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Rule 497 (c)
File No. 811-5545
Registration No. 33-21489
THE KEYPREMIER PRIME MONEY MARKET FUND LOGO
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3435 Stelzer Road
Columbus, Ohio 43219
For current yield, purchase,
and redemption information,
call (800) 766-3960.
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The Sessions Group (the "Group") is an open-end management investment company.
The Group includes The KeyPremier Prime Money Market Fund (the "Fund"), which is
a diversified portfolio of the Group. The Trustees of the Group have divided the
Fund's beneficial ownership into an unlimited number of transferable units
called shares (the "Shares").
Martindale Andres & Company, Inc., West Conshohocken, Pennsylvania (the
"Adviser"), which is a wholly owned subsidiary of Keystone Financial, Inc.
("Keystone"), acts as the investment adviser to the Fund.
The Fund seeks current income with liquidity and stability of principal. The
Fund invests in high-quality money market instruments and other instruments of
high quality. All securities or instruments in which the Fund invests have, or
are deemed to have, remaining maturities of 397 days or less, although
instruments subject to repurchase agreements may bear longer maturities.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
Columbus, Ohio, acts as the Fund's administrator and distributor. BISYS Fund
Services, Inc., Columbus, Ohio, an affiliate of BISYS, acts as the Fund's
transfer agent (the "Transfer Agent") and performs certain fund accounting
services for the Fund.
Additional information about the Fund and the Group, contained in a Statement
of Additional Information, has been filed with the Securities and Exchange
Commission and is available upon request without charge by writing to the Fund
at its address or by calling the Fund at the telephone number shown above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference in its entirety into this Prospectus.
This Prospectus sets forth concisely the information about the Fund and the
Group that a prospective investor ought to know before investing. Investors
should read this Prospectus and retain it for future reference.
THE SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, THE ADVISER, KEYSTONE OR ANY OF THEIR AFFILIATES. SUCH SHARES ARE
NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY, AND AN INVESTMENT IN THE FUND INVOLVES CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THE FUND SEEKS TO MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE, BUT
THERE CAN BE NO ASSURANCE THAT NET ASSET VALUE WILL NOT VARY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is April 1, 1997.
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PROSPECTUS SUMMARY
SHARES OFFERED: Units of beneficial interest ("Shares") of the Fund, one
separate investment fund of The Sessions Group, an Ohio business trust (the
"Group").
OFFERING PRICE: The public offering price of the Fund is equal to the net
asset value per share which the Fund will seek to maintain at $1.00 per Share.
MINIMUM PURCHASE: $1,000 minimum initial investment with $25 minimum
subsequent investments. Such minimum initial investment is reduced to $250 for
investors using the Auto Invest Plan described herein and for employees of the
Adviser and its affiliates.
TYPE OF COMPANY: The Fund is a diversified series of an open-end,
management investment company.
INVESTMENT OBJECTIVES: Current income with liquidity and stability of
principal.
INVESTMENT POLICIES: The Fund invests in high-quality money market
instruments and other instruments of high quality. All securities or instruments
in which the Fund invests have remaining maturities of 397 days (13 months) or
less, although instruments subject to repurchase agreements may bear longer
maturities.
RISK FACTORS AND SPECIAL CONSIDERATIONS: An investment in the Fund is
subject to certain risks, including interest rate risk, as set forth in detail
under "Investment Objective and Policies--Risk Factors and Investment
Techniques." As with other mutual funds, there can be no assurance that the Fund
will achieve its investment objective. The Fund, to the extent set forth under
"Investment Objective and Policies," may engage in the following practices: the
use of repurchase and reverse repurchase agreements, lending portfolio
securities and the purchase of securities on a when-issued or delayed-delivery
basis.
INVESTMENT ADVISER: Martindale Andres & Company, Inc. (the "Adviser").
DIVIDENDS: Dividends from net income are declared daily and generally paid
monthly. Net realized capital gains, if any, are distributed at least annually.
DISTRIBUTOR: BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("BISYS").
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FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES................................................... None
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees After Voluntary Fee Waiver(1)...................................... .20%
12b-1 Fees......................................................................... None
Other Expenses(2).................................................................. .26
----
Estimated Total Fund Operating Expenses After Voluntary Fee Waiver1................ .46%
====
</TABLE>
Example You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- ------ -------
<S> <C>
$5 $15
</TABLE>
The purpose of the above table is to assist a potential purchaser of Shares of
the Fund in understanding the various costs and expenses that an investor in the
Fund will bear directly or indirectly. Such expenses do not include any fees
charged by the Adviser or any of its affiliates to its customer accounts which
may have invested in Shares of the Fund. See "Management of the Group" and
"General Information" for a more complete discussion of the annual operating
expenses of the Fund. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
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1 The Adviser has agreed voluntarily to reduce its investment advisory fee to
0.20% through on or about October 31, 1997. Absent such voluntary fee
reduction, Management Fees and Estimated Total Fund Operating Expenses would
be 0.40% and 0.66%, respectively.
2 "Other Expenses" are estimated for the current fiscal year.
3
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FINANCIAL HIGHLIGHTS
The Fund is one separate fund of the Group. The table below sets forth certain
information concerning the investment results of the Fund since its inception.
Further financial information is included in the Statement of Additional
Information. The Financial Highlights contained in the table below have not been
audited.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 7, 1996
THROUGH
DECEMBER 31, 1996(A)
--------------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................................... $ 1.00
Investment Activities:
Net investment income................................................. 0.004
Net realized and unrealized gains (losses) on investments............. --
--------
Total from Investment Activities........................................ 0.004
--------
Distributions:
Net investment income................................................. (0.004)
Net realized gains.................................................... --
--------
Total Distributions................................................... (0.004)
--------
NET ASSET VALUE, END OF PERIOD.......................................... $ 1.00
TOTAL RETURN............................................................ 1.16%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, at end of period (000)...................................... $104,514
Ratio of expenses to average net assets................................. 0.29%(c)
Ratio of net investment income to average net assets.................... 4.94%(c)
Ratio of expenses to average net assets*................................ 1.19%(c)
Ratio of net investment income to average net assets*................... 4.04%(c)
</TABLE>
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* 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 operations.
(b) Not annualized.
(c) Annualized.
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PERFORMANCE INFORMATION
From time to time performance information for the Fund showing the Fund's
average annual total return, aggregate total return, seven-day yield and
seven-day effective yield may be presented in advertisements, sales literature
and shareholder reports. SUCH PERFORMANCE FIGURES ARE BASED ON HISTORICAL
PERFORMANCE AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Average annual
total return will be calculated for the period since commencement of operations
for the Fund. Average annual total return is measured by comparing the value of
an investment in the Fund at the beginning of the relevant period to the
redeemable value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions), which figure is
then annualized. Aggregate total return is calculated similarly to average
annual total return except that the return figure is aggregated over the
relevant period instead of annualized. The seven-day yield of the Fund refers to
the income generated by an investment therein over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The seven-day effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The seven-day effective yield is slightly higher
than the seven-day yield because of the compounding effect of this assumed
reinvestment. The Fund may also present a 30-day yield which is calculated
similarly to the seven-day yield but instead refers to a 30-day period rather
than a seven-day period.
Investors may also judge the performance of the Fund by comparing or
referencing it to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and to data prepared by various services, which indices or data may be published
by such services or by other services or publications. In addition to
performance information, general information about the Fund that appears in such
publications may be included in advertisements, sales literature and reports to
Shareholders.
Yield and total return are generally functions of market conditions, interest
rates, types of investments held, and operating expenses. Consequently, current
yields and total return will fluctuate and are not necessarily representative of
future results. Any fees charged by Keystone or by any of its affiliates,
including the Adviser, to its customer accounts which may have invested in
Shares of the Fund will not be included in performance calculations; such fees,
if charged, will reduce the actual performance from that quoted. In addition, if
the Adviser or BISYS voluntarily reduces all or part of its fees for the Fund,
as discussed below, the yield and total return for the Fund will be higher than
they would otherwise be in the absence of such voluntary fee reductions.
INVESTMENT OBJECTIVE AND POLICIES
IN GENERAL
The investment objective of the Fund is to seek current income with liquidity
and stability of principal. The investment objective of the Fund is a
non-fundamental policy and as such may be changed by the Group's Trustees
without the vote of the Shareholders of the Fund. There can be no assurance that
the investment objective of the Fund will be achieved.
As a money market fund, the Fund invests exclusively in United States
dollar-denominated instruments which the Trustees of the Group and the Adviser
determine present minimal credit risks and which at the time of acquisition are
rated by one or more appropriate nationally recognized statistical rating orga-
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nizations ("NRSROs") (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 or, if unrated, are determined by the Adviser to be of comparable
quality. The Fund also diversifies its investments so that, with minor
exceptions and except for United States Government securities, not more than
five percent of its total assets is invested in the securities of any one
issuer, not more than five percent of its total assets is invested in securities
of issuers rated by the NRSROs at the time of investment in the second highest
rating category for short-term debt obligations or, if unrated, deemed by the
Adviser to be of comparable quality ("Second Tier Securities") and not more than
the greater of one percent of total assets or one million dollars is invested in
the securities of one issuer that are Second Tier Securities. All securities or
instruments in which the Fund invests have remaining maturities of 397 calendar
days or less. The dollar-weighted average maturity of the securities in the Fund
will not exceed 90 days.
Subject to the foregoing general limitations, the Fund expects to invest in
the following types of securities. The Fund may invest in a variety of U.S.
Treasury obligations, differing in their interest rates, maturities, and times
of issuance, and other obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (collectively, "Government Obligations").
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association and the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the Student Loan Marketing Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks or the
Federal Home Loan Mortgage Corporation, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will invest
in the obligations of such agencies or instrumentalities only when the Adviser
believes that the credit risk with respect thereto is minimal.
The Fund may invest in bankers' acceptances guaranteed by domestic and foreign
banks if at the time of investment the guarantor bank has capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of its most recently
published financial statements). The Fund may also invest in certificates of
deposit and demand and time deposits of domestic and foreign banks and savings
and loan associations if (a) at the time of investment the depositor institution
has capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of their most recently published financial statements) or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
The Fund may also invest in Eurodollar Certificates of Deposit ("ECDs") which
are U.S. dollar denominated certificates of deposit issued by offices of foreign
and domestic banks located outside 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; Canadian Time Deposits ("CTDs") which are
essentially the same as ETDs except they are issued by Canadian offices of major
Canadian banks; and Yankee Certificates of Deposit ("Yankee CDs") which are
certificates of deposit issued by U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States. Under normal market conditions, the
Fund will not invest more than 20% of its total assets in such
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foreign securities (including CCP and Europaper as defined below).
The Fund will not invest in time deposits with maturities in excess of seven
days which are subject to penalties upon early withdrawal if, in the aggregate
with other illiquid securities held by the Fund, such deposits exceed 10% of the
Fund's net assets. Such time deposits include ETDs and CTDs but do not include
certificates of deposit.
The Fund may invest in short-term promissory notes issued by corporations
(including variable amount master demand notes) and in municipal obligations
rated at the time of purchase by one or more appropriate NRSROs in one of the
two highest rating categories for short-term debt obligations or, if not rated,
determined by the Adviser to be of comparable quality to instruments that are so
rated pursuant to guidelines adopted by the Group's Board of Trustees.
Instruments may be purchased in reliance upon a rating only when the rating
organization is not affiliated with the issuer or guarantor of the instrument.
For a description of the rating symbols of the NRSROs, see the Appendix to the
Statement of Additional Information. The Fund may also invest in Canadian
Commercial Paper ("CCP"), which is U.S. dollar denominated commercial paper
issued by a Canadian corporation or a Canadian subsidiary of a U.S. corporation,
and in Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer which, in each case, is rated at the time of purchase by one or more
appropriate NRSROs in one of the two highest rating categories for short-term
debt obligations or, if not rated, determined by the Adviser to be of comparable
quality to instruments that are so rated.
The Fund may also invest in corporate debt securities with remaining
maturities of 397 days or less although at the time of issuance such securities
had maturities exceeding 397 days. The Fund may invest in such securities so
long as comparable securities of such issuer have been rated in the highest
rating category for short-term debt obligations by the appropriate NRSROs or are
otherwise deemed to be eligible for purchase by the Fund in accordance with the
guidelines adopted by the Group's Board of Trustees.
Variable amount master demand notes in which the Fund may invest are unsecured
demand notes that permit the indebtedness thereunder to vary and that provide
for periodic adjustments in the interest rate according to the terms of the
instrument. Because master demand notes are direct lending arrangements between
the 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. While the notes are not typically rated by NRSROs,
issuers of variable amount master demand notes (which are normally
manufacturing, retail, financial, and other business concerns) must satisfy 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 dollar-weighted average portfolio maturity, a
variable amount master demand note will be deemed to have a maturity equal to
the period of time remaining until the principal amount can be recovered from
the issuer through demand. The Fund may purchase variable amount master demand
notes with face maturities in excess of 397 days only so long as the Fund may
demand payment at any time on no more than 30 days' notice or at specified
intervals not exceeding 397 days and upon no more than 30 days' notice.
The Fund may also acquire variable and floating rate notes issued by both
governmental and nongovernmental issuers, subject to the Fund's investment
objective, policies and restrictions. A variable rate note is one whose terms
provide for the adjustment of its interest
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rate on set dates and which, upon such adjustment, can reasonably be expected to
have a market value that approximates its amortized cost. However, in the event
the interest rate of such a note is established by reference to an index or an
interest rate that may from time to time lag behind other market interest rates,
there is the risk that the market value of such note, on readjustment of its
interest rate, will not approximate its amortized cost which could adversely
affect the Fund's ability to maintain a stable net asset value. In such an
instance, the Adviser will seek to sell such note to the extent it can do so in
an orderly fashion given current market conditions.
A floating rate note 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
amortized cost. Such notes are frequently not rated by NRSROs; however, unrated
variable and floating rate notes purchased by the Fund will be determined by the
Adviser to be of comparable quality at the time of purchase to rated instruments
eligible for purchase under the 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 note purchased by the Fund,
the Fund may resell the note 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 note in the event the issuer of the note
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. Variable or floating
rate notes may be secured by bank letters of credit.
To the extent that the Fund holds a note for which the Fund is not entitled to
receive the principal amount within seven days of demand and for which no
readily available market exists, such a note will be treated as an illiquid
security for purposes of calculation of the 10% limitation on such securities as
set forth below.
RISK FACTORS AND INVESTMENT TECHNIQUES
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund would
acquire securities, in exchange for cash from member banks of the Federal
Deposit Insurance Corporation and/or from registered broker-dealers which the
Adviser deems creditworthy under guidelines approved by the Group's Board of
Trustees. The seller agrees to repurchase such securities at a mutually agreed
date and price. The repurchase price generally equals the price paid by the Fund
plus interest negotiated on the basis of current short-term rates, which may be
more or less than the rate on the underlying portfolio securities. Securities
subject to repurchase agreements must be of the same type and quality as those
in which the Fund may invest directly. Repurchase agreements are considered to
be loans by the Fund under the Investment Company Act of 1940, as amended (the
"1940 Act"). For further information about repurchase agreements and the related
risks, see "Investment Objectives and Policies -- Additional Information on
Portfolio Instruments -- Repurchase Agreements" in the Statement of Additional
Information.
Reverse Repurchase Agreements. The Fund may borrow funds by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the 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 the
Fund enters into a reverse repurchase agreement, it will
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place in a segregated custodial account assets such as U.S. Government
securities or other liquid high-grade debt securities consistent with the Fund's
investment restrictions having a value equal to the repurchase price (including
accrued interest), and will continually monitor the account to ensure that such
equivalent value is maintained at all times. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Fund may
decline below the price at which the Fund is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by the
Fund under the 1940 Act and therefore a form of leverage. The Fund may
experience a negative impact on its net asset value if interest rates rise
during the term of a reverse repurchase agreement. The Fund generally will
invest the proceeds of such borrowings only when such borrowings will enhance
the Fund's liquidity or when the Fund reasonably expects that the interest
income to be earned from the investment of the proceeds is greater than the
interest expense of the transaction. For further information about reverse
repurchase agreements, see "Investment Objective and Policies--Additional
Information on Portfolio Instruments--Reverse Repurchase Agreements" in the
Statement of Additional Information.
Except as otherwise disclosed to the Shareholders of the Fund, the Group will
not execute portfolio transactions through, acquire portfolio securities issued
by, make savings deposits in, or enter into repurchase or reverse repurchase
agreements with the Adviser, BISYS, or their affiliates, and will not give
preference to the Adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
Foreign Investments. Investments in foreign securities (including ECDs, ETDs,
CTDs, Yankee CDs, CCP and Europaper) may subject the Fund to investment risks
that differ in some respects from those related to investments in securities of
U.S. domestic issuers. Such risks include future adverse political and economic
developments, the possible imposition of withholding taxes on interest or other
investment income, possible seizure, nationalization, or expropriation of
foreign deposits or investments, the possible establishment of exchange controls
or taxation at the source, less stringent disclosure requirements, less liquid
or developed securities markets or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal or interest
on such securities or the purchase or sale thereof. In addition, foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements and to different accounting, auditing, reporting, and
recordkeeping standards than those applicable to domestic branches of U.S.
banks. The Fund will acquire securities issued by foreign branches of U.S.
banks, foreign banks, or other foreign issuers only when the Adviser believes
that the risks associated with such instruments are minimal.
Securities Lending. In order to generate additional income, the Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks, or
institutional borrowers of securities. The Fund must receive 100% collateral in
the form of cash or U.S. Government securities. This collateral will be valued
daily by the Adviser. Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund any
interest received on such securities. Loans are subject to termination by the
Fund or the borrower at any time. While the Fund does not have the right to
vote securities on loan, the Fund intends to terminate the loan and regain the
right to vote if that is considered important with respect to the investment.
In the event the borrower would default in its obligations, the Fund bears the
risk of delay in recovery of the portfolio
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securities and the loss of rights in the collateral. The Fund will enter into
loan agreements only with broker-dealers, banks, or other institutions that the
Adviser has determined are creditworthy under guidelines established by the
Group's Board of Trustees.
Other Investment Policies. The Fund may purchase securities on a when-issued
or delayed-delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. The
Fund will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with and in furtherance of
its investment objective and policies, not for investment leverage, although
such transactions represent a form of leveraging. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than those available in the market when delivery takes
place. The Fund will generally not pay for such securities or start earning
interest on them until they are received on the settlement date. When the Fund
agrees to purchase such securities, however, its custodian will set aside cash
or liquid securities equal to the amount of the commitment in a separate
account. Securities purchased on a when-issued basis are recorded as an asset
and are subject to changes in the value based upon changes in the general level
of interest rates. In when-issued and delayed-delivery transactions, the Fund
relies on the seller to complete the transaction; the seller's failure to do so
may cause the Fund to miss a price or yield considered to be advantageous.
The Fund may also invest in the securities of other investment companies in
accordance with the limitations of the 1940 Act and any exemptions therefrom.
The Fund intends to invest in the securities of other money market mutual funds
for purposes of short-term cash management. The Fund will incur additional
expenses due to the duplication of fees and expenses as a result of investing in
mutual funds. Additional restrictions on the Fund's investments in the
securities of other mutual funds are contained in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of investment restrictions that may be changed
only by a vote of a majority of the outstanding Shares of the Fund (as defined
under "General Information--Miscellaneous" herein). The Fund will not:
1. Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the Fund's total assets would
be invested in such issuer or the Fund would hold more than 10% of the
outstanding voting securities of the issuer, except that 25% or less of the
Fund's total assets may be invested without regard to such limitations. There
is no limit to the percentage of assets that may be invested in U.S. Treasury
bills, notes, or other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Purchase any securities which would cause more than 25% of the Fund's
total assets at the time of purchase to be invested in securities of one or
more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank certificates of deposit or bankers'
acceptances, and repurchase agreements secured by bank instruments or
obligations of the U.S. Government, its agencies or instrumentalities; (b)
wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activi-
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<PAGE> 11
ties of their parents; and (c) utilities will be divided according to their
services. For example, gas, gas transmission, electric and gas, electric, and
telephone will each be considered a separate industry.
3. Borrow money or issue senior securities except as and to the extent
permitted by the 1940 Act or any rule, order or interpretation thereunder. So
long as the Fund's borrowings, including reverse repurchase agreements and
dollar roll agreements, exceed 5% of the Fund's total assets, the Fund will
not acquire any portfolio securities.
4. Make loans, except that the Fund may purchase or hold debt instruments
and lend portfolio securities in accordance with its investment objective and
policies, make time deposits with financial institutions and enter into
repurchase agreements.
The following additional investment restriction may be changed without the
vote of a majority of the outstanding Shares of the Fund: the Fund may not
purchase or otherwise acquire any security if, as a result, more than 10% of its
net assets would be invested in securities that are illiquid. For purposes of
this investment restriction, illiquid securities include securities which are
not readily marketable and repurchase agreements with maturities in excess of
seven days.
Irrespective of fundamental investment restriction number 1 above, and
pursuant to Rule 2a-7 under the 1940 Act, the Fund will, with respect to 100% of
its total assets, limit its investment in the securities of any one issuer in
the manner provided by such Rule, which limitations are referred to above under
the caption "Investment Objectives and Policies."
VALUATION OF SHARES
The net asset value of the Fund is determined and its Shares are priced as of
12:00 noon (Eastern time) and the close of regular trading on the New York Stock
Exchange (the "Exchange") (generally 4:00 p.m. Eastern time) on each Business
Day of the Fund. The times at which the Shares of the Fund are priced are
hereinafter referred to as the "Valuation Time" or "Valuation Times," as the
case may be. A "Business Day" of the Fund is a day on which the Exchange is open
for trading and any other day (other than a day on which no Shares of the Fund
are tendered for redemption and no order to purchase any Shares of the Fund is
received) during which there is sufficient trading in portfolio instruments such
that the Fund's net asset value per share might be materially affected. The
Exchange will not be open in observance of the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share for purposes of pricing
purchases and redemptions is calculated by dividing the value of all securities
and other assets belonging to the Fund, less the liabilities charged to the
Fund, by the number of the Fund's outstanding Shares.
The assets in the Fund are valued based upon the amortized cost method which
the Trustees of the Group believe fairly reflects the market-based net asset
value per share. Pursuant to the rules and regulations of the Commission
regarding the use of the amortized cost method, the Fund will maintain a
dollar-weighted average portfolio maturity of 90 days or less. Although the
Group seeks to maintain the Fund's net asset value per share at $1.00, there can
be no assurance that net asset value will not vary. For further information
about valuation of investments, see "Net Asset Value" in the Statement of
Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares of the Fund are sold on a continuous basis by the Group's distributor,
BISYS (the
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"Distributor"). The principal office of the Distributor is 3435 Stelzer Road,
Columbus, Ohio 43219. If you wish to purchase Shares, telephone the Group at
(800) 766-3960.
PURCHASES OF SHARES
Shares may be purchased through procedures established by the Distributor in
connection with the requirements of qualified accounts maintained by or on
behalf of certain persons ("Customers") by the Adviser, its affiliates or its
correspondent entities (collectively, "Entities"). These procedures may include
instructions under which a Customer's account is "swept" automatically no less
frequently than weekly and amounts in excess of a minimum amount agreed upon by
the Entity and the Customer are invested by the Distributor in Shares of the
Fund, depending upon the type of the Customer's account and/or the instructions
of the Customer.
Shares of the Fund sold to the Entities acting in a fiduciary, advisory,
custodial, agency, or other similar capacity on behalf of Customers will
normally be held of record by the Entities. With respect to Shares of the Fund
so sold, it is the responsibility of the particular Entity to transmit purchase
or redemption orders to the Distributor and to deliver federal funds for
purchase on a timely basis. Beneficial ownership of Shares will be recorded by
the Entities and reflected in the account statements provided by the Entities to
Customers.
Investors may also purchase Shares of the Fund by completing and signing an
Account Registration Form and mailing it, together with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, payable to the Fund, to The KeyPremier Funds, P.O. Box 182707, Columbus,
Ohio 43218-2707. Subsequent purchases of Shares of the Fund may be made at any
time by mailing a check (or other negotiable bank draft or money order) payable
to the Group, to the above address.
If an Account Registration Form has been previously received by the Group,
investors may also purchase Shares by wiring funds to the Fund's custodian.
