (3.7%):
160,000 Hutchinson Tech(b)............ 3,920,000
-------------
Construction Materials (1.4%):
50,000 Fleetwood Enterprises......... 1,490,625
-------------
Defense (2.5%):
37,000 Thiokol Corp.................. 2,590,000
-------------
Diversified Products (0.5%):
60,000 Quixote Corp.................. 480,000
-------------
Educational Services (3.3%:)
130,000 Devry, Inc.(b)................ 3,510,000
-------------
Electrical Equipment (0.5%):
30,000 C-Cube Microsystems, Inc.(b).. 526,875
-------------
COMMON STOCKS, CONTINUED:
Electronic Instruments (4.2%):
45,000 CFM Technologies, Inc.(b)..... $ 1,473,750
100,000 Credence Systems Corp.(b)..... 2,993,750
-------------
4,467,500
-------------
Financial Services (3.9%):
48,000 Legg Mason, Inc............... 2,583,000
55,000 United Asset Management(b).... 1,557,188
-------------
4,140,188
-------------
Furniture & Furnishings (4.1%):
100,000 Bush Industries, Inc.......... 2,375,000
46,000 Leggett & Platt, Inc.......... 1,978,000
-------------
4,353,000
-------------
Homebuilders -- Mobile Homes (0.6%):
85,000 Winnebago Industries.......... 605,625
-------------
Hotel Management & Related Services (1.8%):
85,000 La Quinta Inns, Inc........... 1,859,375
-------------
Household Products (1.8%):
30,000 Premark International, Inc.... 802,500
30,000 Tupperware Corp............... 1,095,000
-------------
1,897,500
-------------
Insurance (2.6%):
30,000 Arthur J. Gallagher &
Company..................... 1,132,500
30,000 United Health Care Corp....... 1,560,000
-------------
2,692,500
-------------
Machinery & Equipment (0.9%):
100,000 Flow International Corp.(b)... 975,000
-------------
Medical & Hospital Management Services (3.6%):
45,000 Cerner Corp.(b)............... 945,000
85,000 Genesis Health Ventures(b).... 2,868,750
-------------
3,813,750
-------------
Medical Equipment & Supplies (6.2%):
20,000 Arrow International, Inc.,.... 585,000
90,000 Mentor Corp. Minnesota........ 2,666,250
34,000 Respironics, Inc.(b).......... 718,250
50,000 St Jude Medical, Inc.......... 1,950,000
60,000 Syncor International
Corp.(b).................... 630,000
-------------
6,549,500
-------------
Medical-Biotechnology (0.7%):
250,000 Integra Lifesciences
Corp.(b).................... 781,250
-------------
Oil & Gas (4.1%):
50,000 Forest Oil Corp.(b)........... 734,375
70,000 Lomak Petroleum, Inc.......... 1,246,875
50,000 Triton Energy Ltd............. 2,290,625
-------------
4,271,875
-------------
</TABLE>
Continued
B-74
<PAGE> 148
THE SESSIONS GROUP
KEYPREMIER AGGRESSIVE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
JUNE 30, 1997
<TABLE>
<CAPTION>
SECURITY MARKET
SHARES DESCRIPTION VALUE
- ------------ ------------------------------ -------------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Pharmaceuticals (1.0%):
50,000 Interneuron
Pharmaceuticals(b).......... $ 1,006,250
-------------
Retail-General Merchandise (1.2%):
70,000 Fingerhut Companies, Inc...... 1,220,625
-------------
Services (5.4%):
54,000 Devon Group, Inc.(b).......... 1,930,500
70,000 Logicon, Inc.................. 3,710,000
-------------
5,640,500
-------------
Special Industry -- Equipment (3.2%):
100,000 Integrated Circuit
Systems(b).................. 2,268,750
30,000 Lam Research Corp.(b)......... 1,111,875
-------------
3,380,625
-------------
Telecommunication -- Equipment (2.7%):
100,000 Digi International, Inc.(b)... 1,012,500
60,000 ECI Telecommunications........ 1,785,000
-------------
2,797,500
-------------
Telecommunications (1.6%):
70,000 Glenayre Technologies,
Inc.(b)..................... 1,146,250
40,000 Mosaix, Inc.(b)............... 545,000
-------------
1,691,250
-------------
COMMON STOCKS, CONTINUED:
Textile (5.1%):