Prior to wiring any such funds and in order to ensure that wire orders are
invested promptly, investors must call the Group at (800) 766-3960 to obtain
instructions regarding the bank account number into which the funds should be
wired and other pertinent information.
Shares of the Fund are purchased at the net asset value per share (see
"Valuation of Shares") next determined after receipt by the Distributor, its
agents or broker-dealers with whom it has an agreement of an order in good form
to purchase Shares. Purchases of Shares of the Fund will be effected only on a
Business Day (as defined in "Valuation of Shares").
An order to purchase Shares of the Fund will be deemed to have been received
by the Distributor only when federal funds with respect thereto are available to
the Fund's custodian for investment. Federal funds are monies credited to a
bank's account with a Federal Reserve Bank. Payment for an order to purchase
Shares of the Fund which is transmitted by federal funds wire will be available
the same day for investment by the Fund's custodian, if received prior to the
last Valuation Time (see "Valuation of Shares"). Payments transmitted by other
means (such as by check drawn on a member of the Federal Reserve System) will
normally be converted into federal funds within two banking days after receipt.
The Group strongly recommends that investors of substantial amounts use federal
funds to purchase Shares. Shares of the Fund purchased before 12:00 noon,
Eastern Time, begin earning dividends on the same Business Day. Shares of the
Fund purchased after 12:00 noon, Eastern Time, begin earning dividends on the
next Business Day. All Shares of the Fund continue to earn dividends through the
day before their redemption.
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MINIMUM INVESTMENT
Except as otherwise discussed below under "Auto Invest Plan," the minimum
investment is $1,000 for the initial purchase of Shares of the Fund by an
investor and $25 for subsequent purchases of Shares of the Fund. The initial
minimum investment amount is also reduced to $250 for employees of the Adviser,
Keystone or any of their affiliates.
Depending upon the terms of a particular Customer's account, the Entities or
their affiliates may charge a Customer account fees for automatic investment and
other cash management services provided in connection with an investment in the
Fund. Information concerning these services and any charges will be provided by
the Entities. This Prospectus should be read in conjunction with any such
information received from the Entities or their affiliates.
The Fund reserves the right to reject any order for the purchase of its Shares
in whole or in part, including purchases made with foreign checks and third
party checks not originally made payable to the order of the investor.
Every Shareholder will receive a confirmation of each new transaction in his
or her account, which will also show the total number of Shares owned by the
Shareholder and the number of Shares being held in safekeeping by the Transfer
Agent for the account of the Shareholder. Reports of purchases and redemptions
of Shares by Entities on behalf of their Customers will be sent by the Entities
to their Customers. Shareholders may rely on these statements in lieu of
certificates. Certificates representing Shares will not be issued.
AUTO INVEST PLAN
The KeyPremier Funds Auto Invest Plan enables Shareholders to make regular
semi-monthly, monthly, quarterly or semi-annual purchases of Shares of the Fund
through automatic deduction from their bank accounts, provided that the
Shareholder's bank is a member of the Federal Reserve and the Automated Clearing
House (ACH) system. With Shareholder authorization the Transfer Agent will
deduct the amount specified (subject to the applicable minimums) from the
Shareholder's bank account which will automatically be invested in Shares of the
Fund at the public offering price on the date of such deduction. The required
minimum initial investment when opening an account using the Auto Invest Plan is
$250 ($25 for employees of the Adviser, Keystone or one of their affiliates);
the minimum amount for subsequent investments is $25. To participate in the Auto
Invest Plan, Shareholders should complete the appropriate section of the Account
Registration Form or a supplemental sign-up form which can be acquired by
calling the Group at (800) 766-3960. For a Shareholder to change the Auto Invest
instructions, the request must be made in writing to the Group at: 3435 Stelzer
Road, Columbus, Ohio 43219.
IN-KIND PURCHASES
Payment for Shares of the Fund may, in the discretion of the Adviser, be made
in the form of securities that are permissible investments for the Fund as
described in this Prospectus. For further information about this form of
payment, contact the Adviser. In connection with an in-kind securities payment,
the Fund will require, among other things, that the securities be valued on the
date of purchase in accordance with the pricing methods used by the Fund and
that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form of transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
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<PAGE> 14
KEYPREMIER INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A KeyPremier IRA enables individuals, even if they participate in an
employer-sponsored retirement plan, to establish their own retirement program.
KeyPremier IRA contributions may be tax-deductible and earnings are tax
deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA
contributions is restricted or eliminated for individuals who participate in
certain employer pension plans and whose annual income exceeds certain limits.
Existing IRAs and future contributions up to the IRA maximums, whether
deductible or not, still earn income on a tax-deferred basis.
All KeyPremier IRA distribution requests must be made in writing to the
Distributor. Any deposits to a KeyPremier IRA must distinguish the type and year
of the contributions.
For more information on the KeyPremier IRAs call the Group at (800) 766-3960.
Investment in Shares of The KeyPremier Pennsylvania Municipal Bond Fund or any
other tax-exempt fund would not be appropriate for a KeyPremier IRA.
Shareholders are advised to consult a tax adviser on KeyPremier IRA contribution
and withdrawal requirements and restrictions.
GENERAL
The Distributor, at its expense, will also provide additional compensation to
dealers in connection with sales of Shares of the Fund. Such compensation will
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Fund, and/or other dealer-sponsored special events. In
some instances, this compensation will be made available only to certain dealers
whose representatives have sold a significant amount of such Shares.
Compensation will include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Compensation will also
include the following types of non-cash compensation offered through sales
contests: (1) vacation trips, including the provision of travel arrangements and
lodging at luxury resorts at an exotic location, (2) tickets for entertainment
events (such as concerts, cruises and sporting events) and (3) merchandise (such
as clothing, trophies, clocks and pens). Dealers may not use sales of the Fund's
Shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its Shareholders.
EXCHANGE PRIVILEGE
Shareholders may exchange their Shares in the Fund for Shares of any other
fund of the Group advised by the Adviser ("KeyPremier Funds"), including The
KeyPremier Pennsylvania Municipal Bond Fund, The KeyPremier Established Growth
Fund, The KeyPremier Intermediate Term Income Fund and The KeyPremier Aggressive
Growth Fund, at respective net asset values plus a sales charge equal to the
difference, if any, between the sales charge payable upon purchase of Shares of
such KeyPremier Fund and the sales charge, if any, previously paid on the Fund
Shares to be exchanged. In addition, with respect to every exchange, the amount
to be exchanged must meet the applicable minimum investment requirements and the
exchange must be made in states where it is legally authorized. When Shares of
the Fund are exchanged for Shares of a KeyPremier Fund sold with a sales charge,
the applicable sales load will be assessed, unless such Shares to be exchanged
were acquired through a previous exchange for Shares on which a sales charge was
paid. Under such circumstances, the Shareholder must notify the
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<PAGE> 15
Group that a sales charge was originally paid and provide the Group with
sufficient information to permit confirmation of the Shareholder's right not to
pay a sales charge.
An exchange is considered a sale of Shares for federal income tax purposes.
The Group may at any time modify or terminate the foregoing exchange
privileges. The Group, however, will give Shareholders 60 days' advance written
notice of any such modification.
A Shareholder wishing to exchange his or her Shares may do so by contacting
the Group at (800) 766-3960 or by providing written instructions to the Group.
Any Shareholder who wishes to make an exchange should obtain and review the
current prospectus of the fund in which he or she wishes to invest before making
the exchange. For a discussion of risks associated with unauthorized telephone
exchanges, see "Redemption by Telephone" below.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by mail or by telephone. However, all or
part of a Customer's Shares may be redeemed in accordance with instructions and
limitations pertaining to his or her account at an Entity. For example, if a
Customer has agreed with an Entity to maintain a minimum balance in his or her
account with the Entity, and the balance in that account falls below that
minimum, the Customer may be obliged to redeem, or the Entity may redeem on
behalf of the Customer, all or part of the Customer's Shares of the Fund to the
extent necessary to maintain the required minimum balance. Also, Shares may be
redeemed using the check-writing feature described below.
Redemption by Mail
A written request for redemption must be received by the Group, at the address
shown on the front page of this Prospectus, in order to honor the request. The
Transfer Agent will require a signature guarantee by an eligible guarantor
institution. The signature guarantee requirement will be waived if the following
conditions apply: (1) the redemption check is payable to the Shareholder(s) of
record, and (2) the redemption check is mailed to the Shareholder(s) at the
address of record or mailed or wired to a commercial bank account previously
designated on the Account Registration Form. There is no charge for having
redemption proceeds mailed to a designated bank account. To change the address
to which a redemption check is to be mailed, a written request therefor must be
received by the Transfer Agent. In connection with such request, the Transfer
Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall
include banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings associations as those terms are
defined in the Securities Exchange Act of 1934. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
Redemption by Telephone
If a Shareholder has so designated on the Account Registration Form, a
Shareholder may request a redemption of his or her Shares by telephoning the
Group and having the payment of redemption requests sent electronically directly
to a domestic commercial bank account previously designated by the Shareholder
on the Account Registration Form. A shareholder may also have such payment
mailed directly to the Shareholder at the Shareholder's address as recorded by
the Transfer Agent. However, this
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<PAGE> 16
option may be suspended for a period of 30 days following a telephonic address
change. Under most circumstances, such payments will be transmitted on the next
Business Day following receipt of a valid request for redemption. The Group may
reduce the amount of a wire redemption payment by the then-current wire
redemption charge of the Fund's custodian. There is currently no charge for
having payment of redemption requests mailed or sent electronically to a
designated bank account. For telephone redemptions, call the Group at (800)
766-3960.
Neither the Group, the Fund nor its service providers will be liable for any
loss, damages, expense or cost arising out of any telephone redemption effected
in accordance with the Group's telephone redemption procedures, acting upon
instructions reasonably believed to be genuine. The Fund will employ procedures
designed to provide reasonable assurance that instructions by telephone are
genuine; if these procedures are not followed, such Fund or its service
providers may be liable for any losses due to unauthorized or fraudulent
instructions. These procedures include recording all phone conversations,
sending confirmations to Shareholders within 72 hours of the telephone
transaction, verification of account name and account number or tax
identification number, and sending redemption proceeds only to the address of
record or to a previously authorized bank account. If, due to temporary adverse
conditions, Shareholders are unable to effect telephone transactions,
Shareholders may also mail the redemption request to the Group at the address
shown on the front page of this Prospectus.
AUTO WITHDRAWAL PLAN
The Auto Withdrawal Plan enables Shareholders of the Fund, with an account
balance in such Fund of $5,000 or more, to make regular monthly or quarterly
redemptions of Shares. With Shareholder authorization, the Transfer Agent will
automatically redeem Shares at the net asset value on the dates of the
withdrawal and have a check in the amount specified mailed to the Shareholder.
The required minimum withdrawal is $50 monthly. To participate in the Auto
Withdrawal Plan, Shareholders should call (800) 766-3960 for more information.
For a Shareholder to change the Auto Withdrawal instructions, the request must
be made in writing to the Group.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within seven
days after receipt by the Distributor of the request for redemption. However, to
the greatest extent possible, the Fund will attempt to honor requests from
Shareholders for same day payments upon redemption of Shares if the request for
redemption is received by the Distributor before 12:00 noon, Eastern Time, on a
Business Day or, if the request for redemption is received after 12:00 noon,
Eastern Time, to honor requests for payment on the next Business Day. The Fund
will attempt to so honor redemption requests unless it would be disadvantageous
to the Fund or the Shareholders of the Fund to sell or liquidate portfolio
securities in an amount sufficient to satisfy requests for payments in that
manner.
At various times, the Group may be requested to redeem Shares for which it has
not yet received good payment. In such circumstances, the Group may delay the
forwarding of proceeds for up to 15 days or more until payment has been
collected for the purchase of such Shares. During the period of any such delay,
Shares to be redeemed would continue to receive daily dividends as declared
until execution of the redemption. The Group intends to pay cash for all Shares
redeemed, but under abnormal conditions which make payment in cash unwise, the
Group may make payment wholly or partly in portfolio securities at their
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<PAGE> 17
then market value equal to the redemption price. In such cases, an investor may
incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, the Group
reserves the right to redeem, at net asset value, the Shares of any Shareholder
if, because of redemptions of Shares by or on behalf of the Shareholder (but not
as a result of the establishment of an account with less than $1,000 using the
Auto Invest Plan), the account of such Shareholder has a value of less than
$1,000 ($250 if the Shareholder is an employee of the Adviser or one of its
affiliates). Accordingly, an investor purchasing Shares of the Fund in only the
minimum investment amount may be subject to such involuntary redemption if he or
she thereafter redeems some of his or her Shares. Before the Group exercises its
right to redeem such Shares and to send the proceeds to the Shareholder, the
Shareholder will be given notice that the value of the Shares in his or her
account is less than the minimum amount and will be allowed at least 60 days to
make an additional investment in an amount which will increase the value of the
account to at least $1,000 ($250 if the Shareholder is an employee of the
Adviser or one of its affiliates).
See "Additional Purchase and Redemption Information" and "Net Asset Value" in
the Statement of Additional Information for examples of when the Group may
suspend the right of redemption or redeem shares involuntarily in light of the
Group's responsibilities under the 1940 Act.
CHECK-WRITING REDEMPTION PROCEDURE
The Transfer Agent will provide any Shareholder who so requests with a supply
of checks, imprinted with the Shareholder's name, which may be drawn against the
Fund's account maintained by The Bank of New York (the "Bank"), for redemption
of Fund Shares. These checks may be made payable to the order of any person in
any amount not less than $500. To participate in this procedure, an investor
must complete the Check-Writing Redemption Form available from the Transfer
Agent. When a check is presented to the Bank for payment, the Transfer Agent (as
the Shareholder's agent) will cause the Fund to redeem sufficient Shares in the
Shareholder's account to cover the amount of the check. Shares continue earning
daily dividends until the day on which the check is presented to the Bank for
payment. Cancelled checks will be returned to the Shareholder. Due to the delay
caused by the requirement that redemptions be priced at the next computed net
asset value, the Bank will only accept for payment checks presented through
normal bank clearing channels. Shareholders should not attempt to withdraw the
full amount of an account or to close out an account by using this procedure.
No charge will be made to a Shareholder for participation in the check-writing
redemption procedure or for the clearance of any checks. However, a
Shareholder's account may be subject to charges for copies, returned checks
and/or returned items of deposit.
In order to stop payment on a check, the Shareholder must notify the Group in
writing before the check has been presented to the Bank for payment. A charge
may be deducted from the Shareholder's account for each stop payment order.
DIVIDENDS AND TAXES
DIVIDENDS
The net income of the Fund is declared daily and such dividends are generally
paid monthly. Shareholders will automatically receive all income dividends and
capital gains distributions in additional full and fractional Shares of the Fund
at the net asset value as of the date of payment, unless the Shareholder elects
to receive dividends or distributions in cash. Such election, or any revocation
thereof, must be
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<PAGE> 18
made in writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio
43219, and will become effective with respect to dividends and distributions
having record dates after its receipt by the Transfer Agent.
Distributable net realized capital gains, if any, for the Fund are distributed
at least annually. Dividends are paid in cash not later than seven Business Days
after a Shareholder's complete redemption of his or her Shares in the Fund.
If a Shareholder elects to receive distributions in cash, and checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
the Shareholder's cash election will be changed automatically and future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
FEDERAL TAXES
The Fund is treated as a separate entity for federal income tax purposes and
intends to qualify as a "regulated investment company" under the Code for so
long as such qualification is in the best interest of the Fund's Shareholders.
Qualification as a regulated investment company under the Code requires, among
other things, that the regulated investment company distribute to its
shareholders at least 90% of its investment company taxable income. The Fund
contemplates declaring as dividends all or substantially all of its investment
company taxable income (before deduction of dividends paid).
A non-deductible 4% excise tax is imposed on regulated investment companies
that do not distribute in each calendar year (regardless of having a
non-calendar taxable year) an amount equal to 98% of their ordinary income for
the calendar year plus 98% of their capital gain net income for the one-year
period ending on October 31 of such calendar year. If distributions during a
calendar year were less than the required amount, the Fund would be subject to a
nondeductible 4% excise tax on the deficiency.
It is expected that the 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. Since
all of the Fund's net investment income is expected to be derived from earned
interest and short-term capital gains, it is anticipated that no part of any
distribution from the Fund will be eligible for the dividends received deduction
for corporations. The Fund also does not expect to realize any long-term capital
gains and, therefore, does not foresee paying any "capital gains dividends" as
described in the Code.
Distribution by the Fund of the excess of net long-term capital gain, if any,
over net short-term capital loss is taxable to Shareholders as long-term capital
gain in the year in which it is received, regardless of how long the Shareholder
has held the Shares. Such distributions are not eligible for the
dividends received deduction.
Additional information regarding federal taxes is contained in the Statement
of Additional Information under the heading "Additional General
Information--Additional Tax Information." However, the information contained in
this Prospectus and the additional material in the Statement of Additional
Information are only brief summaries of some of the important tax considerations
generally affecting the Fund and its Shareholders. Accordingly, potential
investors are urged to consult their own tax advisers concerning the applica-
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<PAGE> 19
tion of federal, state and local taxes as such laws and regulations affect their
own tax situation.
Shareholders will be advised at least annually as to the federal income tax
consequences of distributions made to them during the year.
MANAGEMENT OF THE GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with its Board of
Trustees. Unless so required by the Group's Declaration of Trust or By-Laws or
by Ohio law, at any given time all of the Trustees may not have been elected by
the shareholders of the Group. The Group will be managed by the Trustees in
accordance with the laws of Ohio governing business trusts. The Trustees, in
turn, elect the officers of the Group to supervise its day-to-day operations.
The Trustees of the Group receive fees and are reimbursed for their expenses
in connection with each meeting of the Board of Trustees they attend. However,
no officer or employee of BISYS Fund Services Inc., the sole general partner of
BISYS, receives any compensation from the Group for acting as a Trustee of the
Group. The officers of the Group receive no compensation directly from the Group
for performing the duties of their offices. BISYS receives fees from the Fund
for acting as Administrator and may receive fees under the Administrative
Services Plan discussed below. BISYS Fund Services, Inc. receives fees from the
Fund for acting as Transfer Agent and for providing certain fund accounting
services.
INVESTMENT ADVISER
Martindale Andres & Company, Inc., Four Falls Corporate Center, Suite 200,
West Conshohocken, Pennsylvania 19428, is the investment adviser of the Fund and
has served as such since the Fund's inception. The Adviser is a wholly owned
subsidiary of Keystone Financial Inc., 1 Keystone Plaza, Harrisburg,
Pennsylvania 17101 ("Keystone"). The Adviser was organized in 1989 and was
acquired by Keystone in December 1995. Except with respect to the KeyPremier
Funds, the Adviser has not previously served as the investment adviser to a
registered open-end management investment company. However, the Adviser has
managed since its founding the investment portfolios of high net worth
individuals, endowments, pension and common trust funds. The Adviser currently
has over $960 million under management.
Subject to the general supervision of the Board of Trustees of the Group and
in accordance with the investment objective and restrictions of the Fund, the
Adviser manages the Fund, makes decisions with respect to and places orders for
all purchases and sales of its portfolio securities, and maintains the Fund's
records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to its Investment
Advisory Agreement with the Group, the Adviser receives a fee from the Fund,
computed daily and paid monthly, at the annual rate of forty one-hundredths of
one percent (.40%) of the Fund's average daily net assets.
The Adviser may periodically voluntarily reduce all or a portion of its
advisory fee with respect to the Fund to increase the net income of the Fund
available for distribution as dividends. The Adviser may not seek reimbursement
of such voluntarily reduced fees after the end of the fiscal year in which the
fees were reduced. The reduction of such fee will cause the yield and total
return of the Fund to be higher than they would otherwise be in the absence of
such a reduction.
ADMINISTRATOR AND DISTRIBUTOR
BISYS is the administrator for the Fund and also acts as the Fund's principal
underwriter and distributor (the "Administrator" or the
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<PAGE> 20
"Distributor," as the context indicates). BISYS and its affiliated companies,
including BISYS Fund Services, Inc., are wholly owned by The BISYS Group, Inc.,
a publicly-held company which is a provider of information processing, loan
servicing and 401(k) administration and recordkeeping services to and through
banking and other financial organizations.
The Administrator generally assists in all aspects of the Fund's
administration and operation. For expenses assumed and services provided as
administrator pursuant to its management and administration agreement with the
Group, the Administrator receives an annual fee, calculated monthly and paid
periodically, from the Fund of eleven and one-half one-hundredths of one percent
(.115%) of the Fund's average daily net assets. The Administrator may
periodically voluntarily reduce all or a portion of its administration fee to
increase the net income of the Fund available for distribution as dividends. The
Administrator may not seek reimbursement of such reduced fees after the end of
the fiscal year in which the fees were reduced. The voluntary reduction of such
fee will cause the yield and total return of the Fund to be higher than they
would otherwise be in the absence of such a fee reduction.
The Distributor acts as agent for the Fund in the distribution of its Shares
and, in such capacity, solicits orders for the sale of Shares, advertises, and
pays the costs of advertising, office space and its personnel involved in such
activities. The Distributor receives no compensation under its Distribution
Agreement with the Group.
EXPENSES
The Adviser and the Administrator each bear all expenses in connection with
the performance of their services as investment adviser and administrator,
respectively, other than the cost of securities (including brokerage
commissions, if any) purchased for the Fund. The Fund will bear the following
expenses relating to its operations: organizational expenses, taxes, interest,
any brokerage fees and commissions, fees and expenses of the Trustees of the
Group, Commission fees, state securities notification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to the
Fund's current shareholders, outside auditing and legal expenses, advisory fees,
fees and out-of-pocket expenses of the custodian, fund accountant and Transfer
Agent, costs for independent pricing services, certain insurance premiums, costs
of maintenance of the Group's existence, costs of shareholders' reports and
meetings, expenses incurred under the Administrative Services Plan described
below and any extraordinary expenses incurred in the Fund's operation.
ADMINISTRATIVE SERVICES PLAN
The Group has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which the Fund is authorized to pay compensation to banks and other
financial institutions (each a "Service Organization"), which may include the
Adviser, its correspondent and affiliated banks, and BISYS, which agree to
provide certain ministerial, record keeping and/or administrative support
services for their customers or account holders (collectively, "customers") who
are the beneficial or record owner of Shares of the Fund. In consideration for
such services, a Service Organization receives a fee from the Fund, computed
daily and paid monthly, at an annual rate of up to .25% of the average daily net
asset value of Shares of the Fund owned beneficially or of record by such
Service Organization's customers for whom the Service Organization provides such
services.
The servicing agreements adopted under the Services Plan (the "Servicing
Agreements") require the Service Organizations receiving such compensation to
perform certain ministerial, record keeping and/or administrative support
services with respect to the beneficial or record owners of Shares of the Fund,
such as processing dividend and distribution payments from the Fund on behalf of
customers, provid-
20
<PAGE> 21
ing periodic statements to customers showing their positions in the Shares of
the Fund, providing sub-accounting with respect to Shares beneficially owned by
such customers and providing customers with a service that invests the assets of
their accounts in Shares of the Fund pursuant to specific or pre-authorized
instructions. As of the date hereof, no such servicing agreements have been
entered into by the Group.
BANKING LAWS
The Adviser believes that it possesses the legal authority to perform the
investment advisory services for the Fund contemplated by its investment
advisory agreement with the Group, as described in this Prospectus, without
violation of applicable banking laws and regulations, and has so represented in
its investment advisory agreement with the Group. Future changes in Federal or
state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations could change the manner in which the Adviser could
continue to perform such services for the Fund. See "Management of the
Group--Glass-Steagall Act" in the Statement of Additional Information for
further discussion of applicable law and regulations.
GENERAL INFORMATION
DESCRIPTION OF THE GROUP AND ITS SHARES
The Group was organized as an Ohio business trust on April 25, 1988. The Group
consists of seventeen funds, each having its own class of shares. Each share
represents an equal proportionate interest in a fund with other shares of the
same fund, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to that fund as are declared at the discretion of
the Trustees (see "Miscellaneous" below). The other funds of the Group are The
KeyPremier Pennsylvania Municipal Bond Fund, The KeyPremier Established Growth
Fund, The KeyPremier Intermediate Term Income Fund, The KeyPremier Aggressive
Growth Fund, 1st Source Monogram U.S. Treasury Obligations Money Market Fund,
1st Source Monogram Diversified Equity Fund, 1st Source Monogram Income Equity
Fund, 1st Source Monogram Special Equity Fund, 1st Source Monogram Income Fund,
1st Source Monogram Intermediate Tax-Free Bond Fund, Riverside Capital Money
Market Fund, Riverside Capital Value Fund, Riverside Capital Fixed Income Fund,
Riverside Capital Growth Fund, Riverside Capital Tennessee Municipal Obligations
Fund and Riverside Capital Low Duration Government Securities Fund.
Shareholders are entitled to one vote for each dollar of value invested and a
proportionate fractional vote for any fraction of a dollar invested, and will
vote in the aggregate and not by fund except as otherwise expressly required by
law. For example, Shareholders of the Fund will vote in the aggregate with other
shareholders of the Group with respect to the election of trustees. However,
Shareholders of the Fund will vote as a fund, and not in the aggregate with
other shareholders of the Group, for purposes of approval or amendment of the
Group's investment advisory agreement with respect to the Fund.
Overall responsibility for the management of the Fund is vested in the Board
of Trustees of the Group. See "Management of the Group--Trustees of the Group."
Individual Trustees are elected by the shareholders of the Group, although
Trustees may, under certain circumstances, fill vacancies, including vacancies
created by expanding the size of the Board. Trustees may be removed by the Board
of Trustees or shareholders in accordance with the provisions of the Declaration
of Trust and By-Laws of the Group and Ohio law. See "Additional
Information--Miscellaneous" in the Statement of Additional Information for
further information.
21
<PAGE> 22
An annual or special meeting of shareholders to conduct necessary business is
not required by the Declaration of Trust, the 1940 Act or other authority
except, under certain circumstances, to elect Trustees, amend the Declaration of
Trust, the investment advisory agreement or the Fund's fundamental policies and
to satisfy certain other requirements. To the extent that such a meeting is not
required, the Group does not intend to have an annual or special meeting of
shareholders.
The Group has represented to the Commission that the Trustees will call a
special meeting of shareholders for purposes of considering the removal of one
or more Trustees upon written request therefor from shareholders holding not
less than 10% of the outstanding votes of the Group. At such a meeting, a quorum
of shareholders (constituting a majority of votes attributable to all
outstanding shares of the Group), by majority vote, has the power to remove one
or more Trustees.
As of March 3, 1997, Keystone possessed, on behalf of its or its affiliates'
underlying accounts, voting or investment power with respect to more than 25% of
the outstanding Shares of the Fund.
CUSTODIAN
The Bank of New York serves as the custodian for the Fund.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as
the Fund's transfer agent pursuant to a Transfer Agency Agreement with the Group
and receives a fee for such services. BISYS Fund Services, Inc. also provides
certain accounting services for the Fund pursuant to a Fund Accounting Agreement
and receives a fee for such services equal to the greater of (a) a fee computed
at an annual rate of 0.03% of the Fund's average daily net assets or (b) the
annual fee of $30,000. See "Management of the Group--Transfer Agency and Fund
Accounting Services" in the Statement of Additional Information for further
information.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual reports
audited by independent public accountants.
As used in this Prospectus and in the Statement of Additional Information,
"assets belonging to a fund" means the consideration received by the Fund upon
the issuance or sale of shares in the Fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or amounts derived from any reinvestment of such proceeds, and any general
assets of the Group not readily identified as belonging to a particular fund
that are allocated to the Fund by the Group's Board of Trustees. The Board of
Trustees may allocate such general assets in any manner it deems fair and
equitable. Determinations by the Board of Trustees of the Group as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to the Fund are conclusive.
As used in this Prospectus and in the Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of the 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 the Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
the Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of the Fund.
Inquiries regarding the Fund may be directed in writing to the Group at 3435
Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 766-3960.
22
<PAGE> 23
INVESTMENT ADVISER
Martindale Andres & Company, Inc.
Four Falls Corporate Center, Suite 200
West Conshohocken, Pennsylvania 19428
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219
LEGAL COUNSEL
Baker & Hostetler LLP
65 East State Street
Columbus, Ohio 43215
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 2
FEE TABLE............................. 3
FINANCIAL HIGHLIGHTS.................. 4
PERFORMANCE INFORMATION............... 5
INVESTMENT OBJECTIVE AND POLICIES..... 5
INVESTMENT RESTRICTIONS............... 10
VALUATION OF SHARES................... 11
HOW TO PURCHASE AND REDEEM SHARES..... 11
DIVIDENDS AND TAXES................... 17
MANAGEMENT OF THE GROUP............... 19
GENERAL INFORMATION................... 21
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR, BISYS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY BISYS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
LOGO
THE
KEYPREMIER
PRIME MONEY
MARKET FUND
MARTINDALE
ANDRES & COMPANY, INC.
INVESTMENT ADVISER
Prospectus
dated April 1, 1997
<PAGE> 24
Rule 497(c)
File No. 811-5545
Registration No. 33-21489
THE KEYPREMIER PENNSYLVANIA
MUNICIPAL BOND FUND
[KEYPREMIER LOGO]
- --------------------------------------------------------------------------------
3435 Stelzer Road
Columbus, Ohio 43219
For current yield, purchase,
and redemption information,
call (800) 766-3960.
- --------------------------------------------------------------------------------
The Sessions Group (the "Group") is an open-end management investment company.
The Group includes The KeyPremier Pennsylvania Municipal Bond Fund (the "Fund"),
which is a non-diversified portfolio of the Group. The Trustees of the Group
have divided the Fund's beneficial ownership into an unlimited number of
transferable units called shares (the "Shares").
Martindale Andres & Company, Inc., West Conshohocken, Pennsylvania (the
"Adviser"), which is a wholly owned subsidiary of Keystone Financial, Inc.
("Keystone"), acts as the investment adviser to the Fund.
The Fund seeks (1) 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 (2)
preservation of capital. The Fund will invest, under normal market conditions,
at least 80% of its net assets in Exempt Securities (as defined below).
The Fund's net asset value per share will fluctuate as the value of its
portfolio changes in response to changing market prices, market rates of
interest and/or other factors.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
Columbus, Ohio, acts as the Fund's administrator and distributor. BISYS Fund
Services, Inc., Columbus, Ohio, an affiliate of BISYS, acts as the Fund's
transfer agent (the "Transfer Agent") and performs certain fund accounting
services for the Fund.
Additional information about the Fund and the Group, contained in a Statement
of Additional Information, has been filed with the Securities and Exchange
Commission and is available upon request without charge by writing to the Fund
at its address or by calling the Fund at the telephone number shown above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference in its entirety into this Prospectus.
This Prospectus sets forth concisely the information about the Fund and the
Group that a prospective investor ought to know before investing. Investors
should read this Prospectus and retain it for future reference.
THE SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, THE ADVISER, KEYSTONE OR ANY OF THEIR AFFILIATES. SUCH SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND AN INVESTMENT IN THE FUND
INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is April 1, 1997.
<PAGE> 25
PROSPECTUS SUMMARY
SHARES OFFERED: Units of beneficial interest ("Shares") of the Fund, one
separate portfolio of The Sessions Group, an Ohio business trust (the "Group").
OFFERING PRICE: The public offering price of the Fund is equal to the net
asset value per share plus a sales charge of 4.5% of the public offering price,
reduced on investments of $100,000 or more (See "How to Purchase and Redeem
Shares--Sales Charges"). Under certain circumstances, the sales charge may be
eliminated (See "How to Purchase and Redeem Shares--Sales Charge Waivers").
MINIMUM PURCHASE: $1,000 minimum initial investment with $25 minimum
subsequent investments. Such minimum initial investment is reduced for investors
using the Auto Invest Plan described herein and for employees of the Adviser and
its affiliates.
TYPE OF COMPANY: The Fund is a series of an open-end, management investment
company. The Fund is a non-diversified fund.
INVESTMENT OBJECTIVES: (1) 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 (2)
preservation of capital.
INVESTMENT POLICIES: Under normal market conditions, the Fund will invest
at least 80% of its net assets in municipal securities issued by or on behalf of
the Commonwealth of Pennsylvania or any county, political subdivision or
municipality thereof, including any agency, board, authority or commission of
any of the foregoing, and debt obligations issued by the Government of Puerto
Rico and other governmental entities, which generate interest income which is
exempt from federal and Pennsylvania state income taxes (but may be subject to
the federal alternative minimum tax when received by certain Shareholders).
RISK FACTORS AND SPECIAL CONSIDERATIONS: An investment in the Fund is
subject to certain risks, as set forth in detail under "Investment Objectives
and Policies--Risk Factors and Investment Techniques." As with other mutual
funds, there can be no assurance that the Fund will achieve its investment
objectives. The Fund, to the extent set forth under "Investment Objectives and
Policies," may engage in the following practices: the purchase of securities
from primarily one state, the use of repurchase agreements and reverse
repurchase agreements, entering into options and futures transactions, the short
selling of securities, the lending of portfolio securities, and the purchase of
securities on a when-issued or delayed-delivery basis.
INVESTMENT ADVISER: Martindale Andres & Company, Inc. (the "Adviser").
DIVIDENDS: Dividends from net income are declared and generally paid
monthly. Net realized capital gains are distributed at least annually.
DISTRIBUTOR: BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("BISYS").
2
<PAGE> 26
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).......... 4.50%
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees After Voluntary Fee Waiver(1)........................................ .30%
12b-1 Fees........................................................................... None
Other Expenses(2).................................................................... .29
----
Estimated Total Fund Operating Expenses After Voluntary Fee Waiver1.................. .59%
====
</TABLE>
Example You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- ------ -------
<S> <C>
$ 51 $63
---
</TABLE>
The purpose of the above table is to assist a potential purchaser of Shares of
the Fund in understanding the various costs and expenses that an investor in the
Fund will bear directly or indirectly. Such expenses do not include any fees
charged by the Adviser or any of its affiliates to its customer accounts which
may have invested in Shares of the Fund. See "Management of the Group" and
"General Information" for a more complete discussion of the Shareholder
transaction expenses and annual operating expenses of the Fund. THE FOREGOING
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ---------------
1 The Adviser has agreed voluntarily to reduce its investment advisory fee to
0.30% through on or about October 31, 1997. Absent such voluntary fee
reduction, Management Fees and Estimated Total Fund Operating Expenses would
be 0.60% and 0.89%, respectively.
2 "Other Expenses" are estimated for the current fiscal year.
3
<PAGE> 27
FINANCIAL HIGHLIGHTS
The Fund is one separate fund of the Group. The table below sets forth certain
information concerning the investment results of the Fund since its inception.
Further financial information is included in the Statement of Additional
Information. The Financial Highlights contained in the table below have not been
audited.
<TABLE>
<CAPTION>
PERIOD FROM OCTOBER
1, 1996 THROUGH
DECEMBER 31, 1996(a)
--------------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................................. $10.21
Investment Activities:
Net investment income............................................... 0.04
Net realized and unrealized gains (losses) on investments........... 0.14
------
Total from Investment Activities...................................... 0.18
------
Distributions:
Net investment income............................................... (0.04)
Net realized gains.................................................. --
------
Total Distributions................................................. (0.04)
------
NET ASSET VALUE, END OF PERIOD........................................ $10.35
======
RATIOS/SUPPLEMENTAL DATA:
Total Return (excludes sales charge).................................. 2.34%(b)
Net Assets, at end of period(000)..................................... $108,000
Ratio of expenses to average net assets............................... 0.27%(c)
Ratio of net investment income to average net assets.................. 1.26%(c)
Ratio of expenses to average net assets*.............................. 1.04%(c)
Ratio of net investment income to average net assets*................. 0.49%(c)
Portfolio Turnover.................................................... 30%
</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 operations.
(b) Not annualized.
(c) Annualized.
4
<PAGE> 28
PERFORMANCE INFORMATION
From time to time performance information for the Fund showing the Fund's
average annual total return, aggregate total return, yield and tax equivalent
yield may be presented in advertisements, sales literature and shareholder
reports. SUCH PERFORMANCE FIGURES ARE BASED ON HISTORICAL PERFORMANCE AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Average annual total return will be
calculated for the period since commencement of operations for the Fund and will
reflect the imposition of the maximum sales charge. Average annual total return
is measured by comparing the value of an investment in the Fund at the beginning
of the relevant period to the redeemable value of the investment at the end of
the period (assuming immediate reinvestment of any dividends or capital gains
distributions), which figure is then annualized. Aggregate total return is
calculated similarly to average annual total return except that the return
figure is aggregated over the relevant period instead of annualized. Yield will
be computed by dividing the Fund's net investment income per share earned during
a recent one-month period by the Fund's per share maximum offering price
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Tax
equivalent yield of the Fund demonstrates the taxable yield necessary to produce
an after-tax yield equivalent to the yield of the Fund. The Fund may also
present its average annual total return, aggregate total return, yield, and tax
equivalent yield excluding the effect of a sales charge.
In addition, from time to time, the Fund may present its distribution rate in
supplemental sales literature and in shareholder reports, both of which must be
accompanied or preceded by a prospectus. Distribution rates will be computed by
dividing the distribution per share made by the Fund over a twelve-month period
by the maximum offering price per share at the end of that period. The
calculation of income in the distribution rate includes both income and capital
gain dividends and does not reflect unrealized gains or losses, although the
Fund may also present a distribution rate excluding the effect of capital gains
and/or a sales charge. The distribution rate differs from the yield, because it
includes capital gain dividends which are often non-recurring in nature, whereas
yield does not include such items.
Investors may also judge the performance of the Fund by comparing or
referencing it to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and to data prepared by various services, which indices or data may be published
by such services or by other services or publications. In addition to
performance information, general information about the Fund that appears in such
publications may be included in advertisements, sales literature and reports to
Shareholders.
Yield and total return are generally functions of market conditions, interest
rates, types of investments held, and operating expenses. Consequently, current
yields and total return will fluctuate and are not necessarily representative of
future results. Any fees charged by Keystone or by any of its affiliates,
including the Adviser, to its customer accounts which may have invested in
Shares of the Fund will not be included in performance calculations; such fees,
if charged, will reduce the actual performance from that quoted. In addition, if
the Adviser or BISYS voluntarily reduces all or part of its fees for the Fund,
as discussed below, the yield and total return for the Fund will be higher than
they would otherwise be in the absence of such voluntary fee reductions.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
The investment objectives of the Fund are to seek (1) income which is exempt
from federal
5
<PAGE> 29
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 (2) preservation of capital.
The investment objectives with respect to the Fund are non-fundamental
policies and as such may be changed by the Group's Trustees without the vote of
the Shareholders of the Fund. There can be no assurance that the investment
objectives of the Fund will be achieved.
Under normal market conditions, at least 80% of the net assets of the Fund are
invested in a portfolio of debt obligations consisting of bonds, notes,
commercial paper and certificates of indebtedness, issued by or on behalf of the
Commonwealth of Pennsylvania, or any county, political subdivision or
municipality thereof (including any agency, board, authority or commission of
any of the foregoing), the interest on which, in the opinion of bond counsel to
the issuer, is exempt from federal and Pennsylvania income taxes (but may be
treated as a preference item for individuals for purposes of the federal
alternative minimum tax) ("Pennsylvania Exempt Securities") and in debt
obligations issued by the Government of Puerto Rico and such other governmental
entities whose debt obligations, either by law or treaty, generate interest
income which is exempt from federal and Pennsylvania state income taxes (but may
be treated as a preference item for individuals for purposes of the federal
alternative minimum tax) (together, with Pennsylvania Exempt Securities, called
"Exempt Securities"). In addition, under normal market conditions, at least 65%
of the Fund's net assets are invested in Pennsylvania Exempt Securities. As a
matter of fundamental policy, under normal market conditions, at least 80% of
the net assets of the Fund are invested in securities, the interest on which is
exempt from federal income tax but may be subject to the federal alternative
minimum tax when received by certain Shareholders. To the extent such securities
are not Pennsylvania Exempt Securities, the income therefrom may be subject to
Pennsylvania income taxes. With respect to the Fund's objective of preserving
capital, the Adviser will attempt to protect principal value in a rising
interest rate environment and enhance principal value in a declining interest
rate environment. Of course, there can be no assurance that the Fund will
achieve its investment objectives.
The two principal classifications of Exempt Securities which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from proceeds of a special excise tax
or other specific revenue source such as the user of the facility being
financed. Private activity bonds held by the Fund are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
The Fund may also invest in "moral obligation" securities, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund, the restoration of which is a moral commitment
but not a legal obligation of the state or municipality which created the
issuer.
The Fund invests in Exempt Securities which are rated at the time of purchase
within the four highest rating groups assigned by one or more appropriate
nationally recognized statistical rating organizations ("NRSROs") (e.g.,
Standard & Poor's Corporation or Moody's Investor Services, Inc.) for bonds and
within the two highest rating groups for notes, tax-ex-
6
<PAGE> 30
empt commercial paper, or variable rate demand obligations, as the case may be.
The Fund may also purchase Exempt Securities which are unrated at the time of
purchase but are determined to be of comparable quality by the Adviser. The
applicable Exempt Securities ratings are described in the Appendix to the
Statement of Additional Information. For a discussion of debt securities rated
within the fourth highest rating group assigned by an NRSRO, see "Risk Factors
and Investment Techniques--Medium Grade Securities" below.
The Fund may invest up to 20% of the value of its net assets in Exempt
Securities which, in the case of bonds, are rated lower than the fourth highest
rating group by an appropriate NRSRO and as low as "B" by an appropriate NRSRO.
Investments rated Ba or lower by Moody's Investors Services, Inc. ("Moody's")
and BB or lower by Standard & Poor's Corporation ("S&P") ordinarily provide
higher yields but involve greater risk because of their speculative
characteristics. Debt rated B by S&P is regarded, on balance, as predominately
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the obligation.
The Fund expects to maintain a dollar-weighted average portfolio maturity of
three to ten years. Within this range, the Adviser may vary the average maturity
substantially in anticipation of a change in the interest rate environment.
There is no limit as to the maturity of any individual security.
The Fund may hold uninvested cash reserves pending investment during temporary
defensive periods or if, in the opinion of the Adviser, suitable Exempt
Securities are unavailable. There is no percentage limitation on the amount of
assets which may be held uninvested. Uninvested cash reserves will not earn
income.
Under normal market conditions, at least 80% of the net assets of the Fund
will be invested in Exempt Securities. However, up to 20% of the net assets of
the Fund may be invested in municipal obligations of other states, and any
political subdivision, county or municipality thereof, which are not Exempt
Securities and in taxable obligations if, for example, suitable Exempt
Securities are unavailable or for cash management purposes. In addition, the
Fund may invest up to 100% of its assets in such securities when deemed
appropriate for temporary defensive purposes as determined by the Adviser to be
warranted due to market conditions. Such taxable obligations consist of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (including U.S. Treasury securities stripped of the unmatured
interest coupons and such stripped interest coupons), certificates of deposit,
bankers' acceptances and demand and time deposits of selected banks, securities
of other investment companies, commercial paper meeting the Fund's quality
standards (as described above) for tax-exempt commercial paper, and repurchase
agreements collateralized by such obligations. These obligations are described
further in the Statement of Additional Information. Under such circumstances and
during the period of such investment, the Fund may not achieve its stated
investment objectives.
The Fund has no limit to the extent that it may invest its net assets in
Exempt Securities, the interest income from which may be treated as a preference
item for purposes of the federal alternative minimum tax. To the extent the Fund
invests in these securities, individual Shareholders, depending on their own tax
status, may be subject to alternative minimum tax on that part of the Fund's
distributions derived from these bonds. For further information relating to the
types of Exempt Securities which will be included in income subject to
alternative minimum tax, see "Additional Information--Additional Tax Information
With Respect to the Pennsylvania Bond Fund" in the Statement of Additional
Information.
7
<PAGE> 31
Opinions relating to the validity of Exempt Securities and to the exemption of
interest thereon from federal and Pennsylvania state income taxes are normally
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Fund nor the Adviser will review the proceedings relating to the
issuance of Exempt Securities or the basis for such opinions.
Exempt Securities purchased by the Fund may include rated and unrated variable
and floating rate notes the interest on which is tax-exempt. A variable rate
note is one whose terms provide for the adjustment of its interest rate on set
dates. A floating rate note is one whose terms provide for the adjustment of its
interest rate whenever a specified interest rate changes. Variable and floating
rate notes, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will be determined by the Adviser to be of comparable quality at the time
of purchase to rated instruments eligible for purchase under the 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 and will continuously monitor their financial condition.
The Fund may also purchase floating and variable rate demand notes and bonds,
which are tax exempt obligations ordinarily having stated maturities in excess
of one year, but which permit the holder to demand payment of principal at any
time, or at specified intervals. Variable rate demand notes include master
demand notes which are obligations that permit the Fund to invest fluctuating
amounts, at varying rates of interest, pursuant to direct arrangements between
the Fund, as lender, and the borrower. These obligations permit daily changes in
the amount borrowed. Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. Use of letters of
credit or other credit support arrangements will not adversely affect the
tax-exempt status of these obligations. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are redeemable
at face value, plus accrued interest. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Each obligation purchased by the Fund will
meet the quality criteria established for the purchase of Exempt Securities. The
Adviser will consider on an ongoing basis the creditworthiness of the issuers of
the floating and variable rate demand obligations in the Fund's portfolio.
Variable and floating rate notes which either are not readily marketable or do
not have a demand feature that will permit the Fund to receive payment of the
principal within seven days after demand by the Fund will be deemed to be
illiquid securities for purposes of complying with the Fund's limitation on
investments in illiquid securities.
The Fund may purchase from financial institutions participation interests in
Exempt Securities (such as industrial development bonds and municipal
lease/purchase agreements). A participation interest gives the Fund an undivided
interest in the Exempt Security in the proportion that the Fund's participation
interest bears to the total principal amount of the Exempt Security. These
instruments may have fixed, floating or variable rates of interest. If the
participation interest is unrated, it will be backed by an irrevocable letter of
credit or guarantee of a bank that the Board of Trustees has determined meets
the prescribed quality standards for banks in whose securities the Fund may
invest, or the payment obligation otherwise will be collateralized by
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U.S. Government securities. For certain participation interests, the Fund will
have the right to demand payment, on not more than seven days' notice, for all
or any part of the Fund's participation interest in the Exempt Security, plus
accrued interest. As to these instruments, the Fund intends to exercise its
right to demand payment only upon a default under the terms of the Exempt
Security, as needed to provide liquidity to meet redemptions, or to maintain or
improve the quality of its investment portfolio.
The Fund may purchase custodial receipts representing the right to receive
certain future principal and interest payments on Exempt Securities which
underlie the custodial receipts. A number of different arrangements are
possible. In a typical custodial receipt arrangement, an issuer or a third party
owner of Exempt Securities deposits such obligations with a custodian in
exchange for two classes of custodial receipts. The two classes have different
characteristics, but, in each case, payments on the two classes are based on
payments received on the underlying Exempt Securities. One class has the
characteristics of a typical auction rate security, where at specified intervals
its interest rate is adjusted, and ownership changes, based on an auction
mechanism. This class' interest rate generally is expected to be below the
coupon rate of the underlying Exempt Securities and generally is at a level
comparable to that of an Exempt Security of similar quality and having a
maturity equal to the period between interest rate adjustments. The second class
bears interest at a rate that exceeds the interest rate typically borne by a
security of comparable quality and maturity; this rate also is adjusted, but in
this case inversely to changes in the rate of interest of the first class. If
the interest rate on the first class exceeds the coupon rate of the underlying
Exempt Securities, its interest rate will exceed the rate paid on the second
class. In no event will the aggregate interest paid with respect to the two
classes exceed the interest paid by the underlying Exempt Securities. The value
of the second class and similar securities should be expected to fluctuate more
than the value of an Exempt Security of comparable quality and maturity and
their purchase by the Fund should increase the volatility of its net asset value
and, thus, its price per share. These custodial receipts are sold in private
placements. The Fund also may purchase directly from issuers, and not in a
private placement, Exempt Securities having characteristics similar to custodial
receipts. These securities may be issued as part of a multi-class offering and
the interest rate on certain classes may be subject to a cap or a floor.