76,000 Lydall, Inc.(b)............... $ 1,605,500
100,000 Unifi, Inc.................... 3,737,500
-------------
5,343,000
-------------
Utilities -- Electric (1.4%):
60,000 Trigen Energy Corp............ 1,500,000
-------------
Utilities -- Telephone (0.9%):
100,000 Picturetel Corp.(b)........... 950,000
-------------
Wholesale -- Food Products (2.3%):
55,000 Amrion, Inc.(b)............... 1,540,000
30,000 JP Foodservice, Inc.(b)....... 860,625
-------------
2,400,625
-------------
Total Common Stocks 99,949,375
-------------
INVESTMENT COMPANIES (5.0%):
3,539,901 Federated Government
Obligation Fund............. 3,539,901
1,773,328 Federated Prime Obligation
Fund........................ 1,773,328
-------------
Total Investment Companies 5,313,229
-------------
Total (Cost -- $70,402,857)(a) $105,262,604
=============
</TABLE>
- ---------
Percentages indicated are based on net assets of $105,257,820.
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................... $41,080,697
Unrealized depreciation.......................... 6,220,950
-----------
Net unrealized appreciation...................... $34,859,747
===========
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
B-75
<PAGE> 149
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION:
The Sessions Group (the "Group") was organized on April 25, 1988 as an Ohio
business trust, and is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company.
The Group is authorized to issue an unlimited number of shares which are
units of beneficial interest, without par value. The Group offers shares of
a number of different series or portfolios, including the following series
for which Martindale Andres & Company, Inc., a wholly owned subsidiary of
Keystone Financial Inc., serves as investment adviser: shares of the
KeyPremier Prime Money Market Fund, KeyPremier Pennsylvania Municipal Bond
Fund, KeyPremier Established Growth Fund, KeyPremier Intermediate Term
Income Fund, and KeyPremier Aggressive Growth Fund (individually, a "Fund"
and collectively, the "Funds").
The investment objective of the Prime Money Market Fund is to seek current
income with liquidity and stability of principal. The investment objectives
of the Pennsylvania Municipal Bond Fund are to seek income which is exempt
from federal income tax and Pennsylvania state income tax, although such
income may be subject to the federal alternative minimum tax when received
by certain shareholders, and preservation of capital. The investment
objective for the Established Growth Fund is growth of capital with some
current income as a secondary objective. The investment objective of the
Intermediate Term Income Fund is current income with long-term growth of
capital as a secondary objective. The investment objective of the
Aggressive Growth Fund is growth of capital.
Shares of the Funds may be sold by the Group's distributor, BISYS Fund
Services Limited Partnership d/b/a BISYS Fund Services (the "Distributor")
and its affiliates, to customers and to all accounts of correspondent banks
of Keystone Financial, Inc. and to the general public.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of income
and expenses for the period. Actual results could differ from those
estimates.
SECURITIES VALUATION:
Investments of the Prime Money Market Fund are valued at amortized cost,
which approximates market value. Under the amortized cost method, discount
or premium is amortized on a constant basis to the maturity of the
security. In addition, the Fund may not a) purchase any instrument with a
remaining maturity greater than 397 calendar days unless such investment is
subject to a demand feature, or b) maintain a dollar-weighted average
portfolio maturity which exceeds 90 days.