The Fund may invest in zero coupon securities which are debt securities issued
or sold at a discount from their face value which do not entitle the holder to
any periodic payment of interest prior to maturity or a specified redemption
date (or cash payment date). The amount of the discount varies depending on the
time remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and perceived credit quality of the issuer. Zero
coupon securities also may take the form of debt securities that have been
stripped of their unmatured interest coupons, the coupons themselves and
receipts or certificates representing interests in such stripped debt
obligations and coupons. The market prices of zero coupon securities generally
are more volatile than the market prices of interest-bearing securities and are
likely to respond to a greater degree to changes in interest rates than
interest-bearing securities having similar maturities and credit qualities. For
further information regarding zero coupon securities, see "Additional Tax
Information With Respect to the Pennsylvania Bond Fund" in the Statement of
Additional Information.
An increase in interest rates will generally reduce the value of the
investments in the Fund, and a decline in interest rates will generally increase
the value of those investments. Depending upon the prevailing market conditions,
the Adviser may purchase debt securities
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at a discount from face value, which produces a yield greater than the coupon
rate. Conversely, if debt securities are purchased at a premium over face value,
the yield will be lower than the coupon rate. In making investment decisions,
the Adviser will consider many factors other than current yield, including the
preservation of capital, maturity, and yield to maturity.
The Fund may use one or more of the investment techniques described below. Use
of such techniques may cause the Fund to earn income which would be taxable to
its Shareholders.
RISK FACTORS AND INVESTMENT TECHNIQUES
Even though interest-bearing securities are investments which promise a stable
stream of income, the prices of such securities are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. Certain securities that may be purchased by the Fund, such
as those with interest rates that fluctuate directly or indirectly based on
multiples of a stated index, are designed to be highly sensitive to changes in
interest rates and can subject the holders thereof to extreme reductions of
yield and possibly loss of principal. The values of fixed-income securities also
may be affected by changes in the credit rating or financial condition of the
issuing entities. The Fund's net asset value generally will not be stable and
should fluctuate based upon changes in the value of the Fund's portfolio
securities. Securities in which the Fund invests may earn a higher level of
current income than certain shorter-term or higher quality securities which
generally have greater liquidity, less market risk and less fluctuation in
market value.
Certain municipal lease/purchase obligations in which the Fund may
invest may contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease/purchase obligations are secured by the leased
property, disposition of the leased property in the event of foreclosure might
prove difficult. In evaluating the credit quality of a municipal lease/purchase
obligation that is unrated, the Adviser will consider, on an ongoing basis, a
number of factors including the likelihood that the issuing municipality will
discontinue appropriating funding for the leased property.
The Fund may employ, among others, the investment techniques described below.
Use of these techniques may give rise to taxable income. Options and futures
transactions and certain variable and floating rate securities involve so-called
"derivative securities." A derivative is generally defined as an instrument
whose value is based upon or derived from some underlying index, reference rate
(e.g., interest rates), security, commodity or other asset.
Zero Coupon Securities. Federal income tax law requires the holder of a zero
coupon security or of certain pay-in-kind bonds to accrue income with respect to
these securities prior to the receipt of cash payments. To maintain its
qualification as a regulated investment company and avoid liability for federal
income taxes, the Fund may be required to distribute such income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Risks of Non-Diversification. Potential Shareholders should consider the fact
that the Fund's portfolio consists primarily of securities issued by the
Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize that the Fund's performance is closely tied to
general economic conditions within the Commonwealth as a whole and to economic
conditions within particular industries and geographic areas located within the
Commonwealth.
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Although the General Fund of the Commonwealth (the principal operating fund of
the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases
and spending decreases have resulted in surpluses the last five years; as of
June 30, 1996, the General
Fund had a surplus of $635.2 million.
The deficit in the Commonwealth's unreserved/undesignated funds also has been
eliminated.
Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food-related industries. Service industries
currently employ the greatest share of nonagricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth or its municipalities, and could adversely affect the market value
of the Pennsylvania Exempt Securities in the Fund or the ability of the
respective obligors to make payments of interest and principal due on such
Securities.
Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suits relating to the following matters: (i) the ACLU has filed suit
in federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia because of that
settlement. After its earlier denial of class certification was reversed by the
Third Circuit Court of Appeals, the district court granted class certification
to the ACLU and the parties are proceeding with discovery. (No available
estimate of potential liability); (ii) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for county funding of the judicial system
to be in conflict with the constitution of the Commonwealth, but stayed judgment
pending enactment by the legislature of funding consistent with the opinion, and
the legislature has yet to consider legislation implementing the judgment. In
1997, the Court established a tripartite committee to develop an implementation
plan; (iii) litigation has been filed in both state and federal court by an
association of rural and small schools and several individual school districts
and parents challenging the constitutionality of the Commonwealth's system for
funding local school districts--the federal case has been stayed pending the
resolution of the state case, and the trial is ongoing as of March, 1997
(no available estimates of potential liability); and (iv) Envirotest/Synterra
Partners ("Envirotest") has filed suit against the Commonwealth asserting that
it sustained damages in excess of $350 million, as a result of investments it
made in reliance on a contract to conduct emissions testing before the
emission testing program was suspended. Envirotest has entered into a
Standstill Agreement with the Commonwealth pursuant to which Envirotest will
receive $145 million over three years; (v) the Commonwealth of Pennsylvania,
its governor, the City of Philadelphia and its mayor were joined in an
enforcement action commenced in 1973 against the School District of
Philadelphia pursuant to the Pennsylvania Human Relations Act. The enforcement
action was pursued to remedy unintentional segregation in the public schools in
Philadelphia. The Supreme Court of Pennsylvania has outlined a briefing
schedule to resolve this matter (no available estimates of potential
liability); and (vi) in 1997, a group including residents, non-profit groups,
the City of Philadelphia and the School District of Philadelphia brought an
action seeking a declaratory judgment against the Commonwealth for failing to
fulfill its obligation to provide an adequate educational system
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for the City of Philadelphia (no available estimates of potential liability).
Although there can be no assurance that such conditions will continue, the
Commonwealth's general obligation bonds are currently rated AA- by S&P and A1 by
Moody's, and Philadelphia's and Pittsburgh's general obligation bonds are
currently rated BBB- and BBB+ respectively by S&P and Baa and Baa1 respectively
by Moody's.
The City of Philadelphia (the "City") experienced a series of General Fund
deficits for Fiscal Years 1988 through 1992 and, while its general financial
situation has improved, the City is still seeking a long-term solution for its
economic difficulties. The audited balance of the City's General Fund as of June
30, 1996 was a surplus of $118.5 million, up from a surplus of approximately
$80.5 as of June 30, 1995.
In recent years an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.76
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. PICA
provides assistance regarding the City's finances. The City is currently
operating under a five year plan approved by PICA in 1996. PICA's power to issue
further bonds to finance capital projects expired on December 31, 1994. PICA's
authority to issue bonds to finance cash flow deficits expired December 31,
1996, and its authority to refund existing debt will not expire.
The Fund's classification as "non-diversified" means that the proportion of
the Fund's assets that may be invested in the securities of a single issuer is
not limited by the Investment Company Act of 1940, as amended (the "1940 Act").
However, the Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which requires the Fund generally to invest as of
the end of each fiscal quarter, with respect to 50% of its total assets, not
more than 5% of such assets in the obligations of a single issuer; as to the
remaining 50% of its total assets, the Fund is not so restricted. In no event,
however, may the Fund invest more than 25% of its total assets in the
obligations of any one issuer as of the end of each fiscal quarter. Since a
relatively high percentage of the Fund's assets may be invested in the
obligations of a limited number of issuers, some of which may be within the same
economic sector, the Fund's portfolio securities may be more susceptible to any
single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund would
acquire securities, in exchange for cash from banks and/or registered broker-
dealers which the Adviser deems creditworthy under guidelines approved by the
Group's Board of Trustees. The seller agrees to repurchase such securities at a
mutually agreed date and price. The repurchase price generally equals the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying portfolio
securities. Securities subject to repurchase agreements must be of the same type
and quality as those in which the Fund may invest directly. Repurchase
agreements are considered to be loans by the Fund under the 1940 Act. For
further information about repurchase agreements and the related risks, see
"Investment Objectives and Policies--Additional Information on Portfolio
Instruments--Repurchase Agreements" in the Statement of Additional Information.
Reverse Repurchase Agreements. The Fund may borrow funds by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to
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<PAGE> 36
repurchase them at a mutually agreed-upon date and price. At the time the Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid
high-grade debt securities consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will continually monitor the account to ensure that such equivalent value is
maintained at all times. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Fund may decline below the price at
which the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings by the Fund under the 1940 Act and
therefore a form of leverage. The Fund may experience a negative impact on its
net asset value if interest rates rise during the term of a reverse repurchase
agreement. The Fund generally will invest the proceeds of such borrowings only
when such borrowings will enhance the Fund's liquidity or when the Fund
reasonably expects that the interest income to be earned from the investment of
the proceeds is greater than the interest expense of the transaction. For
further information about reverse repurchase agreements, see "Investment
Objectives and Policies--Additional Information on Portfolio
Instruments--Reverse Repurchase Agreements" in the Statement of Additional
Information.
Except as otherwise disclosed to the Shareholders of the Fund, the Group will
not execute portfolio transactions through, acquire portfolio securities issued
by, make savings deposits in, or enter into repurchase or reverse repurchase
agreements with the Adviser, BISYS, or their affiliates, and will not give
preference to the Adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
When Issued or Delayed Delivery Securities. The Fund may purchase securities
on a when-issued or delayed-delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The Fund will engage in when-issued and delayed-delivery
transactions only for the purpose of acquiring portfolio securities consistent
with and in furtherance of its investment objectives and policies, not for
investment leverage, although such transactions represent a form of leveraging.
When-issued securities are securities purchased for delivery beyond the normal
settlement date at a stated price and yield and thereby involve a risk that the
yield obtained in the transaction will be less than those available in the
market when delivery takes place. The Fund will generally not pay for such
securities or start earning interest on them until they are received on the
settlement date. When the Fund agrees to purchase such securities, however, its
custodian will set aside cash or liquid securities equal to the amount of the
commitment in a separate account. Securities purchased on a when-issued basis
are recorded as an asset and are subject to changes in the value based upon
changes in the general level of interest rates. In when-issued and
delayed-delivery transactions, the Fund relies on the seller to complete the
transaction; the seller's failure to do so may cause the Fund to miss a price or
yield considered to be advantageous.
Medium-Grade Securities. As described above, the Fund may invest in debt
securities within the fourth highest rating group assigned by an NRSRO (e.g. BBB
or Baa by S&P and Moody's, respectively) and comparable unrated securities.
These types of debt securities are considered by Moody's to have some
speculative characteristics, and while interest payments and principal security
appears adequate for the present, such securities lack certain protective
elements or may be characteristically unreliable over any great period of time.
Should subsequent events cause the rating of a debt security purchased by the
Fund to fall below BBB or Baa, as the case may be, the
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<PAGE> 37
Adviser will consider such an event in determining whether the Fund should
continue to hold that security. In no event, however, would the Fund be required
to liquidate any such portfolio security where the Fund would suffer a loss on
the sale of such security.
Short Sales. The Fund will from time to time sell securities short. Short
sales are effected when the Adviser believes that the price of a particular
security will decline, and involve 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. When the Fund sells a security short, it will borrow the same security
from a broker or other institution to complete the sale. The Fund may make a
profit or incur a loss depending upon whether the market price of the security
sold short decreases or increases between the date of the short sale and the
date on which the Fund must replace the borrowed security. An increase in the
value of a security sold short by the Fund over the price at which it was sold
short will result in a loss to the Fund, and there can be no assurance that the
Fund will be able to close out the position at any particular time or at an
acceptable price.
All short sales must be fully collateralized, and the Fund will not sell
securities short if, immediately after and as a result of the sale, the value of
all securities sold short by the Fund exceeds 25% of its total assets.
Writing Covered Call and Put Options. The Fund may write covered call and put
options on securities, or futures contracts regarding securities, in which the
Fund may invest, in an effort to realize additional income. A put option gives
the purchaser the right to sell the underlying security at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security. A call option gives the purchaser of the option
the right to buy, and a writer has the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is consideration for undertaking the obligations under the option
contract. Such options will be listed on national securities or futures
exchanges. The Fund may write covered call options (options on securities owned
by the Fund) as a means of seeking to enhance its taxable income through the
receipt of premiums in instances in which the Adviser determines that the
underlying securities or futures contracts are not likely to increase in value
above the exercise price. The Fund also may seek to earn additional taxable
income through the receipt of premiums by writing put options. By writing a
covered call option, the Fund limits its opportunity to profit from any increase
in the market value of the underlying security above the exercise price of the
option; by writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security at a price in excess of its then
current market value.
The Fund, as part of its options transactions, also may purchase index put and
call options and write index options. Through the writing or purchase of index
options the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option.
When the Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked-to-market to
reflect the current value of the option written. The
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<PAGE> 38
current value of the traded option is the last sale price or, in the absence of
a sale, the mean between bid and asked price. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or a loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If 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.
Purchasing Options. In addition, the Fund may purchase put and call options
written by third parties covering those types of financial instruments in which
the Fund may invest to attempt to provide protection against adverse price
effects from anticipated changes in prevailing prices for such instruments. The
purchase of a put option is intended to protect the value of the Fund's holdings
in a falling market while the purchase of a call option is intended to protect
the value of the Fund's positions in a rising market.
In purchasing a call option, the Fund would be in a position to realize a gain
if, during the option period, the price of the underlying security, index or
futures contract increased by an amount in excess of the premium paid for the
call option. It would realize a loss if the price of the underlying security,
index or futures contract declined or remained the same or did not increase
during the period by more than the amount of the premium. By purchasing a put
option, the Fund would be in a position to realize a gain if, during the option
period, the price of the security, index or futures contract declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the security, index or futures contract increased or remained the same or did
not decrease during that period by more than the amount of the premium. If a put
or call option purchased by the Fund were permitted to expire without being sold
or exercised, its premium would represent a realized loss to the Fund.
The Fund also may acquire "puts" with respect to Exempt Securities held in its
portfolio. A put is a right to sell a specified security (or securities) within
a specified period of time at a specified exercise price. The Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities.
The amount payable to the Fund upon its exercise of a "put" is normally (i)
the Fund's acquisition cost of the Exempt Securities (excluding any accrued
interest which the Fund paid on the acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Tax-Free Fund owned the securities, plus (ii) all interest accrued on
the securities since the last interest payment date during that period.
Puts may be acquired by the Fund to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of the Fund's
assets at a rate of return more favorable than that of the underlying security.
Puts may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities.
The Fund expects that it will generally acquire such puts only where the puts
are available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for puts either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to the puts (thus reducing the yield to maturity otherwise available for
the same securities).
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<PAGE> 39
The Fund intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
Futures Contracts. The Fund may purchase or sell contracts for the future
delivery of the specific financial instruments in which the Fund may invest, and
indices based upon the types of securities in which the Fund may invest
(collectively, "Futures Contracts"). The Fund may use this investment technique
as a substitute for a comparable market position in the underlying securities or
to hedge against anticipated future changes in market interest rates, which
otherwise might adversely affect either the value of the Fund's securities or
the prices of securities which the Fund intends to purchase at a later date.
Alternatively, the Fund may purchase or sell futures contracts to hedge against
changes in market interest rates which may result in the premature call at par
value of certain securities which the Fund has purchased at a premium.
To the extent the Fund is engaging in a futures transaction as a hedging
device, because of the risk of an imperfect correlation between securities in
the Fund's portfolio that are the subject of a hedging transaction and the
futures contract used as a hedging device, it is possible that the hedge will
not be fully effective if, for example, losses on the portfolio securities
exceed gains on the futures contract or losses on the futures contract exceed
gains on the portfolio securities. For futures contracts based on indices, the
risk of imperfect correlation increases as the composition of the Fund's
portfolio varies from the composition of the index. In an effort to compensate
for the imperfect correlation of movements in the price of the securities being
hedged and movements in the price of futures contracts, the Fund may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the future contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Fund's net investment results if the
market does not move as anticipated when the hedge is established.
Successful use of futures by the Fund also is subject to the Adviser's ability
to predict correctly movements in the direction of the market or interest rates.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting the value of securities held in its portfolio and
prices increase instead, the Fund will lose part or all of the benefit of the
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
Call options sold by the Fund with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments
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<PAGE> 40
the prices of which are expected to move relatively consistently with the
instruments underlying, the futures contract. Put options sold by the Fund with
respect to futures contracts will be covered when, among other things, cash or
liquid securities are placed in a segregated account to fulfill the obligation
undertaken.
The Fund may utilize municipal bond index futures to protect against changes
in the market value of the Exempt Securities in its portfolio or which it
intends to acquire. Municipal bond index futures contracts are based on an index
of long-term municipal obligations. The index assigns relative values to the
municipal obligations included in an index, and fluctuates with changes in the
market value of such municipal obligations. The contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash based upon the difference between the value of the index at the close of
the last trading day of the contract and the price at which the index contract
was originally written. The acquisition or sale of a municipal bond index
futures contract enables the Fund to protect its assets from fluctuations in
rates on tax exempt securities without actually buying or selling such
securities.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts. The Fund may purchase and sell interest rate futures contracts and
options on interest rate futures contracts as a substitute for a comparable
market position or to hedge against adverse movements in interest rates.
To the extent the Fund has invested in interest rate futures contracts or
options on interest rate futures contracts as a substitute for a comparable
market position, the Fund will be subject to the investment risks of having
purchased the securities underlying the contract.
The Fund may purchase call options on interest rate futures contracts to hedge
against a decline in interest rates and may purchase put options on interest
rate futures contracts to hedge its portfolio securities against the risk of
rising interest rates.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities held in the Fund's portfolio
and rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of the securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
These sales of securities may, but will not necessarily, be at increased prices
which reflect the decline in interest rates.
The Fund may sell call options on interest rate futures contracts to partially
hedge against declining prices of its portfolio securities. If the futures price
at expiration of the option is below the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The Fund may
sell put options on interest rate futures contracts to hedge against increasing
prices of the securities which are deliverable upon exercise of the futures
contracts. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option sold by a Fund is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing options on futures may to some extent
be reduced or increased by changes in the value of its portfolio securities.
17
<PAGE> 41
The Fund also may sell options on interest rate futures contracts as part of
closing purchase transactions to terminate its options positions. No assurance
can be given that such closing transactions can be effected or that there will
be a correlation between price movements in the options on interest rate futures
and price movements in the Fund's portfolio securities which are the subject of
the hedge. In addition, the Fund's purchase of such options will be based upon
predictions as to anticipated interest rate trends, which could prove to be
inaccurate.
In general, the value of futures contracts sold by the Fund to offset declines
in its portfolio securities will not exceed the total market value of the
portfolio securities to be hedged, and futures contracts purchased by the Fund
will be covered by a segregated account consisting of cash or liquid securities
in an amount equal to the total market value of such futures contracts, less the
initial margin deposited therefor.
When buying futures contracts and when writing put options, the Fund will be
required to segregate in a separate account cash and/or U.S. Government
securities in an amount sufficient to meets its obligations. When writing call
options, the Fund will be required to own the financial instrument or futures
contract underlying the option or segregate cash and/or U.S. Government
securities in an amount sufficient to meet its obligations under written calls.
Investment Company Securities. The Fund may also invest in the securities of
other investment companies in accordance with the limitations of the 1940 Act
and any exemptions therefrom. The Fund intends to invest in money market mutual
funds for purposes of short-term cash management. The Fund will incur additional
expenses due to the duplication of fees and expenses as a result of investing in
mutual funds. Additional restrictions on the Fund's investments in the
securities of other investment companies are contained in the Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of investment restrictions that may be changed
only by a vote of a majority of the outstanding Shares of the Fund (as defined
under "General Information--Miscellaneous" herein).
The Fund will not:
1. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, if at
the end of each fiscal quarter, (a) more than 5% of the Fund's total assets
(taken at current value) would be invested in such issuer (except that up to
50% of the Fund's total assets may be invested without regard to such 5%
limitation), and (b) more than 25% of its total assets (taken at current
value) would be invested in securities of a single issuer. There is no limit
to the percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. For purposes of this limitation, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to a private activity bond
that is backed only by the assets and revenues of a non-governmental user,
such non-governmental user.
2. Borrow money or issue senior securities except as and to the extent
permitted by the 1940 Act or any rule, order or interpretation thereunder.
3. Make loans, except that the Fund may purchase or hold debt instruments
and lend portfolio securities in accordance with its investment objectives and
policies, make time deposits with financial institutions and enter into
repurchase agreements.
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<PAGE> 42
The following additional investment restriction may be changed without the
vote of a majority of the outstanding Shares of the Fund: the Fund will not
purchase or otherwise acquire any security, if, as a result, more than 15% of
its net assets would be invested in securities that are illiquid. For purposes
of this investment restriction, illiquid securities include securities which are
not readily marketable and repurchase agreements with maturities in excess of
seven days.
VALUATION OF SHARES
The net asset value of the Fund is determined and its Shares are priced as of
the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. Eastern time) on each Business Day of the Fund. The time at
which the Shares of the Fund is priced is hereinafter referred to as the
"Valuation Time." A "Business Day" of the Fund is a day on which the Exchange is
open for trading and any other day (other than a day on which no Shares of the
Fund are tendered for redemption and no order to purchase any Shares of the Fund
is received) during which there is sufficient trading in portfolio instruments
such that the Fund's net asset value per share might be materially affected. The
Exchange will not be open in observance of the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share for purposes of pricing
purchases and redemptions is calculated by dividing the value of all securities
and other assets belonging to the Fund, less the liabilities charged to the
Fund, by the number of the Fund's outstanding Shares.
The net asset value per share for the Fund will fluctuate as the value of the
investment portfolio of the Fund changes.
The portfolio securities in the Fund for which market quotations are readily
available are valued based upon their current available prices in the principal
market in which such securities normally are traded. Unlisted securities for
which market quotations are readily available are valued at such market values.
Other securities, including restricted securities and other securities for which
market quotations are not readily available, and other assets are valued at fair
value by the Adviser under procedures established by, and under the supervision
of the Group's Board of Trustees. Securities may be valued by an independent
pricing service approved by the Group's Board of Trustees. Investments in debt
securities with remaining maturities of 60 days or less may be valued based upon
the amortized cost method.
HOW TO PURCHASE
AND REDEEM SHARES
DISTRIBUTOR
Shares of the Fund are sold on a continuous basis by the Group's distributor,
BISYS (the "Distributor"). The principal office of the Distributor is 3435
Stelzer Road, Columbus, Ohio 43219. If you wish to purchase Shares, telephone
the Group at (800) 766-3960.
PURCHASES OF SHARES
Shares may be purchased through procedures established by the Distributor in
connection with the requirements of qualified accounts maintained by or on
behalf of certain persons ("Customers") by the Adviser, its affiliates or its
correspondent entities (collectively, "Entities"). These procedures may include
instructions under which a Customer's account is "swept" automatically no less
frequently than weekly and amounts in excess of a minimum amount agreed upon by
the Entity and the Customer are invested by the Distributor in Shares of the
Fund, depending upon the type of the Customer's account and/or the instructions
of the Customer.
Shares of the Fund sold to the Entities acting in a fiduciary, advisory,
custodial, agency, or
19
<PAGE> 43
other similar capacity on behalf of Customers will normally be held of record by
the Entities. With respect to Shares of the Fund so sold, it is the
responsibility of the particular Entity to transmit purchase or redemption
orders to the Distributor and to deliver federal funds for purchase on a timely
basis. Beneficial ownership of Shares will be recorded by the Entities and
reflected in the account statements provided by the Entities to Customers.
Investors may also purchase Shares of the Fund by completing and signing an
Account Registration Form and mailing it, together with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, payable to the Fund, to The KeyPremier Funds, P.O. Box 182707, Columbus,
Ohio 43218-2707. Subsequent purchases of Shares of the Fund may be made at any
time by mailing a check (or other negotiable bank draft or money order) payable
to the Group, to the above address.
If an Account Registration Form has been previously received by the Group,
investors may also purchase Shares by wiring funds to the Fund's custodian.
Prior to wiring any such funds and in order to ensure that wire orders are
invested promptly, investors must call the Group at (800) 766-3960 to obtain
instructions regarding the bank account number into which the funds should be
wired and other pertinent information.