Continued
B-76
<PAGE> 150
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
Investments in common and preferred stocks, corporate bonds, municipal
securities and U.S. Government securities of the Pennsylvania Municipal
Bond Fund, Established Growth Fund, Intermediate Term Income Fund, and the
Aggressive Growth Fund, (collectively, "the variable net asset value
funds"), are valued at their market values determined on the basis of the
latest available bid quotation in the principal market (closing sales
prices if the principal market is an exchange or NASDAQ National Market) in
which such securities are normally traded. The variable net asset value
funds may also use an independent pricing service approved by the Board of
Trustees to value certain other securities. Such prices reflect market
values which may be established through the use of electronic and matrix
techniques. Investments in investment companies are valued at their net
asset values as reported by such companies. Other securities for which
quotations are not readily available are valued at their fair value under
procedures established by the Group's Board of Trustees. The differences
between the cost and market values of investments held by the variable net
asset value funds are reflected as either unrealized appreciation or
depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the amortization of premium
or discount. Dividend income is recorded on the ex-dividend date. Gains or
losses realized on sales of securities are determined by comparing the
identified cost of the security lot sold with the net sales proceeds.
REPURCHASE AGREEMENTS:
The Funds may acquire repurchase agreements from financial institutions
such as banks and broker dealers which Martindale Andres & Company, Inc.
deems creditworthy under guidelines approved by the Board of Trustees,
subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price generally equals
the price paid by each 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,
is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued
interest). Securities subject to repurchase agreements are held by the
Funds' custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system.
REVERSE REPURCHASE AGREEMENTS:
The Funds may borrow for temporary purposes by entering into reverse
repurchase agreements. 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 places in a segregated custodial account assets having a value equal to
the repurchase price (including accrued interest), and will continually
monitor the
Continued
B-77
<PAGE> 151
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
account to ensure such equivalent value is maintained at all times. The
Funds had no significant holdings in reverse repurchase agreements during
the periods ended June 30, 1997.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid monthly
and distributable net realized capital gains, if any, are declared and
distributed at least annually for the Prime Money Market Fund. Dividends
from net investment income are declared and paid monthly and distributable
net realized capital gains, if any, are declared and distributed annually
for the Pennsylvania Municipal Bond and Intermediate Term Income Funds.
Dividends from net investment income are declared and paid quarterly and
distributable net realized capital gains, if any, are declared and
distributed annually for the Established Growth and Aggressive Growth
Funds.
Dividends from net investment income and net realized capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily
due to differing treatments for net operating losses, expiring capital loss
carry forwards, and deferral of certain losses.
FEDERAL INCOME TAXES:
It is the policy of each of the Funds to qualify or continue to qualify as
a regulated investment company by complying with the provisions available
to certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of net investment income
and net realized capital gains sufficient to relieve it from all, or
substantially all, Federal income taxes.
ORGANIZATION COSTS:
All expenses in connection with each Fund's organization and registration
under the 1940 Act and the Securities Act of 1933 were paid by the Fund.
Such expenses are amortized over a period of five years commencing with the
date of the initial public offering.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of portfolio securities (excluding short-term
securities) for the variable net asset value funds for the period ended
June 30, 1997, are as follows (commencement of operations of such funds was
October 1, 1996, December 2, 1996, December 2, 1996, and February 3, 1997,
respectively):
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Pennsylvania Municipal Bond Fund............................. $115,550,685 $101,834,935
Established Growth Fund...................................... $ 11,590,972 $ 2,016,892
Intermediate Term Income Fund................................ $776,906,116 $582,925,224
Aggressive Growth Fund....................................... $ 6,375,297 $ 1,960,691
</TABLE>
Continued
B-78
<PAGE> 152
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Funds by Martindale Andres
& Company, Inc. Under the terms of the investment advisory agreement,
Martindale Andres & Company, Inc. is entitled to receive fees based on a
percentage of the average net assets of each Fund. Martindale Andres &
Company, Inc. has agreed that if the aggregate expenses of the Funds, as
defined, for any fiscal year exceed limitations of any state having
jurisdiction over the Funds, Martindale Andres & Company, Inc. will refund
to the Funds, or otherwise bear, such excess. Such limitation did not
affect the calculation of the investment advisory fees during the period
ended June 30, 1997.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership, and BISYS Fund Services Inc.
("BISYS Services") are subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Funds as administrator and distributor. Such officers and
trustees are paid no fees directly by the Funds for serving as officers and
trustees of the Group. Under the terms of the administration agreement,
BISYS's fees are computed daily as a percentage of the average net assets
of each Fund. BISYS Services serves the Funds as transfer agent and mutual
fund accountant.