Shares of the Fund are purchased at the net asset value per share (see
"Valuation of Shares") next determined after receipt by the Distributor, its
agents or broker-dealers with whom it has an agreement of an order in good form
to purchase Shares plus any applicable sales charge as described below.
Purchases of Shares of the Fund will be effected only on a Business Day (as
defined in "Valuation of Shares") of the Fund.
For an order for the purchase of Shares of the Fund that is placed through a
broker-dealer, the applicable public offering price will be the net asset value
as so determined (plus any applicable sales charge), but only if the
broker-dealer receives the order and transmits it to the Distributor prior to
the Valuation Time for that day. The broker-dealer is responsible for
transmitting such orders by the Valuation Time. If the broker-dealer fails to do
so, the investor's right to that day's closing price must be settled between the
investor and the broker-dealer. If the broker-dealer receives the order after
the Valuation Time for that day, the price will be based on the net asset value
determined as of the Valuation Time for the next Business Day.
MINIMUM INVESTMENT
Except as otherwise discussed below under "Auto Invest Plan," the minimum
investment is $1,000 for the initial purchase of Shares of the Fund by an
investor and $25 for subsequent purchases of Shares of the Fund. The initial
minimum investment amount is also reduced to $250 for employees of the Adviser,
Keystone or any of their affiliates.
Depending upon the terms of a particular Customer's account, the Entities or
their affiliates may charge a Customer account fees for automatic investment and
other cash management services provided in connection with an investment in the
Fund. Information concerning these services and any charges will be provided by
the Entities. This Prospectus should be read in conjunction with any such
information received from the Entities or their affiliates.
The Fund reserves the right to reject any order for the purchase of its Shares
in whole or in part, including purchases made with foreign checks and third
party checks not originally made payable to the order of the investor.
Every Shareholder will receive a confirmation of each new transaction in his
or her account, which will also show the total number of Shares owned by the
Shareholder and the number of Shares being held in safekeeping by
20
<PAGE> 44
the Transfer Agent for the account of the Shareholder. Reports of purchases and
redemptions of Shares by Entities on behalf of their Customers will be sent by
the Entities to their Customers. Shareholders may rely on these statements in
lieu of certificates. Certificates representing Shares will not be issued.
AUTO INVEST PLAN
The KeyPremier Funds Auto Invest Plan enables Shareholders to make regular
semi-monthly, monthly, quarterly or semi-annual purchases of Shares of the Fund
through automatic deduction from their bank accounts, provided that the
Shareholder's bank is a member of the Federal Reserve and the Automated Clearing
House (ACH) system. With Shareholder authorization the Transfer Agent will
deduct the amount specified (subject to the applicable minimums) from the
Shareholder's bank account which will automatically be invested in Shares of the
Fund at the public offering price on the date of such deduction. The required
minimum initial investment when opening an account using the Auto Invest Plan is
$250; the minimum amount for subsequent investments is $25. To participate in
the Auto Invest Plan, Shareholders should complete the appropriate section of
the Account Registration Form or a supplemental sign-up form which can be
acquired by calling the Group at (800) 766-3960. For a Shareholder to change the
Auto Invest instructions, the request must be made in writing to the Group at:
3435 Stelzer Road, Columbus, Ohio 43219.
IN-KIND PURCHASES
Payment for Shares of the Fund may, in the discretion of the Adviser, be made
in the form of securities that are permissible investments for the Fund as
described in this Prospectus. For further information about this form of
payment, contact the Adviser. In connection with an in-kind securities payment,
the Fund will require, among other things, that the securities be valued on the
date of purchase in accordance with the pricing methods used by the Fund and
that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form of transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
SALES CHARGES
The public offering price of Shares of the Fund equals net asset value plus a
sales charge in accordance with the table below. BISYS receives this sales
charge as Distributor and reallows a portion of it as dealer discounts and
brokerage commissions. However, the Distributor, in its sole discretion, may pay
certain dealers all or part of the portion of the sales charge it receives. The
broker or dealer who receives a reallowance in excess of 90% of the sales charge
may be deemed to be an "underwriter" for purposes of the Securities Act of 1933.
<TABLE>
<CAPTION>
DEALER
DISCOUNTS AND
AMOUNT OF SALES CHARGE BROKERAGE
TRANSACTION AT AS % OF NET SALES CHARGE AS COMMISSIONS AS
PUBLIC OFFERING AMOUNT % OF PUBLIC % OF PUBLIC
PRICE INVESTED OFFERING PRICE OFFERING PRICE
- -------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Less than $100,000.. 4.71% 4.50% 4.05%
$100,000 but less
than $250,000..... 3.63 3.50 3.15
$250,000 but less
than $500,000..... 2.56 2.50 2.25
$500,000 but less
than $1,000,000... 1.52 1.50 1.35
$1,000,000 or more.. 0 0 0
</TABLE>
From time to time dealers who receive dealer discounts and brokerage
commissions from the Distributor may reallow all or a portion of such dealer
discounts and brokerage commissions to other dealers or brokers. The
Distributor, at its expense, will also provide additional compensation to
dealers in connection with sales of Shares of the Fund. Such compensation will
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Fund, and/or other dealer-sponsored special
21
<PAGE> 45
events. In some instances, this compensation will be made available only to
certain dealers whose representatives have sold a significant amount of such
Shares. Compensation will include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Compensation
will also include the following types of non-cash compensation offered through
sales contests: (1) vacation trips, including the provision of travel
arrangements and lodging at luxury resorts at an exotic location, (2) tickets
for entertainment events (such as concerts, cruises and sporting events) and (3)
merchandise (such as clothing, trophies, clocks and pens). Dealers may not use
sales of the Fund's Shares to qualify for this compensation to the extent such
may be prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Fund or its Shareholders.
SALES CHARGE WAIVERS
The Distributor will waive sales charges for the purchase of Shares of the
Fund by or on behalf of (1) purchasers for whom Keystone, the Adviser, one of
their affiliates or another financial institution acts in a fiduciary, advisory,
agency, custodial (other than individual retirement accounts), or similar
capacity, (2) officers, trustees, directors, advisory board members, employees
and retired employees (including spouses, children and parents of the foregoing)
of Keystone, the Adviser, the Group, BISYS and any affiliated company thereof,
(3) investors who purchase Shares with the proceeds from a distribution from the
Adviser, Keystone or an affiliated trust or agency account, (4) brokers, dealers
and agents, who have a sales agreement with the Distributor, and their employees
(and their spouses and children under 21), and (5) investment advisers or
financial planners regulated by a federal or state governmental authority who
are purchasing Shares for their own account or for an account for which they are
authorized to make investment decisions (i.e., a discretionary account) and who
charge a management, consulting or other fee for their services, and clients of
such investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such investment
adviser or financial planner on the books and records of a broker or agent. The
Distributor may change or eliminate the foregoing waivers at any time. The
Distributor may also periodically waive all or a portion of the sales charge for
all investors with respect to the Fund.
In addition, the Distributor may waive sales charges for the purchase of the
Fund's Shares with the proceeds from the recent redemption of shares of a
non-money market fund that imposes a sales charge. The purchase must be made
within 60 days of the redemption, and the Distributor must be notified in
writing by the investor, or by his financial institution, at the time the
purchase is made. A copy of the investor's account statement showing such
redemption must accompany such notice.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining concurrent purchases of the Fund and one or more of the
other funds of the Group sold with a sales charge and advised by the Adviser
("KeyPremier Load Funds"). For example, if a Shareholder concurrently purchases
Shares in the Fund at the total public offering price of $50,000 and Shares in
another KeyPremier Load Fund at the total public offering price of $50,000, the
sales charge with respect to the Shares of the Fund so purchased would be that
applicable to a $100,000 purchase as shown in the table above. This privilege,
however, may be modified or eliminated at any time or from
22
<PAGE> 46
time to time by the Group without notice thereof.
LETTER OF INTENT
An investor may obtain a reduced sales charge by means of a written Letter of
Intent which expresses the intention of such investor to purchase Shares of the
Fund at a designated total public offering price within a designated 13-month
period. Each purchase of Shares under a Letter of Intent will be made at the net
asset value plus the sales charge applicable at the time of such purchase to a
single transaction of the total dollar amount indicated in the Letter of Intent.
A Letter of Intent may include purchases of Shares made not more than 90 days
prior to the date such investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. This program may be modified or eliminated
at any time or from time to time by the Group without notice. For further
information about letters of intent, interested investors should contact the
Group at (800) 766-3960.
A Letter of Intent is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Letter of
Intent is 5% of such amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the Shares actually
purchased if the full amount indicated is not purchased, and such escrowed
Shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends on escrowed Shares, whether paid in cash or reinvested in
additional Shares, are not subject to escrow. The escrowed Shares will not be
available for disposal by the investor until all purchases pursuant to the
Letter of Intent have been made or the higher sales charge has been paid. When
the full amount indicated has been purchased, the escrow will be released. An
adjustment will be made to reflect any reduced sales charge applicable to Shares
purchased during the 90-day period prior to the date the Letter of Intent was
entered into at the conclusion of the 13-month period and in the form of
additional Shares credited to the Shareholder's account at the then current
public offering price applicable to a single purchase of the total amount of the
total purchases. Additionally, if the total purchases within the 13-month period
exceed the amount specified, a similar adjustment will be made to reflect
further reduced sales charges applicable to such purchases, if any.
RIGHT OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to purchase
Shares of the Fund at the public offering price applicable to the total of (a)
the total public offering price of the Shares of the Fund then being purchased
plus (b) an amount equal to the then current net asset value of the purchaser's
combined holdings of the shares of all KeyPremier Load Funds. The "purchaser's
combined holdings" described in the preceding sentence shall include the
combined holdings of the purchaser, the purchaser's spouse and children under
the age of 21 and the purchaser's retirement plan accounts. To receive the
applicable public offering price pursuant to the right of accumulation,
Shareholders must, at the time of purchase, give the Transfer Agent sufficient
information to permit confirmation of qualification. This right of accumulation,
however, may be modified or eliminated at any time or from time to time by the
Group without notice.
EXCHANGE PRIVILEGE
Shareholders may exchange their Shares in the Fund for Shares of any other
fund of the Group advised by the Adviser ("KeyPremier Funds"), including The
KeyPremier Prime Money Market Fund, The KeyPremier Established Growth Fund, The
KeyPremier Intermediate Term Income Fund and The
23
<PAGE> 47
KeyPremier Aggressive Growth Fund, at respective net asset values plus a sales
charge equal to the difference, if any, between the sales charge payable upon
purchase of Shares of such KeyPremier Fund and the sales charge, if any,
previously paid on the Fund Shares to be exchanged. In addition, with respect to
every exchange, the amount to be exchanged must meet the applicable minimum
investment requirements and the exchange must be made in states where it is
legally authorized.
An exchange is considered a sale of Shares for federal income tax purposes.
However, a Shareholder may not include any sales charge on Shares of the Fund as
a part of the cost of those Shares for purposes of calculating the gain or loss
realized on an exchange of those Shares within 90 days of their purchase.
The Group may at any time modify or terminate the foregoing exchange
privileges. The Group, however, will give Shareholders 60 days' advance written
notice of any such modification.
A Shareholder wishing to exchange his or her Shares may do so by contacting
the Group at (800) 766-3960 or by providing written instructions to the Group.
Any Shareholder who wishes to make an exchange should obtain and review the
current prospectus of the fund in which he or she wishes to invest before making
the exchange. For a discussion of risks associated with unauthorized telephone
exchanges, see "Redemption by Telephone" below.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by mail or by telephone. However, all or
part of a Customer's Shares may be redeemed in accordance with instructions and
limitations pertaining to his or her account at an Entity. For example, if a
Customer has agreed with an Entity to maintain a minimum balance in his or her
account with the Entity, and the balance in that account falls below that
minimum, the Customer may be obliged to redeem, or the Entity may redeem on
behalf of the Customer, all or part of the Customer's Shares of the Fund to the
extent necessary to maintain the required minimum balance.
Redemption by Mail
A written request for redemption must be received by the Group, at the address
shown on the front page of this Prospectus, in order to honor the request. The
Transfer Agent will require a signature guarantee by an eligible guarantor
institution. The signature guarantee requirement will be waived if the following
conditions apply: (1) the redemption check is payable to the Shareholder(s) of
record, and (2) the redemption check is mailed to the Shareholder(s) at the
address of record or mailed or wired to a commercial bank account previously
designated on the Account Registration Form. There is no charge for having
redemption proceeds mailed to a designated bank account. To change the address
to which a redemption check is to be mailed, a written request therefor must be
received by the Transfer Agent. In connection with such request, the Transfer
Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall
include banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings associations as those terms are
defined in the Securities Exchange Act of 1934. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
Redemption by Telephone
If a Shareholder has so designated on the Account Registration Form, a
Shareholder may
24
<PAGE> 48
request a redemption of his or her Shares by telephoning the Group and having
the payment of redemption requests sent electronically directly to a domestic
commercial bank account previously designated by the Shareholder on the Account
Registration Form. A Shareholder may also have such payment mailed directly to
the Shareholder at the Shareholder's address as recorded by the Transfer Agent.
However, this option may be suspended for a period of 30 days following a
telephonic address change. Under most circumstances, such payments will be
transmitted on the next Business Day following receipt of a valid request for
redemption. The Group may reduce the amount of a wire redemption payment by the
then-current wire redemption charge of the Fund's custodian. There is currently
no charge for having payment of redemption requests mailed or sent
electronically to a designated bank account. For telephone redemptions, call the
Group at (800) 766-3960.
Neither the Group, the Fund nor its service providers will be liable for any
loss, damages, expense or cost arising out of any telephone redemption effected
in accordance with the Group's telephone redemption procedures, acting upon
instructions reasonably believed to be genuine. The Fund will employ procedures
designed to provide reasonable assurance that instructions by telephone are
genuine; if these procedures are not followed, the Fund or its service providers
may be liable for any losses due to unauthorized or fraudulent instructions.
These procedures include recording all phone conversations, sending
confirmations to Shareholders within 72 hours of the telephone transaction,
verification of account name and account number or tax identification number,
and sending redemption proceeds only to the address of record or to a previously
authorized bank account. If, due to temporary adverse conditions, Shareholders
are unable to effect telephone transactions, Shareholders may also mail the
redemption request to the Group at the address shown on the front page of this
Prospectus.
Auto Withdrawal Plan
The Auto Withdrawal Plan enables Shareholders of the Fund, with an account
balance in the Fund of $5,000 or more, to make regular monthly or quarterly
redemptions of Shares. With Shareholder authorization, the Transfer Agent will
automatically redeem Shares at the net asset value on the dates of the
withdrawal and have a check in the amount specified mailed to the Shareholder.
The required minimum withdrawal is $50 monthly. To participate in the Auto
Withdrawal Plan, Shareholders should call (800) 766-3960 for more information.
Purchases of additional Shares, including use of the Auto Invest Plan described
above, concurrent with withdrawals may be disadvantageous to certain
Shareholders because of tax liabilities and sales charges. For a Shareholder to
change the Auto Withdrawal instructions, the request must be made in writing to
the Group.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within seven
days after receipt by the Distributor of the request for redemption. However, to
the greatest extent possible, the Fund will attempt to honor requests from
Shareholders for next day payments upon redemption of Shares if the request for
redemption is received by the Distributor before the Valuation Time on a
Business Day or, if the request for redemption is received after the Valuation
Time, to honor requests for payment on the second Business Day thereafter. The
Fund will attempt to so honor redemption requests unless it would be
disadvantageous to the Fund or the Shareholders of the Fund to sell or liquidate
portfolio
25
<PAGE> 49
securities in an amount sufficient to satisfy requests for payments in that
manner.
At various times, the Group may be requested to redeem Shares for which it has
not yet received good payment. In such circumstances, the Group may delay the
forwarding of proceeds for up to 15 days or more until payment has been
collected for the purchase of such Shares. The Group intends to pay cash for all
Shares redeemed, but under abnormal conditions which make payment in cash
unwise, the Group may make payment wholly or partly in portfolio securities at
their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, the Group
reserves the right to redeem, at net asset value, the Shares of any Shareholder
if, because of redemptions of Shares by or on behalf of the Shareholder (but not
as a result of a decrease in the market price of such Shares, the deduction of
any sales charge or the establishment of an account with less than $1,000 using
the Auto Invest Plan), the account of such Shareholder has a value of less than
$1,000 ($250 if the Shareholder is an employee of the Adviser or one of its
affiliates). Accordingly, an investor purchasing Shares of the Fund in only the
minimum investment amount may be subject to such involuntary redemption if he or
she thereafter redeems some of his or her Shares. Before the Group exercises its
right to redeem such Shares and to send the proceeds to the Shareholder, the
Shareholder will be given notice that the value of the Shares in his or her
account is less than the minimum amount and will be allowed at least 60 days to
make an additional investment in an amount which will increase the value of the
account to at least $1,000 ($250 if the Shareholder is an employee of the
Adviser or one of its affiliates).
See "Additional Purchase and Redemption Information" in the Statement of
Additional Information for examples of when the Group may suspend the right of
redemption.
DIVIDENDS AND TAXES
DIVIDENDS
A dividend for the Fund is declared monthly at the close of business on the
day of declaration consisting of an amount of accumulated undistributed net
income of the Fund as determined necessary or appropriate by the appropriate
officers of the Group. Such dividend is generally paid monthly. Shareholders
will automatically receive all income dividends and capital gains distributions
in additional full and fractional Shares of the Fund at the net asset value as
of the date of payment, unless the Shareholder elects to receive dividends or
distributions in cash. Such election, or any revocation thereof, must be made in
writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio 43219, and
will become effective with respect to dividends and distributions having record
dates after its receipt by the Transfer Agent.
Distributable net realized capital gains for the Fund are distributed at least
annually. Dividends are paid in cash not later than seven Business Days after a
Shareholder's complete redemption of his or her Shares in the Fund.
If a Shareholder elects to receive distributions in cash, and checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
the Shareholder's cash election will be changed automatically and future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of the date of payment of the
distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
26
<PAGE> 50
FEDERAL TAXES
The Fund is treated as a separate entity for federal income tax purposes and
intends to qualify as a "regulated investment company" under the Code for so
long as such qualification is in the best interest of the Fund's Shareholders.
Qualification as a regulated investment company under the Code requires, among
other things, that the regulated investment company distribute to its
shareholders at least 90% of its investment company taxable income. The Fund
contemplates declaring as dividends all or substantially all of the Fund's
investment company taxable income (before deduction of dividends paid).
A non-deductible 4% excise tax is imposed on regulated investment companies
that do not distribute in each calendar year (regardless of having a
non-calendar taxable year) an amount equal to 98% of their ordinary income for
the calendar year plus 98% of their capital gain net income for the one-year
period ending on October 31 of such calendar year. If distributions during a
calendar year were less than the required amount, that Fund would be subject to
a non-deductible 4% excise tax on the deficiency.
It is expected that the Fund will distribute annually substantially all of its
net investment income and net capital gains to its Shareholders. Dividends
derived from interest earned on Exempt Securities constitute "exempt-interest
dividends" when designated as such by the Fund and will be excludable from gross
income for federal income tax purposes. However, exempt-interest dividends
attributable to 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. 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 over alternative minimum taxable income.
Distributions, if any, derived from capital gains will generally be taxable to
Shareholders as capital gains for federal income tax purposes to the extent so
designated by the Fund. Dividends, if any, derived from sources other than
interest excluded from gross income for federal income tax purposes and capital
gains will be taxable to Shareholders as ordinary income for federal income tax
purposes whether or not reinvested in additional Shares. Shareholders not
subject to federal income tax on their income will not, of course, be required
to pay federal income tax on any amounts distributed to them. The Fund
anticipates that substantially all of its dividends will be excluded from gross
income for federal income tax purposes. The Fund will notify each Shareholder
annually of the tax status of all distributions.
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 will be disallowed to the extent of the
amount of such exempt-interest dividend. In certain limited instances, the
portion of Social Security benefits that may be subject to federal income
taxation, may be affected by the amount of tax-exempt interest income, including
exempt-interest dividends, received by a Shareholder.
Interest on indebtedness incurred or continued by a Shareholder to purchase or
carry Shares of the Fund is not deductible for federal income taxes assuming the
Fund distributes exempt-interest dividends during the Shareholder's taxable
year. It is anticipated that distributions from the Fund will not be eligible
for the dividends received deduction for corporations.
Proposals that may restrict or eliminate the income tax exemption for interest
on Exempt Securities may be introduced in the future. If any such proposal were
enacted that would
27
<PAGE> 51
reduce the availability of Exempt Securities for investment by the Fund so as to
adversely affect Fund Shareholders, the Fund would reevaluate its investment
objective and policies and submit possible changes in the Fund's structure to
Shareholders for their consideration. If legislation were enacted that would
treat a type of Exempt Securities as taxable, the Fund would treat such security
as a permissible taxable investment within the applicable limits set forth
herein.
Additional information regarding federal taxes is contained in the Statement
of Additional Information under the heading "Additional Information--Additional
General Tax Information." However, the information contained in this Prospectus
and the additional material in the Statement of Additional Information are only
brief summaries of some of the important tax considerations generally affecting
the Fund and its Shareholders. Accordingly, potential investors are urged to
consult their own tax advisers concerning the application of federal, state and
local taxes as such laws and regulations affect their own tax situation.
Shareholders will be advised at least annually as to the federal and state
income tax consequences of distributions made to them during the year.
PENNSYLVANIA TAXES
Under current Pennsylvania law, Shareholders will not be subject to
Pennsylvania Personal Income Tax on distributions from the Fund attributable to
interest income from Pennsylvania Exempt Securities or from obligations of the
United States, its territories and certain of its agencies and instrumentalities
("Federal Exempt Securities"). However, Pennsylvania Personal Income Tax will
apply to distributions from the Fund attributable to gain realized on the
disposition of any investment, including Exempt Securities, or to interest
income from investments other than Exempt Securities. Shareholders also will be
subject to the Pennsylvania Personal Income tax on any gain they realize on the
disposition of Shares in the Fund.
Distributions attributable to interest from Exempt Securities is not subject
to the Philadelphia School District Net Income Tax. However, distributions
attributable to gain from the disposition of Exempt Securities are subject to
the Philadelphia School District Net Income Tax, except that distributions
attributable to gain on any investment held for more than six months are exempt.
A shareholder's gain on the disposition of Shares in the Fund that he or she has
held for more than six months will not be subject to the Philadelphia School
District Net Income Tax.
Shareholders are not subject to the county personal property tax imposed on
residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended to
the extent that the Fund is comprised of Exempt Securities.
MANAGEMENT OF THE GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with its Board of
Trustees. Unless so required by the Group's Declaration of Trust or By-Laws, or
by Ohio law, at any given time, all of the Trustees may not have been elected by
the shareholders of the Group. The Group will be managed by the Trustees in
accordance with the laws of Ohio governing business trusts. The Trustees, in
turn, elect the officers of the Group to supervise its day-to-day operations.
The Trustees of the Group receive fees and are reimbursed for their expenses
in connection with each meeting of the Board of Trustees they attend. However,
no officer or employee of BISYS Fund Services Inc., the sole general partner of
BISYS, receives any compensation from the Group for acting as a Trustee of the
Group. The officers of the Group
28
<PAGE> 52
receive no compensation directly from the Group for performing the duties of
their offices. BISYS receives fees from the Fund for acting as Administrator,
may receive fees under the Administrative Services Plan discussed below, and may
retain all or a portion of any sales load imposed upon purchases of Shares.
BISYS Fund Services, Inc. receives fees from the Fund for acting as Transfer
Agent and for providing certain fund accounting services.
INVESTMENT ADVISER
Martindale Andres & Company, Inc., Four Falls Corporate Center, Suite 200,
West Conshohocken, Pennsylvania 19428, is the investment adviser of the Fund and
has served as such since the Fund's inception. The Adviser is a wholly owned
subsidiary of Keystone Financial, Inc., 1 Keystone Plaza, Harrisburg,
Pennsylvania 17101 ("Keystone"). The Adviser was organized in 1989 and was
acquired by Keystone in December 1995. Except with respect to the KeyPremier
Funds, the Adviser has not previously served as the investment adviser to a
registered open-end management investment company. However, the Adviser has
managed since its founding the investment portfolios of high net worth
individuals, endowments, pension and common trust funds. The Adviser currently
has over $960 million under management, including over $400 million of municipal
securities.
Subject to the general supervision of the Board of Trustees of the Group and
in accordance with the investment objectives and restrictions of the Fund, the
Adviser manages the Fund, makes decisions with respect to and places orders for
all purchases and sales of its portfolio securities, and maintains the Fund's
records relating to such purchases and sales.
Mr. Robert Andres is primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Andres co-founded the Adviser in 1989 and serves as
its President and Chief Operating Officer. Prior thereto, he served as President
of Merrill Lynch Mortgage Capital Corporation and manager of Merrill Lynch's
secondary corporate bond trading division. He has had more than 30 years of
broad based experience with respect to fixed-income securities, including more
than 20 years in trading, sales and investment management of municipal
securities.
For the services provided and expenses assumed pursuant to its Investment
Advisory Agreement with the Group, the Adviser receives a fee from the Fund,
computed daily and paid monthly, at the annual rate of sixty one-hundredths of
one percent (.60%) of the Fund's average daily net assets.
The Adviser may periodically voluntarily reduce all or a portion of its
advisory fee with respect to the Fund to increase the net income of the Fund
available for distribution as dividends. The Adviser may not seek reimbursement
of such voluntarily reduced fees after the end of the fiscal year in which the
fees were reduced. The reduction of such fee will cause the yield and total
return of the Fund to be higher than they would otherwise be in the absence of
such a reduction.
ADMINISTRATOR AND DISTRIBUTOR
BISYS is the administrator for the Fund and also acts as the Fund's principal
underwriter and distributor (the "Administrator" or the "Distributor," as the
context indicates). BISYS and its affiliated companies, including BISYS Fund
Services, Inc., are wholly owned by The BISYS Group, Inc., a publicly-held
company which is a provider of information processing, loan servicing and 401(k)
administration and recordkeeping services to and through banking and other
financial organizations.
The Administrator generally assists in all aspects of the Fund's
administration and operation. For expenses assumed and services provided as
administrator pursuant to its management and administration agreement with
29
<PAGE> 53
the Group, the Administrator receives a fee from the Fund, computed daily and
paid periodically, calculated at an annual rate of eleven and one-half
one-hundredths of one percent (.115%) of the Fund's average daily net assets.
The Administrator may periodically voluntarily reduce all or a portion of its
administration fee with respect to the Fund to increase the net income of the
Fund available for distribution as dividends. The Administrator may not seek
reimbursement of such reduced fees after the end of the fiscal year in which the
fees were reduced. The voluntary reduction of such fee will cause the yield and
total return of the Fund to be higher than they would otherwise be in the
absence of such a fee reduction.
The Distributor acts as agent for the Fund in the distribution of its Shares
and, in such capacity, solicits orders for the sale of Shares, advertises, and
pays the costs of advertising, office space and its personnel involved in such
activities. The Distributor receives no compensation under its Distribution
Agreement with the Group, but may retain all or a portion of any sales charge
imposed upon the purchase of Shares. See "How to Purchase and Redeem
Shares--Sales Charges."
EXPENSES
The Adviser and the Administrator each bear all expenses in connection with
the performance of their services as investment adviser and administrator,
respectively, other than the cost of securities (including brokerage
commissions, if any) purchased for the Fund. The Fund will bear the following
expenses relating to its operations: organizational expenses, taxes, interest,
any brokerage fees and commissions, fees and expenses of the Trustees of the
Group, Commission fees, state securities notification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to the
Fund's current shareholders, outside auditing and legal expenses, advisory fees,
fees and out-of-pocket expenses of the custodian, fund accountant and Transfer
Agent, costs for independent pricing services, certain insurance premiums, costs
of maintenance of the Group's existence, costs of shareholders' reports and
meetings, expenses incurred under the Administrative Services Plan described
below and any extraordinary expenses incurred in the Fund's operation.
ADMINISTRATIVE SERVICES PLAN
The Group has adopted an Administrative Services Plan (the "Services Plan")
pursuant to which the Fund is authorized to pay compensation to banks and other
financial institutions (each a "Service Organization"), which may include the
Adviser, its correspondent and affiliated banks, and BISYS, which agree to
provide certain ministerial, record keeping and/or administrative support
services for their customers or account holders (collectively, "customers") who
are the beneficial or record owner of Shares of the Fund. In consideration for
such services, a Service Organization receives a fee from the Fund, computed
daily and paid monthly, at an annual rate of up to .25% of the average daily net
asset value of Shares of the Fund owned beneficially or of record by such
Service Organization's customers for whom the Service Organization provides such
services.
The servicing agreements adopted under the Services Plan (the "Servicing
Agreements") require the Service Organizations receiving such compensation to
perform certain ministerial, record keeping and/or administrative support
services with respect to the beneficial or record owners of Shares of the Fund,
such as processing dividend and distribution payments from the Fund on behalf of
customers, providing periodic statements to customers showing their positions in
the Shares of the Fund, providing sub-accounting with respect to Shares
beneficially owned by such customers and providing customers with a service that
invests the assets of their accounts in Shares of the Fund pursuant to specific
or pre-authorized instructions. As of the date hereof, no such servicing
30
<PAGE> 54
agreements have been entered into by the Group with respect to the Fund.
BANKING LAWS
The Adviser believes that it possesses the legal authority to perform the
investment advisory services for the Fund contemplated by its investment
advisory agreement with the Group, as described in this Prospectus, without
violation of applicable banking laws and regulations, and has so represented in
its investment advisory agreement with the Group. Future changes in federal or
state statutes and regulations relating to permissible activities of banks or
bank holding companies and their subsidiaries and affiliates as well as further
judicial or administrative decisions or interpretations of present and future
statutes and regulations could change the manner in which the Adviser could
continue to perform such services for the Fund. See "Management of the
Group--Glass-Steagall Act" in the Statement of Additional Information for
further discussion of applicable law and regulations.
GENERAL INFORMATION
DESCRIPTION OF THE GROUP AND ITS SHARES
The Group was organized as an Ohio business trust on April 25, 1988. The Group
consists of seventeen funds, each having its own class of shares. Each share
represents an equal proportionate interest in a fund with other shares of the
same fund, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to that fund as are declared at the discretion of
the Trustees (see "Miscellaneous" below). The other funds of the Group are The
KeyPremier Prime Money Market Fund, The KeyPremier Established Growth Fund, The
KeyPremier Intermediate Term Income Fund, The KeyPremier Aggressive Growth Fund,
1st Source Monogram U.S. Treasury Obligations Money Market Fund, 1st Source
Monogram Diversified Equity Fund, 1st Source Monogram Income Equity Fund, 1st
Source Monogram Special Equity Fund, 1st Source Monogram Income Fund, 1st Source
Monogram Intermediate Tax-Free Bond Fund, Riverside Capital Money Market Fund,
Riverside Capital Value Equity Fund, Riverside Capital Fixed Income Fund,
Riverside Capital Growth Fund, Riverside Capital Tennessee Municipal Obligations
Fund and Riverside Capital Low Duration Government Securities Fund.
The Fund was initially funded by the transfer of all of the assets of a
corresponding common trust fund managed by the Adviser in exchange for Shares of
the Fund equal in aggregate net asset value to the assets so received.
Shareholders are entitled to one vote for each dollar of value invested and a
proportionate fractional vote for any fraction of a dollar invested, and will
vote in the aggregate and not by fund except as otherwise expressly required by
law. For example, Shareholders of the Fund will vote in the aggregate with other
shareholders of the Group with respect to the election of trustees. However,
Shareholders of the Fund will vote as a fund, and not in the aggregate with
other shareholders of the Group, for purposes of approval or amendment of the
Group's investment advisory agreement with respect to the Fund.
Overall responsibility for the management of the Fund is vested in the Board
of Trustees of the Group. See "Management of the Group-- Trustees of the Group."
Individual Trustees are elected by the shareholders of the Group, although
Trustees may, under certain circumstances, fill vacancies created by expanding
the size of the Board. Trustees may be removed by the Board of Trustees or
shareholders in accordance with the provisions of the Declaration of Trust and
By-Laws of the Group and Ohio law. See "Additional Information--Miscellaneous"
in the Statement of Additional Information for further information.
31
<PAGE> 55
An annual or special meeting of shareholders to conduct necessary business is
not required by the Declaration of Trust, the 1940 Act or other authority
except, under certain circumstances, to elect Trustees, amend the Declaration of
Trust, the investment advisory agreement or the Fund's fundamental policies and
to satisfy certain other requirements. To the extent that such a meeting is not
required, the Group does not intend to have an annual or special meeting of
shareholders.
The Group has represented to the Commission that the Trustees will call a
special meeting of shareholders for purposes of considering the removal of one
or more Trustees upon written request therefor from shareholders holding not
less than 10% of the outstanding votes of the Group. At such a meeting, a quorum
of shareholders (constituting a majority of votes attributable to all
outstanding shares of the Group), by majority vote, has the power to remove one
or more Trustees.
As of March 3, 1997, Keystone possessed, on behalf of its or its affiliates'
underlying accounts, voting or investment power with respect to more than 25% of
the outstanding Shares of the Fund.
CUSTODIAN
The Bank of New York serves as the custodian for the Fund.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, serves as
the Fund's transfer agent pursuant to a Transfer Agency Agreement with the Group
and receives a fee for such services. BISYS Fund Services, Inc. also provides
certain accounting services for the Fund pursuant to the Fund Accounting
Agreement and receives a fee for such services equal to the greater of (a) a fee
computed at an annual rate of 0.03% of the Fund's average daily net assets, or
(b) the annual fee of $35,000. See "Management of the Group--Transfer Agency and
Fund Accounting Services" in the Statement of Additional Information for further
information.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports and annual reports
audited by independent public accountants.
As used in this Prospectus and in the Statement of Additional Information,
"assets belonging to a fund" means the consideration received by the fund upon
the issuance or sale of shares in that fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or amounts derived from any reinvestment of such proceeds, and any general
assets of the Group not readily identified as belonging to a particular fund
that are allocated to the fund by the Group's Board of Trustees. The Board of
Trustees may allocate such general assets in any manner it deems fair and
equitable. Determinations by the Board of Trustees of the Group as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to the Fund are conclusive.
As used in this Prospectus and in the Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of the 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 the Fund present at a meeting at which the
holders of more than 50% of the votes attributable to Shareholders of record of
the Fund are represented in person or by proxy, or (b) the holders of more than
50% of the outstanding votes of Shareholders of the Fund.
Inquiries regarding the Fund may be directed in writing to the Group at 3435
Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 766-3690.
32
<PAGE> 56
INVESTMENT ADVISER
Martindale Andres & Company, Inc.
Four Falls Corporate Center, Suite 200
West Conshohocken, Pennsylvania 19428
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219
LEGAL COUNSEL
Baker & Hostetler LLP
65 East State Street
Columbus, Ohio 43215
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 2
FEE TABLE............................. 3
FINANCIAL HIGHLIGHTS.................. 4
PERFORMANCE INFORMATION............... 5
INVESTMENT OBJECTIVES AND POLICIES.... 5
INVESTMENT RESTRICTIONS............... 18
VALUATION OF SHARES................... 19
HOW TO PURCHASE AND REDEEM SHARES..... 19
DIVIDENDS AND TAXES................... 26
MANAGEMENT OF THE GROUP............... 28
GENERAL INFORMATION................... 31
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR, BISYS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY BISYS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
[KEYPREMIER LOGO]
THE
KEYPREMIER
PENNSYLVANIA
MUNICIPAL BOND
FUND
MARTINDALE
ANDRES & COMPANY, INC.
INVESTMENT ADVISER
Prospectus
dated April 1, 1997
<PAGE> 57
Rule 497(c)
File No. 811-5545
Registration No. 33-21489
The KeyPremier Prime Money Market Fund
The KeyPremier Pennsylvania Municipal Bond Fund
Two Investment Portfolios of
THE SESSIONS GROUP
Statement of Additional Information
April 1, 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 "Money Market Fund") and The KeyPremier
Pennsylvania Municipal Bond Fund (the "Pennsylvania Bond Fund"), each dated as
of the date hereof. The Money Market Fund and the Pennsylvania Bond Fund are
hereafter collectively referred to as the "Funds" and individually as a "Fund."
The Funds are two of seventeen funds of The Sessions Group, an Ohio business
trust (the "Group"). This Statement of Additional Information is incorporated in
its entirety into the Prospectuses. Copies of the Prospectuses may be obtained
by writing the Group at 3435 Stelzer Road, Columbus, Ohio 43219, or by
telephoning toll free (800) 766-3960.
<PAGE> 58
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
<S> <C>
THE SESSIONS GROUP............................................................................................ B-1
INVESTMENT OBJECTIVES AND POLICIES............................................................................ B-1
Additional Information on Portfolio Instruments...................................................... B-1
Investment Restrictions.............................................................................. B-15
Portfolio Turnover................................................................................... B-16
NET ASSET VALUE............................................................................................... B-17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................ B-18
MANAGEMENT OF THE GROUP....................................................................................... B-18
Trustees and Officers................................................................................ B-18
Investment Adviser................................................................................... B-21
Portfolio Transactions............................................................................... B-23
Glass-Steagall Act................................................................................... B-25
Administrator........................................................................................ B-26
Distributor.......................................................................................... B-27
Administrative Services Plan......................................................................... B-28
Custodian............................................................................................ B-29
Transfer Agency and Fund Accounting Services......................................................... B-29
Auditors ............................................................................................ B-30
Legal Counsel........................................................................................ B-30
ADDITIONAL INFORMATION........................................................................................ B-31
Description of Shares................................................................................ B-31
Vote of a Majority of the Outstanding Shares......................................................... B-32
Additional General Tax Information................................................................... B-32
Additional Tax Information With Respect to the
Pennsylvania Bond Fund...................................................................... B-35
Seven-Day and 30-Day Yields of the Money Market Fund................................................. B-39
Yield of the Pennsylvania Bond Fund.................................................................. B-40
Tax-Free vs. Taxable Income.......................................................................... B-41
Calculation of Total Return.......................................................................... B-41
Distribution Rates................................................................................... B-42
Performance Comparisons.............................................................................. B-42
Miscellaneous........................................................................................ B-43
FINANCIAL STATEMENTS.......................................................................................... B-45
APPENDIX ...................................................................................................... A-1
</TABLE>
- i -
<PAGE> 59
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 deals with two of those portfolios, the
Money Market Fund, 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 of the Funds.
Capitalized terms not defined herein are defined in the Prospectuses. No
investment in Shares of either Fund should be made without first reading the
Prospectus of that Fund.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
- -----------------------------------------------
The following policies supplement the investment objectives and
policies of the Funds as set forth in the respective Prospectus.
BANK OBLIGATIONS. Each Fund may invest in bank obligations
such as bankers' acceptances, certificates of deposit, and demand
and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by the Funds will be those guaranteed by
domestic and foreign banks having, at the time of investment, capital, surplus,
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and demand and time deposits will be those of domestic and foreign banks and
savings and loan associations, if (a) at the time of investment the depository
institution has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation.
<PAGE> 60
The 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 will purchase commercial paper consisting of issues rated at
the time of purchase by one or more appropriate nationally recognized
statistical rating organizations ("NRSRO") (e.g., Standard & Poor's Corporation
and Moody's Investors Service, Inc.) in one of the two highest rating categories
for short-term debt obligations. Each Fund may also invest in commercial paper
that is not rated but that is determined by the Adviser to be of comparable
quality to instruments that are so rated by an NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of the NRSROs, see the Appendix. The 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 Funds 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 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
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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, may subject the
Money Market Fund to investment risks that differ in some respects from those
related to investment in obligations of U.S. domestic issuers or in U.S.
securities markets. Such risks include future adverse political and economic
developments, possible seizure, nationalization, or expropriation of foreign
investments, less stringent disclosure requirements, the possible establishment
of exchange controls or taxation at the source, or the adoption of other foreign
governmental restrictions. The Money Market 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. Obligations of certain agencies and instrumentalities of the
U.S. Government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Each Fund may also invest in the following types of U.S. Treasury
securities: direct obligations issued by the U.S. Treasury including bills,
notes and bonds which differ from each other only in interest rates, maturities
and times of issuance; U.S. Treasury securities that have been stripped of their
unmatured interest coupons (which typically provide for interest payments
semi-annually); interest coupons that have been stripped from such U.S. Treasury
securities; receipts and certificates for such stripped debt obligations and
stripped coupons (collectively, "Stripped Treasury Securities"); and in
repurchase agreements collateralized by such securities. Stripped Treasury
Securities will include (1) coupons that have been stripped from U.S. Treasury
bonds, which may be held through the Federal Reserve Bank's book-entry system
called "Separate Trading of Registered Interest and Principal of Securities"
("STRIPS") or through a program entitled "Coupon Under Book-Entry Safekeeping"
("CUBES").
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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 Fund will be
invested in Exempt Securities and 65% of the 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 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
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"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 NOTES. Each Fund may acquire variable and
floating rate notes, subject to such Fund's investment objective, policies and
restrictions. A variable rate note 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 note 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 or amortized cost, as the case may be.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes 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 notes (such issuers include
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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 note
purchased by a Fund, the Fund may resell the note 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 note in the event the issuer
of the note 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 note and the Fund is not
entitled to receive the principal amount of a note within seven days, such a
note 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 notes may be secured by bank
letters of credit.
Variable or floating rate notes invested in by the 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 Money Market
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 Money Market 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 Money Market 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.
4. A floating rate note which has a remaining maturity of 397 days or
less is deemed by the Money Market 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 Money Market 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 Money
Market Fund is entitled to receive the principal amount of the note either at
any time on no more than thirty days' notice
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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 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.
WHEN-ISSUED SECURITIES. As discussed in the Prospectuses,
each Fund may purchase securities on a "when-issued" basis (I.E.,
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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, the 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.
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
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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, high grade debt securities consistent with that
Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest), and will subsequently continually monitor the
account to ensure that such equivalent value is maintained at all times. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the price at which that Fund is obligated to
repurchase the securities. Reverse repurchase agreements are considered to be
borrowings by a Fund under the 1940 Act and therefore a form of leveraging.
LOWER RATED BONDS. The Pennsylvania Bond Fund is permitted to invest in
securities rated Ba and B by Moody's or BB and B by another appropriate NRSRO.
Such bonds, though higher yielding, are characterized by risk. See the Appendix
hereto for a general description of NRSRO ratings of municipal obligations.
Although ratings may be useful in evaluating the safety of interest and
principal payments, they do not evaluate the market value risk of these bonds.
The Pennsylvania Bond 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 lower
rated bonds tend to be more sensitive to economic conditions than are higher
rated securities. These bonds generally are considered by S&P and Moody's to be,
on balance, predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation and generally
will involve more credit risk than securities in the higher rating categories.
Because there is no established retail secondary market for many of
these securities, the Pennsylvania Bond Fund anticipates that such securities
could be sold only to a limited number of
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dealers or institutional investors. To the extent a secondary trading market for
these bonds does exist, it generally is not as liquid as the secondary market
for higher rated securities. The lack of a liquid secondary market may have an
adverse impact on market price and yield and the Pennsylvania Bond Fund's
ability to dispose of particular issues when necessary to meet its liquidity
needs or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Pennsylvania Bond
Fund to obtain accurate market quotations for purposes of valuing the
Pennsylvania Bond Fund's portfolio and calculating its net asset value. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of these securities. In such
cases, judgment may play a greater role in valuation because less reliable
objective data may be available.
These bonds may be particularly susceptible to economic downturns. It
is likely that any economic recession could severely disrupt the market for such
securities and may have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default of such securities.
The Pennsylvania Bond Fund may acquire these bonds during an initial
offering. Such securities may involve special risks because they are new issues.
The Pennsylvania Bond Fund has no arrangement with any persons concerning the
acquisition of such securities, and the Adviser will review carefully the credit
and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon securities in which the Pennsylvania Bond Fund may
invest. Zero coupon bonds carry an additional risk in that, unlike bonds which
pay interest through the period to maturity, the Pennsylvania Bond Fund will
realize no cash until the cash payment date unless a portion of such securities
are sold and, if the issuer defaults, the Pennsylvania Bond Fund may obtain no
return at all on its investment.
SHORT SALES. The Pennsylvania Bond Fund will 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 Pennsylvania Bond 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
Pennsylvania Bond Fund must borrow the security, and the Pennsylvania Bond Fund
is obligated to return the security to the lender, which is accomplished by a
later purchase of the security
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by the Pennsylvania Bond Fund. The frequency of short sales will vary
substantially in different periods, and it is not intended that any specified
portion of the Pennsylvania Bond Fund's assets will as a matter of practice be
invested in short sales.
At any time that the Pennsylvania Bond Fund has an open short sale
position, the Pennsylvania Bond Fund is required to segregate with its custodian
(and to maintain such amount until the Pennsylvania Bond Fund replaces the
borrowed security) an amount of cash or liquid securities equal to the
difference between (i) the current market value of the securities sold short and
(ii) any cash or U.S. Government 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, the Pennsylvania Bond Fund will
not gain any leverage merely by selling short, except to the extent that it
earns interest on the immobilized cash or government securities while also being
subject to the possibility of gain or loss from the securities sold short. The
total amount of cash or U.S. Government securities deposited with the broker
(not including the proceeds of the short sale) and segregated by the
Pennsylvania Bond Fund with the Pennsylvania Bond Fund's custodian may not at
any time be more than 25% of the Pennsylvania Bond Fund's net assets. These
deposits do not have the effect of limiting the amount of money the Pennsylvania
Bond Fund may lose on a short sale -- the Pennsylvania Bond Fund's possible
losses may exceed the total amount deposited.
The Pennsylvania Bond 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
and the date on which the Pennsylvania Bond Fund purchases the security to
replace the borrowed security. The Pennsylvania Bond 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
Pennsylvania Bond 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 Pennsylvania
Bond Fund's investment in the security. For example, if the Pennsylvania Bond
Fund purchases a $10 security short, the most that can be lost is $10. However,
if the Pennsylvania Bond 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 the Pennsylvania Bond Fund is authorized to
engage, as described in its Prospectus, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent the Adviser's
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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 the Pennsylvania
Bond 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 the Pennsylvania Bond Fund can realize on its investments or cause
the Pennsylvania Bond 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 the Pennsylvania Bond
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 at all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Pennsylvania Bond Fund 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.
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 discusses in greater detail below and in the Pennsylvania Bond Fund's
Prospectus. In addition, many hedging transactions involving options require
segregation of the Pennsylvania Bond 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
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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. The Pennsylvania
Bond Fund's ability to close out its position as a purchaser or seller of a put
or call option is dependent in part, upon the liquidity of the option market. In
addition, the hours of trading for listed options may not coincide with the
hours during which the underlying financial instruments are traded. To the
extent that the option markets close before the markets for the underlying
financial instruments, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the option markets.
Exchange-listed options generally have standardized terms and
performance mechanics unlike over-the-counter traded options. The Pennsylvania
Bond Fund currently expects to purchase and sell only exchange traded options.
Exchange-traded options generally are guaranteed by the clearing agency which is
the issuer or counterparty to such options. This guarantee usually is supported
by a daily payment system (i.e., variation margin requirements) operated by the
clearing agency in order to reduce overall credit risk. As a result, unless the
clearing agency defaults, there is relatively little counterparty credit risk
associated with options purchased on an exchange.
All options written by the Pennsylvania Bond Fund must be "covered"
(i.e., the Pennsylvania Bond 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 the Pennsylvania Bond Fund will
receive the option premium to help protect it against loss, a call option
written by the Pennsylvania Bond Fund exposes such Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument which it might otherwise have sold. With respect to put
options written by the Pennsylvania Bond Fund, such Fund will place high quality
liquid debt securities in a segregated account to cover its obligations under
such put option and will monitor the value of the assets in such account and its
obligations under the put option daily.
FUTURES CONTRACTS. As discussed in the Prospectus of the Pennsylvania
Bond Fund, such Fund may enter into futures contracts. This investment technique
is designed primarily to act as a substitute for a position in the underlying
security and to hedge against anticipated future changes in market conditions or
interest rates which otherwise might adversely affect the value of securities
which such the Pennsylvania Bond 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, the
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Pennsylvania Bond 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, the Pennsylvania Bond
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 the Pennsylvania Bond 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 the
Pennsylvania Bond Fund to segregate liquid assets, such as cash, U.S. Government
securities or other liquid high grade debt obligations, to cover its performance
under such contracts. The Pennsylvania Bond Fund may lose the expected benefit
of futures transactions if interest rates or securities prices 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 the Pennsylvania Bond 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, the Pennsylvania Bond Fund will
maintain in a segregated account cash or liquid high-grade 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," the Pennsylvania Bond 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 Pennsylvania Bond Fund 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.