The Group has adopted an Administrative Services Plan, pursuant to which
each Fund is authorized to pay compensation to banks and other financial
institutions, which may include Martindale Andres & Company, Inc., Keystone
Financial, Inc., and its correspondent and affiliated banks and BISYS, for
providing ministerial, recordkeeping and/or administrative support services
to their customers who are the beneficial or record owners of a Fund. The
compensation which may be paid under the Administrative Services Plan is a
fee computed daily at an annual rate of up to 0.25% of the average daily
net asset value of a Fund. The Group has not implemented such a plan as of
June 30, 1997.
BISYS is also entitled to receive commissions on sales of shares of the
variable net asset value funds. For the year ended June 30, 1997, BISYS
received $17,553 from commissions earned on sales of shares of the variable
net asset value funds, of which $1,943 was allowed to affiliated
broker/dealers with Martindale Andres & Company.
Fees may be voluntarily reduced to assist the Funds in maintaining more
competitive expense ratios.
Continued
B-79
<PAGE> 153
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
Information regarding these transactions is as follows for the year ended
June 30, 1997:
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA INTERMEDIATE
MONEY MUNICIPAL ESTABLISHED TERM AGGRESSIVE
MARKET BOND GROWTH INCOME GROWTH
FUND FUND FUND FUND FUND
-------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of average net
assets)............................... .40% .60% .75% .60% 1.00%
Voluntary fee reductions................ $236,280 $420,686 $ 558,942 $529,626 $ 263,486
ADMINISTRATION FEES:
Annual fee before voluntary fee
reductions (percentage of average net
assets)............................... .115% .115% .115% .115% .115%
FUND ACCOUNTANT FEES.................... $ 21,776 $ 30,096 $ 31,176 $ 35,604 $ 13,033
TRANSFER AGENT FEES..................... $ 19,648 $ 21,322 $ 20,282 $ 19,824 $ 11,099
</TABLE>
5. FEDERAL INCOME TAXES:
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal
year. The Pennsylvania Municipal Bond Fund and Intermediate Term Income
Fund, had deferred losses of $507,887 and $3,155,784 respectively, which
will be treated as arising on the first day of the fiscal year ending June
30, 1998.
During the period ended June 30, 1997, the following Fund declared
long-term capital gain distributions in the following amounts:
<TABLE>
<S> <C>
FUND AMOUNT
---- ------
Pennsylvania Municipal Bond Fund $7,579
</TABLE>
6. EXEMPT INTEREST INCOME DESIGNATIONS (UNAUDITED):
For the taxable period ended June 30, 1997, 100% of income dividends paid
by the Established Growth Fund and 100% of income dividends paid by the
Aggressive Growth Fund qualify for the dividends received deduction
available to corporations.
Continued
B-80
<PAGE> 154
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
JUNE 30, 1997
7. CONVERSION OF COMMON/COLLECTIVE TRUST FUNDS:
On September 30, 1996, November 30, 1996, November 30, 1996, and February
3, 1997 respectively, the Pennsylvania Municipal Bond, Established Growth,
Intermediate Term Income, and Aggressive Growth Funds converted all of the
net assets of various common and collective trust funds of Keystone
Financial, Inc. The following is a summary of shares issued, net assets
converted, net asset value per share, and unrealized appreciation as of the
dates of conversion:
<TABLE>
<CAPTION>
PENNSYLVANIA INTERMEDIATE
MUNICIPAL ESTABLISHED TERM AGGRESSIVE
BOND GROWTH INCOME GROWTH
FUND FUND FUND FUND
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Shares............................. 10,288,691 16,173,916 18,918,934 9,409,050
Net Assets......................... $105,086,408 $161,793,160 $189,189,347 $94,090,501
Net Asset Value.................... $ 10.21 $ 10.00 $ 10.00 $ 10.00
Unrealized Appreciation............ $ 486,473 $ 60,390,907 $ 1,761,954 $32,799,001
</TABLE>
Continued
B-81
<PAGE> 155
THE SESSIONS GROUP
KEYPREMIER FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA INTERMEDIATE
MONEY MARKET MUNICIPAL ESTABLISHED TERM AGGRESSIVE