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SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
securities issued by other investment companies. Each Fund currently intends to
limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 5% of the value of its total assets will be
invested in the securities of any one investment company; (b) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by such Fund. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that such Fund bears directly in connection with its own operations.
Investment companies in which Pennsylvania Bond Fund 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 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 the Prospectus,
each Fund 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
B-15
<PAGE> 74
4. Purchase or sell commodities or commodities contracts,
except to the extent disclosed in the current Prospectus of such
Fund.
The following additional investment restrictions may be changed without
the vote of a majority of the outstanding Shares of the Funds. Each Fund may
not:
1. Purchase securities of other investment companies, except
(a) in connection with a merger, consolidation, acquisition or
reorganization, and (b) to the extent permitted by the 1940 Act, or
pursuant to any exemptions therefrom;
2. Purchase or retain the securities of an issuer if the officers or
trustees of the Group, or the officers or directors of the Adviser, who each
owns beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities; and
3. Mortgage or hypothecate the Fund's assets in excess of
one-third of such Fund's total assets.
Furthermore, the Money Market Fund may not engage in any short sales.
In addition, the Pennsylvania Bond 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 the Pennsylvania Bond Fund would
exceed 25% of the value of the Pennsylvania Bond Fund's total assets.
If any percentage restriction or requirement described above is
satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in asset value will not constitute a
violation of such restriction or requirement. However, should a change in net
asset value or other external events cause a Fund's investments in illiquid
securities, repurchase agreements with maturities in excess of seven days and
other instruments in such Fund which are not readily marketable to exceed the
limit set forth in that Fund's Prospectus for its investment in illiquid
securities, such Fund will act to cause the aggregate amount of such securities
to come within such limit as soon as reasonably practicable. In such an event,
however, no Fund 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
B-16
<PAGE> 75
exclude all securities whose remaining maturities at the time of acquisition
were one year or less.
Because the Money Market Fund intends 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 the Money Market
Fund is expected to be no greater than 10%.
The portfolio turnover rate for the Pennsylvania Bond Fund for its
first fiscal period ending June 30, 1997, is estimated to be less than 100%. The
portfolio turnover rate for the Pennsylvania Bond 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 the Pennsylvania Bond Fund and may result in additional tax consequences to
the Pennsylvania Bond Fund's Shareholders. Portfolio turnover will not be a
limiting factor in making investment decisions.
NET ASSET VALUE
The Money Market Fund has elected to use the amortized cost method of
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 the Money Market Fund can be expected to vary
inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the 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 the Money Market Fund will not 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 Fund, to stabilize the net asset value per share of the 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
B-17
<PAGE> 76
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 the 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 (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 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:
B-18
<PAGE> 77
<TABLE>
<CAPTION>
<S> <C> <C>
Position(s) held Principal Occupation
Name, Address and Age With the Group During Past 5 Years
- --------------------- ---------------- ---------------------
Walter B. Grimm* Chairman, From June, 1992 to present,
3435 Stelzer Road President and employee of BISYS Fund Services
Columbus, Ohio 43219 Trustee Limited Partnership
Age: 51 (formerly The Winsbury Company);
from July, 1981 to June, 1992,
President of Leigh Investments
Consulting (investment firm).
Nancy E. Converse* Trustee and Since June, 1990,
3435 Stelzer Road Assistant employee of BISYS Fund
Columbus, Ohio 43219 Secretary Services Limited
Age: 47 Partnership (formerly The
Winsbury Company) or BISYS
Fund Services Ohio, Inc.
(formerly The Winsbury
Service Corporation).
Maurice G. Stark Trustee Consultant; from 1979
7662 Cloister Drive to December, 1994, Vice
Columbus, Ohio 43235 President-Finance and Chief
Age: 61 Financial Officer, Battelle
Memorial Institute
(scientific research and
development service corporation).
James H. Woodward, Ph.D. Trustee Since July 1991, Chancellor
The University of North of The University of North
Carolina at Charlotte Carolina at Charlotte.
Charlotte, NC 28223
Age: 56
Chalmers P. Wylie Trustee From April, 1993 to
754 Stonewood Court present, of Counsel with
Columbus, Ohio 43235 Emens, Kegler, Brown, Hill
Age: 75 & Ritter (law 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 Division of BISYS
Age: 50 Fund Services Limited
Partnership; from June,
1987 to December, 1995,
employee of BISYS Fund
Services Limited
Partnership (formerly The
Winsbury Company); from
September, 1988 to present,
Vice President of BISYS
Fund Services Ohio, Inc.
(formerly The Winsbury
Service Corporation).
</TABLE>
B-19
<PAGE> 78
<TABLE>
<CAPTION>
<S> <C> <C>
William J. Tomko Vice President From April, 1987 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited Partnership
Age: 37 (formerly The Winsbury
Company).
Stephen G. Mintos Treasurer From January, 1987 to
3435 Stelzer Road present, employee of BISYS
Columbus, Ohio 43219 Fund Services Limited
Age: 42 Partnership (formerly The
Winsbury Company).
George Stevens Secretary From September, 1996 to
3435 Stelzer Road present, employee of BISYS
Columbus, Ohio 43219 Fund Services Limited
Age: 45 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: 29 Partnership; prior to June,
1995, supervisor 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.
As of the date of this Statement of Additional Information, the Group's
officers and Trustees, as a group, own less than 1% of either Fund's Shares.
No officer or employee of BISYS or BISYS Fund Services, Inc. receives any
compensation from the Group for acting as trustee of the Group. The officers of
the Group receive no compensation directly from the Group for performing the
duties of their offices. BISYS receives fees from each Fund for acting as
Administrator and may receive fees pursuant to the Administrative Services Plan
described below. BISYS Fund Services, Inc. receives fees from the Funds for
acting as transfer agent and for providing certain fund accounting services.
Messrs. Grimm, Huber, Mintos, Tomko and Stevens, Ms. Converse and Ms. Metz are
employees of BISYS.
The following table sets forth information regarding all compensation paid
by the Group to its Trustees for their services as trustees during the fiscal
year ended June 30, 1996. The Group has no pension or retirement plans.
</TABLE>
B-20
<PAGE> 79
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 $7,772.17 $7,772.17
Trustee
Michael M. VanBuskirk(1) $7,772.17 $7,772.17
Trustee
James H. Woodward, Ph.D. $0 $0
Trustee
Chalmers P. Wylie $7,772.17 $7,772.17
Trustee
</TABLE>
*For purposes of this Table, Fund Complex means one or more mutual
funds, including the Funds, which have a common investment adviser or affiliated
investment advisers or which hold themselves out to the public as being related.
(1) Mr. VanBuskirk resigned his position as a trustee of the Group
effective May 3, 1996.
Ms. Converse and Dr. Woodward were elected trustees of the
Group on June 28, 1996.
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 January 29, 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
Money Market Fund pays the Adviser a fee, computed daily and paid monthly, at
the annual rate of forty one-hundredths of one percent (.40%) of the average
daily net assets of the Money Market Fund, and the Pennsylvania Bond Fund pays
the
B-21
<PAGE> 80
Adviser a fee, computed daily and paid monthly, at the annual rate of sixty
one-hundredths of one percent (.60%) of the average daily net assets of the
Pennsylvania Bond Fund. Pursuant to such Investment Advisory Agreement, the
Adviser also provides investment advisory and management services to three other
funds of the Group: The KeyPremier Established Growth Fund (the "Established
Growth Fund"), The KeyPremier Intermediate Term Income Fund (the "Income Fund"),
and The KeyPremier Aggressive Growth Fund (the "Aggressive Growth 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; the Income Fund pays
the Adviser a fee, computed daily and paid monthly, at the annual rate of sixty
one-hundredths of one percent (.60%) of the average daily net assets of that
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, 1996, the Adviser had not received any
compensation under the Advisory Agreement since neither Fund had yet commenced
operations.
Unless sooner terminated, the Investment Advisory Agreement will
continue in effect with respect to a Fund until July 9, 1998, and from year to
year thereafter, for successive annual periods ending on July 9th, if, as to
that Fund, such continuance is approved at least annually by the Group's Board
of Trustees or by vote of a majority of the outstanding Shares of that Fund (as
defined under "GENERAL INFORMATION - Miscellaneous" in such Fund's Prospectus),
and a majority of the Trustees who are not parties to the Investment Advisory
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Investment Advisory Agreement by votes cast in person at a meeting called for
such purpose. The Investment Advisory Agreement is terminable as to a Fund at
any time on 60 days' written notice without penalty by the Trustees, by vote of
a majority of the outstanding Shares of that Fund, or by the Adviser. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by a Fund in connection with the performance of the Investment Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
B-22
<PAGE> 81
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 a 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 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
B-23
<PAGE> 82
in lieu of services required to be performed by the Adviser under its agreement
regarding management of the Funds. 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.
Except as otherwise disclosed to the Shareholders of the Funds and as
permitted by applicable laws, rules and regulations, the Group will not, on
behalf of a Fund, execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, Keystone, BISYS, or their
affiliates, and will not give preference to the Adviser's or Keystone's
correspondents with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those
for other funds of the Group or any other investment company or account managed
by the Adviser. Any such other fund, investment company or account may also
invest in the same securities as the Group on behalf of a Fund. When a purchase
or sale of the same security is made at substantially the same time on behalf of
a Fund and another fund of the Group, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Adviser believes to be equitable to
the Fund and such other fund, investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by a
Fund or the size of the position obtained by a Fund. To the extent permitted by
law, the Adviser may aggregate the securities to be sold or purchased for a Fund
with those to be sold or purchased for other funds of the Group, investment
companies or accounts in order to obtain best execution. As provided by the
Investment Advisory 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
B-24
<PAGE> 83
consideration whether securities of such customers are held by the Funds or any
other fund of the Group.
Glass-Steagall Act
- ------------------
In 1971, the United States Supreme Court held in INVESTMENT COMPANY
INSTITUTE V. CAMP that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a mutual fund for
the collective investment of managing agency accounts. Subsequently, the Board
of Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981, the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the BOARD
OF GOVERNORS case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
The Adviser believes that it possesses the legal authority to perform
the services for the Funds contemplated by the 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
B-25
<PAGE> 84
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 January 29, 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 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 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
B-26
<PAGE> 85
Administrator may delegate all or any part of its responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
equal to a fee, calculated daily and paid periodically, at the annual rate equal
to eleven and one-half one-hundredths of one percent (.115%) of that Fund's
average daily net assets.
For the fiscal year ended June 30, 1996, the Administrator had not
received any compensation under the Administration Agreement since neither of
the Funds had yet commenced operations.
Unless sooner terminated as provided therein, the Administration
Agreement has an initial term expiring on July 9, 1999, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Administration Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Administration Agreement; through a failure to renew at the end of a one-year
term; upon 180 days' written notice by the Group after the initial term but only
in connection with the reorganization of the Funds into another registered
management investment company; and for cause (as defined in the Administration
Agreement) by the party alleging cause, on not less than 60 days' notice by the
Group's Board of Trustees or by the Administrator.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by a
Fund in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
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
January 29, 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
B-27
<PAGE> 86
purpose of voting on such 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 any
sales charge imposed upon a purchase of 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
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 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. As of
the date hereof, there are no Servicing Agreements in place with respect to the
Funds.
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<PAGE> 87
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 January 29, 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.
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 January 29, 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 year ended June 30, 1996, the Transfer Agent received
no compensation from the Group for services as transfer agent for the Funds
since the Funds had not yet commenced operations.
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to each of the Funds pursuant to a Fund Accounting Agreement dated July
9, 1996, as amended as of January 29, 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 for the Money Market
Fund and $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 credits, general and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense accounts, including interest
accrued and interest received, and other required separate ledger accounts;
maintains a monthly trial balance of all ledger accounts; performs certain
accounting services for the Funds, including calculation of the net asset value
per share, calculation of the dividend and capital gain distributions, if any,
and of yield, reconciliation of cash movements with the Funds' custodian,
affirmation to the Funds'
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custodian of all portfolio trades and cash settlements, verification and
reconciliation with the Funds' custodian of all daily trade activity; provides
certain reports; obtains dealer quotations, prices from a pricing service or
matrix prices on all portfolio securities in order to mark the portfolio to the
market; and prepares an interim balance sheet, statement of income and expense,
and statement of changes in net assets for the Funds.
Unless sooner terminated as provided therein, the Fund Accounting
Agreement has an initial term expiring on July 9, 1999, and thereafter shall be
renewed automatically for successive one-year terms, unless written notice not
to renew is given by the non-renewing party to the other party at least 60 days
prior to the expiration of the then-current term. The Fund Accounting Agreement
is terminable with respect to a Fund upon mutual agreement of the parties to the
Fund Accounting Agreement; upon 180 days' written notice by the Group after the
initial term but only in connection with the reorganization of the Funds into
another registered management investment company; and for cause (as defined in
the Fund Accounting Agreement) by the party alleging cause, on not less than 60
days' notice by the Group's Board of Trustees or by BISYS Fund Services, Inc.
The Fund Accounting Agreement provides that BISYS Fund Services, Inc.
shall not be liable for any error of judgment or mistake of law or any loss
suffered by a Fund in connection with the matters to which the Fund Accounting
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
or negligence in the performance of its duties, or from the reckless disregard
by BISYS Fund Services, Inc. of its obligations and duties thereunder.
For the fiscal year ended June 30, 1996, BISYS Fund Services, Inc.
earned no fees with respect to its fund accounting services to the Funds since
the Funds had not yet commenced operations.
Auditors
- --------
KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio 43215, has
been selected as the independent auditors for the Funds and as such will audit
the financial statements of the Funds for the periods as of and ending June 30,
1997.
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.
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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, one of which represents interests in the Money Market Fund and one of
which represents interests in the Pennsylvania Bond Fund. The other fifteen
series are Riverside Capital Money Market Fund, Riverside Capital Value Equity
Fund, Riverside Capital Fixed Income Fund, Riverside Capital Tennessee Municipal
Obligations Fund, Riverside Capital Low Duration Government Securities Fund,
Riverside Capital Growth Fund, the Established Growth Fund, the Income Fund, the
Aggressive Growth Fund, 1st Source Monogram U.S. Treasury Obligations Money
Market Fund, 1st Source Monogram Diversified Equity Fund, 1st Source Monogram
Income Equity Fund, 1st Source Monogram Special Equity Fund, 1st Source Monogram
Income Fund and 1st Source Monogram Intermediate Tax-Free Bond Fund. The Group's
Declaration of Trust authorizes the Board of Trustees to divide or redivide any
unissued shares of the Group into one or more additional series by setting or
changing in any one or more respects their respective preferences, conversion or
other rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectuses 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
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<PAGE> 90
fund in the matter are identical, or that the matter does not affect any
interest of the fund. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the election of Trustees
may be effectively acted upon by shareholders of the Group voting without regard
to series.
As of March 3, 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
either of the Funds: Keystone Financial, Inc., 1315 Eleventh Avenue, P. O. Box
2450, Altoona, Pennsylvania 16601 owned beneficially and of record 99.86% of the
issued and outstanding Shares of the Money Market Fund and 98.85% of the issued
and outstanding Shares of Pennsylvania Bond 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 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: derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; derive less than 30% of its gross income from the
sale or other disposition of stock, securities, options, future contracts or
foreign currencies held less than three months; and diversify its investments
within certain prescribed limits. In addition, to utilize the tax provisions
specially applicable to regulated investment companies, a Fund must distribute
to its Shareholders at least 90% of its investment company taxable income for
the year. In general, the Fund's investment company taxable income will be its
taxable income subject to certain adjustments and excluding the excess of any
net
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<PAGE> 91
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, the
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of its taxable income will be subject to
federal tax at regular corporate rates (without any deduction for distributions
to its Shareholders). In such event, dividend distributions would be taxable to
Shareholders to the extent of earnings and profits, and would be eligible for
the dividends received deduction for corporations.
It is expected that each Fund will distribute annually to Shareholders
all or substantially all of that Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to Shareholders for federal income
tax purposes, even if paid in additional Shares of that Fund and not in cash.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss, if any, is taxable to Shareholders as long-term
capital gain in the year in which it is received, regardless of how long the
Shareholder has held the Shares. Such distributions are not eligible for the
dividends received deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the 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.
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<PAGE> 92
Capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on long-term capital gains
of individuals cannot exceed 28%. Capital losses may be used to offset capital
gains. In addition, individuals may deduct up to $3,000 of net capital loss each
year to offset ordinary income. Excess net capital loss may be carried forward
and deducted in future years.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Because all of the Funds'
net investment income is expected to be derived from earned interest, it is
anticipated that no distributions from any of the Funds will qualify for the 70%
dividends received deduction.
Foreign taxes may be imposed on the Money Market Fund by foreign
countries with respect to its income from foreign securities. Since less than
50% in value of the Money Market Fund's total assets at the end of its fiscal
year are expected to be invested in stocks or securities of foreign
corporations, the Money Market 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 Money Market Fund. These taxes will be taken as a deduction by the Money
Market 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 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.
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<PAGE> 93
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.
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
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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.
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 long-term capital
gains, the Pennsylvania Bond Fund intends to distribute any realized 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 long-term
capital gains 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 capital gains are taxed like ordinary
income except that net capital gains of individuals are subject to a maximum
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<PAGE> 95
federal income tax rate of 28%. Net capital gains are the excess of net
long-term capital gains over net short-term capital losses. 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 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
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<PAGE> 96
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 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
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<PAGE> 97
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 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 Money Market Fund
- ----------------------------------------------------
The standardized seven-day yield for the Money Market Fund is computed
by determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account in the Money Market 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 Money Market 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
the Money Market 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.
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<PAGE> 98
The effective yield for the 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 December 31, 1996, the seven-day yield
and the seven-day effective yield for the Money Market Fund were 5.15% and
5.28%, respectively. For the 30-day period then ended, the 30-day yield and the
30-day effective yield for the Money Market Fund were 5.08% and 5.20%,
respectively.
Yield of the Pennsylvania Bond Fund
- -----------------------------------
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," the yield of the Pennsylvania Bond Fund is computed by annualizing
net investment income per share for a recent 30-day period and dividing that
amount by the Pennsylvania Bond 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 the Pennsylvania Bond Fund will vary from time to time
depending upon market conditions, interest rates, the composition of the
Pennsylvania Bond Fund's portfolio and operating expenses of the Group allocated
to the Pennsylvania Bond Fund. These factors and possible differences in the
methods used in calculating yield should be considered when comparing the
Pennsylvania Bond 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 the Pennsylvania Bond Fund's Shares and to
the relative risks associated with the investment objectives and policies of the
Pennsylvania Bond 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 December 31, 1996, the yield and tax
equivalent yield for the Pennsylvania Bond Fund, reflecting the imposition of
the maximum sales load, were 4.67% and 7.73%, respectively, and, without the
sales load, 4.89% and 8.10%, respectively.
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Tax-free vs. Taxable Income
- ---------------------------
The table below shows the effect, as of the date hereof, of the tax
status of bonds on the tax equivalent yield received by their holders under the
regular Federal income tax and the Pennsylvania Personal Income Tax laws. They
give the approximate yield a taxable security must earn for residents of
Pennsylvania, at various income brackets to produce after-tax yields equivalent
to those of tax exempt bonds yielding varying rates from 4% to 10%. This table,
however, does not reflect the phase out of itemized deductions for certain high
income taxpayers.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Single Return $0 - $24,650 $24,650 - $ 59,750 - $124,650 - $271,050 -
59,750 124,650 271,050
- --------------------------------------------------------------------------------------------------------------------------------
Joint Return $0 - $41,200 $41,200 - $ 99,600 - $151,750 - $271,050 -
99,600 151,750 271,050
- --------------------------------------------------------------------------------------------------------------------------------
If your combined
federal and state
tax bracket is... 17.38% 30.02% 32.99% 37.79% 41.29%
- --------------------------------------------------------------------------------------------------------------------------------
And you have a tax- Then you'll be earning the
exempt investment equivalent of a taxable
yielding... investment yielding...
- --------------------------------------------------------------------------------------------------------------------------------
4.00% 4.84% 5.72% 5.97% 6.43% 6.81%
4.50% 5.45% 6.43% 6.72% 7.23% 7.66%
5.00% 6.05% 7.14% 7.46% 8.04% 8.52%
5.50% 6.66% 7.86% 8.21% 8.84% 9.37%
6.00% 7.26% 8.57% 8.95% 9.64% 10.22%
6.50% 7.87% 9.29% 9.70% 10.45% 11.07%
7.00% 8.47% 10.00% 10.45% 11.25% 11.92%
7.50% 9.08% 10.72% 11.19% 12.06% 12.77%
8.00% 9.68% 11.43% 11.94% 12.86% 13.63%
8.50% 10.29% 12.15% 12.68% 13.66% 14.48%
9.00% 10.89% 12.86% 13.43% 14.47% 15.33%
9.50% 11.50% 13.58% 14.18% 15.27% 16.18%
10.00% 12.10% 14.29% 14.92% 16.07% 17.03%
</TABLE>
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
B-41
<PAGE> 100
the end of the period by multiplying the total number of Shares owned at the end
of the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
annualizing the result for periods of less than one year. A Fund, however, may
also advertise aggregate total return in addition to average annual total
return. Aggregate total return is a measure of the change in value of an
investment in a Fund over the relevant period and is calculated similarly to
average annual total return except that the result is not annualized.
For the period from commencement of operations (October 7, 1996)
through December 31, 1996, the aggregate total return for the Money Market Fund
was 1.16%. For the period from commencement of operations (October 1, 1996)
through December 31, 1996, the aggregate total return for the Pennsylvania Bond
Fund, reflecting imposition of the maximum sales load, was 2.25% and, excluding
the maximum sales load, was 2.34%.
Distribution Rates
- ------------------
The Pennsylvania Bond Fund may from time to time advertise current
distribution rates which are calculated in accordance with the method disclosed
in that Fund's Prospectus.
Performance Comparisons
- -----------------------
Investors may judge the performance of the Funds by comparing them to
the performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies through various mutual fund or market indices
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation and to data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service which monitors the performance of mutual funds.
Comparisons may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, Morningstar, Inc., Ibbotson
Associates, CDA/Wiesenberger, The New York Times, Business Week, U.S.A. Today
and local 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
B-42
<PAGE> 101
of compounding and the benefits of dollar cost averaging); (2) discussions of
general economic trends; (3) presentations of statistical data to supplement
such discussions; (4) descriptions of past or anticipated portfolio holdings for
the Funds; (5) descriptions of investment strategies for the Funds; (6)
descriptions or comparisons of various investment products, which may or may not
include the Funds; (7) comparisons of investment products (including the Funds)
with relevant market or industry indices or other appropriate benchmarks; (8)
discussions of fund rankings or ratings by recognized rating organizations; and
(9) testimonials describing the experience of persons that have invested in a
Fund. The Group may also include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such communications.
Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of a Fund.
Current yields or total return will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
total return may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and total
return are functions of a Fund's quality, composition and maturity, as well as
expenses allocated to that Fund. Fees imposed upon Customer accounts by the
Adviser, its affiliates or its affiliated or correspondent banks for cash
management services or other services will reduce a Fund's effective yield and
total return to Customers.
Miscellaneous
- -------------
Individual Trustees are generally elected by the shareholders and,
subject to removal by the vote of two-thirds of the Board of Trustees, serve for
a term lasting until the next meeting of shareholders at which Trustees are
elected. Such meetings are not required to be held at any specific intervals.
Generally, shareholders owning not less than 20% of the outstanding shares of
the Group entitled to vote may cause the Trustees to call a special meeting.
However, the Group has represented to the Commission that the Trustees will call
a special meeting for the purpose of 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
B-43
<PAGE> 102
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-44
<PAGE> 103
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following financial statements are unaudited and contain financial
information regarding two other funds of the Group, The KeyPremier Established
Growth Fund and The KeyPremier Intermediate Term Income Fund. No offer to sell
the shares of these Funds is made hereby or by the Prospectuses.