FUND BOND FUND GROWTH FUND INCOME FUND GROWTH FUND
---------------- ---------------- ---------------- ---------------- ----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
ENDING ENDING ENDING ENDING ENDING
JUNE 30, 1997(A) JUNE 30, 1997(A) JUNE 30, 1997(A) JUNE 30, 1997(A) JUNE 30, 1997(A)
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period............... $ 1.00 $ 10.21 $ 10.00 $ 10.00 $ 10.00
------- -------- -------- -------- --------
Investment Activities
Net investment income... 0.037 0.34 0.08 0.36 0.01
Net realized and
unrealized gains
(losses) on
investments........... -- 0.06 1.13 (0.23) 0.24
------- -------- -------- -------- --------
Total from Investment
Activities.......... 0.037 0.40 1.21 0.13 0.25
------- -------- -------- -------- --------
Distributions
Net investment income... (0.037) (0.32) (0.08) (0.36) (0.01)
------- -------- -------- -------- --------
Total Distributions... (0.037) (0.32) (0.08) (0.36) (0.01)
------- -------- -------- -------- --------
Net Asset Value, End of
Period.................. $ 1.00 $ 10.29 $ 11.13 $ 9.77 $ 10.24
------- -------- -------- -------- --------
Total Return (excludes
sales charge)........... 3.73%(b) 3.98%(b) 12.20%(b) 1.40%(b) 2.52%(b)
Ratios/Supplemental Data:
Net Assets, at end of
period (000)............ $ 95,850 $123,194 $190,914 $207,859 $105,258
Ratio of expenses to
average net assets...... 0.36%(c) 0.37%(c) 0.44%(c) 0.37%(c) 0.66%(c)
Ratio of net investment
income to average net
assets.................. 5.02%(c) 4.46%(c) 1.39%(c) 6.45%(c) 0.28%(c)
Ratio of expenses to
average net assets*..... 0.70%(c) 0.86%(c) 1.01%(c) 0.84%(c) 1.35%(c)
Ratio of net investment
income to average net
assets*................. 4.68%(c) 3.97%(c) 0.82%(c) 5.98%(c) (0.41%)(c)
Portfolio Turnover........ -- 98% 1% 329% 2%
Average Broker Commission
Paid.................... -- -- $ 0.0748(d) -- $ 0.0708(d)
</TABLE>
- ---------------
<TABLE>
<S> <C>
* During the period certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
(a) Commencement of the Funds began October 7, 1996, October 1, 1996, December 2, 1996, December 2, 1996, and February 3, 1997,
respectively.
(b) Not Annualized
(c) Annualized
(d) Represents the total dollar amount of commissions paid on portfolio transactions divided by total number of shares
purchased and sold by the Fund for which commissions were charged.
</TABLE>
See notes to financial statements.
B-82
<PAGE> 156
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Sessions Group --
KeyPremier Funds:
We have audited the accompanying statements of assets and liabilities of The
Sessions Group -- KeyPremier Funds (comprised of the KeyPremier Prime Money
Market Fund, KeyPremier Pennsylvania Municipal Bond Fund, KeyPremier Established
Growth Fund, KeyPremier Intermediate Term Income Fund, and KeyPremier Aggressive
Growth Fund, collectively the Funds), including the schedules of portfolio
investments as of June 30, 1997, and the related statements of operations,
statements of changes in net assets and the financial highlights for each of the
periods indicated herein. These financial statements and the financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of June
30, 1997 by confirmation with the custodian and other appropriate audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising The Sessions Group -- KeyPremier Funds at
June 30, 1997, the results of their operations, the changes in their net assets
and the financial highlights for each of the periods indicated herein, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
August 22, 1997
B-83
<PAGE> 157
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
A-1
<PAGE> 158
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
A-2
<PAGE> 159
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.
A-3
<PAGE> 160
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
A-4
<PAGE> 161
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
A-5
<PAGE> 162
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
A-6
<PAGE> 163
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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