B-45
<PAGE> 104
THE SESSIONS GROUP
KEYPREMIER FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
INTERMEDIATE
PRIME PENNSYLVANIA ESTABLISHED TERM
MONEY MARKET MUNICIPAL GROWTH INCOME
FUND FUND FUND FUND
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (cost $102,898,736;
$105,025,259; $101,950,409; and $181,480,352,
respectively)................................... $102,898,736 $106,411,146 $159,249,409 $180,941,609
Repurchase agreements............................. -- -- -- --
------------ ------------ ------------ ------------
Total Investments........................... 102,898,736 106,411,146 159,249,409 180,941,609
Cash.............................................. 2,074,272 -- -- --
Interest and dividends receivable................. -- 1,793,446 216,304 1,966,629
Income and other receivables...................... -- 764 -- --
Receivable from brokers for investments sold...... -- 247,500 -- 7,441,875
Unamortized organization costs.................... 20,589 22,020 17,839 21,079
Prepaid expenses and other assets................. 2,912 2,126 5,297 6,112
------------ ------------ ------------ ------------
Total Assets................................ 104,996,509 108,477,002 159,488,849 190,377,304
------------ ------------ ------------ ------------
LIABILITIES:
Dividends payable................................. 450,739 447,394 271,315 867,149
Accrued expenses and other payables:
Administration fees........................... 3,985 4,149 6,103 7,207
Custodian and accounting fees................. 3,269 3,891 2,722 2,880
Legal and audit fees.......................... 9,802 9,513 3,548 4,174
Printing...................................... 5,171 3,775 -- --
Transfer agent fees........................... 6,682 6,788 2,422 2,410
Registration and filing fees.................. 2,349 633 -- --
Other......................................... 427 397 105 150
------------ ------------ ------------ ------------
Total Liabilities........................... 482,424 476,540 286,215 883,970
------------ ------------ ------------ ------------
NET ASSETS:
Capital........................................... 104,512,330 106,510,905 101,897,711 190,140,035
Distributed in excess of net investment income.... -- (278) (1) (2)
Net unrealized appreciation (depreciation) on
investments..................................... -- 1,385,887 57,299,000 (538,743)
Accumulated undistributed net realized gains
(losses) on investment transactions............. 1,755 103,948 5,924 (107,956)
------------ ------------ ------------ ------------
Net Assets.................................... $104,514,085 $108,000,462 $159,202,634 $189,493,334
============ ============ ============ ============
Outstanding units of beneficial interest
(shares)........................................ 104,512,330 10,437,558 16,229,902 19,188,146
=========== ============ ============ ============
Net asset value--redemption price per share $ 1.00 $ 10.35 $ 9.81 $ 9.88
=========== ============ ============ ============
Maximum Sales Charge.............................. -- 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) $ 10.84 $ 10.27 $ 10.35
=========== ============ ============ ============
</TABLE>
- ---------
(a) Offering price and redemption price are the same for the Prime Money Market
Fund.
See notes to financial statements.
B-46
<PAGE> 105
THE SESSIONS GROUP
KEYPREMIER FUNDS
STATEMENTS OF OPERATIONS(a)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
INTERMEDIATE
PRIME PENNSYLVANIA ESTABLISHED TERM
MONEY MARKET MUNICIPAL GROWTH INCOME
FUND FUND FUND FUND
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income.......................... $1,257,381 $ 1,098,607 $ 53 $ 836,822
Dividend income.......................... -- 4,799 303,359 67,269
---------- ---------- ---------- -----------
Total Income...................... 1,257,381 1,103,406 303,412 904,091
---------- ---------- ---------- -----------
EXPENSES:
Investment advisory fees................. 96,110 167,165 98,518 93,788
Administration fees...................... 27,632 32,022 15,106 17,976
Custodian and accounting fees............ 9,488 12,328 5,261 5,828
Legal and audit fees..................... 10,436 10,191 4,230 4,960
Organization costs....................... 2,230 1,914 150 180
Trustee fees and expenses................ 1,114 1,053 480 540
Transfer agent fees...................... 6,682 7,875 2,490 2,490
Registration and filing fees............. 2,868 1,023 1,260 1,260
Printing costs........................... 7,998 6,774 2,460 2,950
Other.................................... 1,458 1,302 661 760
---------- ---------- ---------- -----------
Total Expenses........................... 166,016 241,647 130,616 130,732
Less: Expenses voluntarily
reduced...................... (96,110) (167,165) (98,518) (93,788)
---------- ---------- ---------- -----------
Net Expenses............................. 69,906 74,482 32,098 36,944
---------- ---------- ---------- -----------
Net Investment Income.................... 1,187,475 1,028,924 271,314 867,147
---------- ---------- ---------- -----------
REALIZED/UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses)
investment transactions................ 1,755 111,438 5,924 (107,956)
Change in unrealized appreciation
(depreciation) on investments.......... -- 1,385,887 57,299,000 (538,743)
---------- ---------- ---------- -----------
Net realized/unrealized gains (losses) on
investments............................ 1,755 1,497,325 57,304,924 (646,699)
---------- ---------- ---------- -----------
Change in net assets resulting from
operations............................. $1,189,230 $ 2,526,249 $57,576,238 $ 220,448
========== ========== ========== ===========
</TABLE>
- ---------
(a) Commencement of the Funds began October 7, October 1, November 30, and
November 30, respectively.
See notes to financial statements.
B-47
<PAGE> 106
THE SESSIONS GROUP
KEYPREMIER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA INTERMEDIATE
MONEY MARKET MUNICIPAL ESTABLISHED TERM
FUND FUND GROWTH INCOME FUND
------------ ------------ ------------ ------------
FOR PERIOD FOR PERIOD FOR PERIOD FOR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(a) 1996(a) 1996(a) 1996(a)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.................... $ 1,187,475 $ 1,028,924 $ 271,314 $ 867,147
Net realized gains (losses) on
investments transactions............... 1,755 111,438 5,924 (107,956)
Net change in unrealized appreciation
(depreciation) on investments.......... -- 1,385,887 57,299,000 (538,743)
----------- ------------ ------------ ------------
Change in net assets resulting from
operations............................... 1,189,230 2,526,249 57,576,238 220,448
----------- ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............... (1,187,475) (1,028,924) (271,314) (867,147)
In excess of net investment income....... -- (278) (1) (2)
From net realized gains on investments... -- (7,490) -- --
----------- ------------ ------------ ------------
Change in net assets from shareholder
distributions............................ (1,187,475) (1,036,692) (271,315) (867,149)
----------- ------------ ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued.............. 179,091,701 115,331,885 103,428,704 192,848,494
Dividends reinvested..................... -- -- -- --
Cost of shares redeemed.................. (74,579,371) (8,820,980) (1,530,993) (2,708,459)
----------- ------------ ------------ ------------
Change in net assets from capital
transactions............................. 104,512,330 106,510,905 101,897,711 190,140,035
------------ ------------ ------------ ------------
Change in net assets....................... 104,514,085 108,000,462 159,202,634 189,493,334
NET ASSETS:
Beginning of period...................... -- -- -- --
----------- ------------ ------------ ------------
End of period............................ $104,514,085 $108,000,462 $159,202,634 $189,493,334
============ ============= ============ ============
SHARE TRANSACTIONS:
Issued................................... 179,091,701 11,289,561 16,384,743 19,460,390
Reinvested............................... -- -- -- --
Redeemed................................. (74,579,371) (852,003) (154,841) (272,244)
----------- ------------ ------------- ------------
Change in shares........................... 104,512,330 10,437,558 16,229,902 19,188,146
=========== ============ ============ ============
</TABLE>
- ---------
(a) Commencement of the Funds began October 7, October 1, November 30, and
November 30, respectively.
See notes to financial statements.
B-48
<PAGE> 107
THE SESSIONS GROUP
KEYPREMIER PRIME MONEY MARKET FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ----------- ----------------------------- -------------
<C> <S> <C>
U.S. GOVERNMENT AGENCIES (90.8%):
Federal Home Loan Bank:
$ 5,000,000 5.36%, 1/3/97................ $ 4,998,511
50,000,000 5.46%, 1/3/97................ 49,984,833
Federal Home Loan Mortgage Corp.:
5,000,000 5.37%, 1/2/97................ 4,999,254
Federal National Mortgage Assoc.:
5,000,000 5.44%, 1/6/97................ 4,996,222
5,000,000 5.32%, 1/14/97............... 4,990,395
5,000,000 5.30%, 1/16/97............... 4,988,958
5,000,000 5.30%, 1/17/97............... 4,988,222
U.S. GOVERNMENT AGENCIES, CONTINUED:
Federal National Mortgage Assoc.Continued:
$ 5,000,000 5.37%, 1/21/97............... $ 4,985,083
5,000,000 5.37%, 1/22/97............... 4,984,338
5,000,000 5.27%, 1/23/97............... 4,983,897
-------------
Total U.S. Government Agencies 94,899,713
U.S. TREASURY BILLS (7.7%):
8,000,000 4.40%, 1/2/97................ 7,999,023
-------------
Total(Cost--$102,898,736) (a) $ 102,898,736
=============
</TABLE>
- ---------
Percentages indicated are based on net assets of $104,514,085.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements.
B-49
<PAGE> 108
THE SESSIONS GROUP
KEYPREMIER PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ---------- ----------------------------------------------------------------------------------------- ------------
<C> <S> <C>
MUNICIPAL BONDS (98.0%):
Pennsylvania (93.1%):
$1,330,000 Berks County, Pennsylvania Municipal Authority, 7.10%, 5/15/22, Callable 5/15/04 @ 100... $ 1,522,850
1,000,000 Berks County, Pennsylvania Municipal Authority Hospital Revenues, 5.00%, 10/1/02......... 1,020,000
1,000,000 Bethel Park, Pennsylvania School District, 5.40%, 8/1/00, Callable 8/1/99 @ 100.......... 1,026,250
1,000,000 Bethlehem, Pennsylvania Area School District, Series A, 6.50%, 9/1/00.................... 1,071,250
4,065,000 Bethlehem, Pennsylvania Water Authority, Series A, 6.30%, 11/15/15, Callable 11/15/02 @
100.................................................................................... 4,415,606
1,000,000 Bucks County, Pennsylvania, Series A, 6.00%, 3/1/01...................................... 1,058,750
1,000,000 Bucks County, Pennsylvania Water & Sewer Authority, Series B, 6.50%, 12/1/02,
Callable 12/1/02 @ 100................................................................. 1,097,500
1,900,000 Central Dauphin, Pennsylvania School District, 6.00%, 6/1/01............................. 2,018,750
1,875,000 Chester County, Pennsylvania, 5.60%, 12/15/08, Callable 12/15/03 @ 100................... 1,933,594
1,000,000 Chester County, Pennsylvania, 5.05%, 11/1/08, Callable 11/1/06 @ 100..................... 996,250
1,050,000 Chester County, Pennsylvania, 5.15%, 11/1/09, Callable 11/1/06 @ 100..................... 1,046,063
1,250,000 Delaware County, Pennsylvania, 5.40%, 10/1/10, Callable 10/1/05 @ 100.................... 1,256,250
700,000 Delaware County, Pennsylvania Industrial Development Authority, Series A, 8.10%, 12/1/13,
Callable 6/1/97 @ 103.5................................................................ 732,067
2,000,000 Geisinger, Pennsylvania Health Systems Authority, Series B, 7.38%, 7/1/02, Callable
7/1/99 @ 102........................................................................... 2,150,000
1,000,000 Hempfield, Pennsylvania School District, Lancaster County, 6.40%, 8/15/05,
Callable 8/15/02 @ 100................................................................. 1,082,500
3,500,000 Indiana County, Pennsylvania Industrial Development Authority, Series A, 6.00%, 6/1/06... 3,797,500
5,250,000 Indiana County, Pennsylvania Industrial Development Authority, 5.35%, 11/1/10............ 5,282,813
1,000,000 Lewisburg, Pennsylvania Area School District, 4.85%, 3/15/09, Callable 3/15/06 @ 100..... 967,500
500,000 Lycoming County, Pennsylvania Hospital Authority, Series B, 7.40%, 7/1/99................ 536,875
1,000,000 Montgomery County, Pennsylvania, Series B, 5.20%, 10/15/11, Callable 10/15/06 @ 100...... 983,750
2,155,000 Northampton County, Pennsylvania Higher Education Authority, 6.90%, 10/15/06,
Callable 10/15/01 @ 102................................................................ 2,381,275
1,000,000 Northampton County, Pennsylvania Higher Education Authority, 6.00%, 9/1/01............... 1,055,000
3,000,000 Pennsbury, Pennsylvania School District, 6.80%, 8/15/14, Callable 8/15/04 @ 100.......... 3,390,000
2,000,000 Pennsylvania Housing Finance Agency, 5.40%, 1/1/00....................................... 2,042,500
3,325,000 Pennsylvania Infrastructure Investment Authority, 6.00%, 9/1/05.......................... 3,603,469
2,000,000 Pennsylvania Infrastructure Investment Authority, 6.00%, 9/1/03.......................... 2,157,500
4,425,000 Pennsylvania Intergovernmental Cooperation Authority, 7.00%, 6/15/14, Callable 6/15/05 @
100.................................................................................... 5,077,688
3,500,000 Pennsylvania State, Series A, 6.70%, 1/1/02, Callable 1/1/01 @ 101.5..................... 3,823,750
3,000,000 Pennsylvania State, 5.38%, 5/15/05....................................................... 3,071,250
3,000,000 Pennsylvania State, 5.30%, 5/1/06, Callable 5/1/04 @ 101.5............................... 3,108,750
1,375,000 Pennsylvania State Higher Education Assistance Agency, Series A, 6.80%, 12/1/00.......... 1,469,531
375,000 Pennsylvania State Higher Education Facilities Authority, Series A, 6.88%, 7/1/99........ 398,437
2,000,000 Pennsylvania State Higher Education Facilities Authority, Series A, 5.90%, 8/15/00....... 2,102,500
750,000 Pennsylvania State Higher Education Facilities Authority, Series A, 6.40%, 1/1/02,
Callable 1/1/97 @100................................................................... 750,000
1,000,000 Pennsylvania State Higher Education Facilities Authority, 7.00%, 5/1/02, Callable 5/1/00
@ 100.................................................................................. 1,085,000
5,000,000 Pennsylvania State Higher Education Facilities Authority, Series A, 5.35%, 1/1/08,
Callable 1/1/06 @ 101.................................................................. 5,068,750
1,750,000 Pennsylvania State Higher Education Facilities Authority, Series D, 7.15%, 6/15/15,
Callable 6/15/00 @ 100................................................................. 1,905,312
</TABLE>
Continued
B-50
<PAGE> 109
THE SESSIONS GROUP
KEYPREMIER PENNSYLVANIA MUNICIPAL BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- ---------- ----------------------------------------------------------------------------------------- ------------
<C> <S> <C>
MUNICIPAL BONDS, CONTINUED:
$1,500,000 Pennsylvania State Industrial Development Authority, 5.00%, 7/1/00....................... $ 1,531,875
1,000,000 Pennsylvania State Turnpike, Series J, 6.40%, 12/1/00.................................... 1,072,500
1,000,000 Pennsylvania State Turnpike, Series P, 5.20%, 12/1/00.................................... 1,027,500
1,000,000 Philadelphia, Pennsylvania Gas Works, 5.50%, 7/1/04...................................... 1,045,000
1,000,000 Philadelphia, Pennsylvania Water & Wastewater, 6.25%, 8/1/02............................. 1,085,000
5,250,000 Philadelphia, Pennsylvania Water & Wastewater, 6.25%, 8/1/08............................. 5,775,000
1,000,000 Philadelphia, Pennsylvania Hospitals & Higher Education Facilities Authority, Series A,
6.50%, 2/15/21, Callable 2/15/02 @ 102................................................. 1,101,250
1,000,000 Pittsburgh, Pennsylvania Water & Sewer Authority, Series A, 6.00%, 9/1/16,
Callable 9/1/01 @ 100.................................................................. 1,062,500
1,700,000 Sayre, Pennsylvania Health Care Facilities Authority, Series A, 6.60%, 3/1/01............ 1,833,875
2,200,000 Union County, Pennsylvania Higher Education Facilities Financing Authority, 5.75%,
4/1/00................................................................................. 2,304,500
1,000,000 West Shore, Pennsylvania School District, 6.40%, 9/1/01, Callable 9/1/98 @ 100........... 1,031,250
3,000,000 Westmoreland County, Pennsylvania, 6.70%, 8/1/09, Callable 8/1/01 @ 100.................. 3,270,000
1,850,000 York County, Pennsylvania Industrial Development Authority, 6.25%, 7/1/02................ 1,981,812
------------
100,608,892
------------
Puerto Rico (4.9%):
5,000,000 Puerto Rico Public Building Authority, Series M, 5.70%, 7/1/09........................... 5,262,500
------------
5,262,500
------------
Total Municipal Bonds 105,871,392
------------
VARIABLE RATE BANK ACCOUNT (0.5%):
539,754 Bank Of New York......................................................................... 539,754
------------
Total Variable Rate Bank Account 539,754
------------
Total (Cost--$105,025,259) $106,411,146
============
</TABLE>
- ---------
Percentages indicated are based on net assets of $108,000,462.
(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.......................... $1,764,899
Unrealized depreciation.......................... (379,012)
----------
Net unrealized appreciation...................... $1,385,887
=========
</TABLE>
See notes to financial statements.
B-51
<PAGE> 110
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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. serves as investment adviser:
shares of the KeyPremier Prime Money Market Fund, KeyPremier Pennsylvania
Municipal Bond Fund, KeyPremier Established Growth, KeyPremier Intermediate
Term Income 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
objectives for the Established Growth Fund are growth of capital with some
current income as a secondary objective. The investment objective of the
Intermediate Term Income Fund are current income with long-term growth of
capital as a secondary objective.
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. Martindale Andres &
Company, Inc. serves as investment adviser to the Funds.
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 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.
Continued
B-52
<PAGE> 111
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31,1996
(UNAUDITED)
Investments in common and preferred stocks, corporate bonds, commercial
paper, municipal securities and U.S. Government securities of the
Pennsylvania Municipal Bond Fund, Established Growth Fund and the
Intermediate Term Income 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. 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. 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.
Continued
B-53
<PAGE> 112
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31,1996
(UNAUDITED)
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 Fund and the Intermediate Term Income
Fund. 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 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.
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 each 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 PORTFOLIO SECURITIES:
Purchases and sales of portfolio securities (excluding short-term
securities) for the variable net asset value funds for the period ended
December 31, 1996, are as follows (commencement of operations of such funds
was October 1, November 30 and November 30, respectively):
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -----------
<S> <C> <C>
PA Municipal Bond Fund........................................ $ 36,348,637 $31,711,442
Established Growth Fund....................................... $ 3,272,009 $ 137,326
Intermediate Income Fund...................................... $253,869,567 $81,969,997
</TABLE>
Continued
B-54
<PAGE> 113
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31,1996
(UNAUDITED)
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 December 31, 1996.
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., 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 0.115% of the average daily net asset value of a
Fund. The Group has not implemented such plan as of December 31, 1996.
BISYS is also entitled to receive commissions on sales of shares of the
variable net asset value funds. For the period ended December 31, 1996,
BISYS received no commissions 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-55
<PAGE> 114
THE SESSIONS GROUP
KEYPREMIER FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31,1996
(UNAUDITED)
Information regarding these transactions is as follows for the period ended
December 31, 1996:
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA INTERMEDIATE
MONEY MUNI ESTABLISHED TERM
MARKET BOND GROWTH INCOME
FUND FUND FUND FUND
------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee
reductions (percentage of average net
assets)............................... .40% .60% .75% .60%
Voluntary fee reductions................ $96,110 $167,165 $98,518 $ 93,788
ADMINISTRATION FEES:
Annual fee before voluntary fee
reductions (percentage of average net
assets)............................... .115% .115% .115% .115%
Voluntary fee reductions................ -- -- -- --
FUND ACCOUNTANT FEES.................... $ 7,208 $ 8,353 $ 3,940 $ 4,680
TRANSFER AGENT FEES..................... $ 6,682 $ 7,875 $ 2,490 $ 2,490
</TABLE>
5. ACQUISITION OF COMMON COLLECTIVE TRUST FUNDS
On October 1, 1996, November 30, 1996, and November 30, 1996, respectively,
the Pennsylvania Municipal Bond, Established Growth, and Intermediate Term
Income Funds acquired all of the assets of various common and collective
trust funds maintained by affiliates of Keystone Financial, Inc. The
following is a summary of shares issued, net assets acquired, net asset
value per share and unrealized appreciation as of the dates acquired:
<TABLE>
<CAPTION>
INTERMEDIATE
PENNSYLVANIA ESTABLISHED TERM
MUNI GROWTH INCOME
FUND FUND FUND
------------ ------------ ------------
<S> <C> <C> <C>
Shares......................................... 10,282,956 16,173,916 18,918,934
Net Assets..................................... $104,988,989 $161,739,160 $189,189,347
Net Asset Value................................ $ 10.21 $ 10.00 $ 10.00
Unrealized Appreciation (Depreciation)......... $ 398,186 $ 56,299,092 $ (1,493,470)
</TABLE>
B-56
<PAGE> 115
THE SESSIONS GROUP
KEYPREMIER FUNDS
FINANCIAL HIGHLIGHTS
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME PENNSYLVANIA ESTABLISHED INTERMEDIATE
MONEY MARKET MUNICIPAL GROWTH TERM
FUND FUND FUND INCOME FUND
------------ ------------ ------------ ------------
FOR PERIOD FOR PERIOD FOR PERIOD FOR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(a) 1996(a) 1996(a) 1996(a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 1.00 $ 10.21 $ 10.00 $ 10.00
------------ ------------ ------------ ------------
Investment Activities
Net investment income.................. 0.004 0.04 0.02 0.05
Net realized and unrealized gains
(losses) on investments.............. -- 0.14 (0.19) (0.12)
------------ ------------ ------------ ------------
Total from Investment Activities... 0.004 0.18 (0.17) (0.07)
------------ ------------ ------------ ------------
Distributions
Net investment income.................. (0.004) (0.04) (0.02) (0.05)
Net realized gains..................... -- -- -- --
------------ ------------ ------------ ------------
Total Distributions................ (0.004) (0.04) (0.02) (0.05)
------------ ------------ ------------ ------------
Net Asset Value, End of Period........... $ 1.00 $ 10.35 $ 9.81 $ 9.88
=============== ============ ============== ==============
Total Return (excludes sales charge)..... 1.16%(b) 2.34%(b) 11.75%(b)(d) -0.75%(b)
Ratios/Supplemental Data:
Net Assets, at end of period (000)....... $104,514 $108,000 $159,203 $189,493
Ratio of expenses to average net
assets................................. 0.29%(c) 0.27%(c) 0.24%(c) 0.24%(c)
Ratio of net investment income to average
net assets............................. 4.94%(c) 1.26%(c) 2.07%(c) 5.55%(c)
Ratio of expenses to average net
assets*................................ 1.19%(c) 1.04%(c) 0.94%(c) 1.49%(c)
Ratio of net investment income to average
net assets*............................ 4.04%(c) 0.49%(c) 1.37%(c) 4.30%(c)
Portfolio Turnover....................... -- 30% -- 49%
</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 October 7, October 1, November 30, and
November 30, respectively.
(b) Not annualized
(c) Annualized
(d) The quoted return of the Portfolio includes performance of certain
collective trust portfolio ("Commingled") accounts for the period from
January 31, 1995 to the Mutual Funds commencement of operations on November
30, 1996 as adjusted to reflect the expenses associated with the Portfolio.
See notes to financial statements.
B-57
<PAGE> 116
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
A-1
<PAGE> 117
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.
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.
The following summarizes the four 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
A-2
<PAGE> 118
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.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds
rated Aa through Baa. 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 four 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. 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.
To provide more detailed indications of credit quality, the ratings AA
to BBB 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 four 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
A-3
<PAGE> 119
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.
The following summarizes IBCA's four 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.
The following summarizes Thomson's description of its four 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.
A-4
<PAGE> 120
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.
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
A-5
<PAGE> 121
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.
"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:
A-6
<PAGE> 122
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 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.
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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 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
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limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
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.
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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 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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