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The Pillar Funds
Investment Advisor:
Summit Bank Investment Management Division,
a division of Summit Bank
The Pillar Funds (the "Trust") consists of mutual fund portfolios seeking to
provide a convenient and economical means of investing in one or more
professionally managed portfolios of securities. This Prospectus relates to
shares of the following fund (the "Fund"):
o Institutional Select Money Market Fund
Shares of the Fund are offered without distribution fees to: (i) cash sweep
customers of Summit Bank; (ii) any individual or institution (including Summit
Bank, its affiliates and correspondent banks), for the investment of funds held
by such individual or institution in a fiduciary, agency, custodial or other
representative capacity; and (iii) any "qualified customer" who has entered into
an agreement with Summit Bank, its affiliates or correspondent banks ("Qualified
Customers"). Persons who own shares of the Fund are referred to herein as
"Shareholders."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED, ENDORSED OR
GUARANTEED BY, ANY BANK (INCLUDING SUMMIT BANK OR ITS AFFILIATES OR
CORRESPONDENTS), ANY STATE OR STATE AGENCY, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), THE U.S. GOVERNMENT OR ANY U.S. GOVERNMENT AGENCY.
Amounts invested in the Fund are subject to investment risks, including possible
loss of the principal amount invested.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Investors are advised to read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated April 30, 1997, as supplemented June 30, 1997 has been filed
with the Securities and Exchange Commission and is available without charge
through the Distributor, SEI Investments Distribution Co., Oaks, Pennsylvania
19456 or by calling 1-800-932-7782. The Statement of Additional Information is
incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
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PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
June 30, 1997
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SUMMARY
The Pillar Funds (the "Trust") consists of open-end management investment
companies which provide a convenient way to invest in professionally managed
portfolios of securities. The following provides basic information about the
Trust's Institutional Select Money Market Fund (the " Fund").
What is the Investment Objective? The Fund seeks to preserve principal
value and maintain a high degree of liquidity while providing current income.
There can be no assurance that the Fund will be able to maintain a net asset
value of $1.00 per share on a continuous basis or that the Fund will meet its
investment objective. See "Investment Objective and Policies."
What are the Permitted Investments? The Fund invests in short-term,
U.S. dollar-denominated obligations of United States issuers and obligations of
U.S. and London branches of foreign banks. See "Investment Objective and
Policies."
Who is the Advisor? Summit Bank Investment Management Division, a
division of Summit Bank, serves as the advisor (the "Advisor") to the Trust.
Who is the Administrator? SEI Fund Resources serves as the
administrator (the "Administrator") of the Trust. See "The Administrator."
Who is the Transfer Agent? State Street Bank and Trust Company acts as
transfer agent (the "Transfer Agent") for the Trust. See "The Transfer Agent."
Who is the Shareholder Servicing and Dividend Disbursing Agent? Boston
Financial Data Services is the Trust's dividend disbursing agent and shareholder
servicing agent. See "The Shareholder Servicing Agent."
Who is the Distributor? SEI Investments Distribution Co. acts as
distributor (the "Distributor") of the Trust's shares. See "The Distributor."
How do I Purchase and Redeem Shares? A purchase order for the Fund will
be effective as of the "Business Day" received by the Distributor if the
Distributor receives the order and payment in federal funds before 12:00 noon,
Eastern time, on such Business Day. A "Business Day" for the Fund is any day on
which both the New York Stock Exchange is open for trading and the Federal
Reserve Bank is open. A redemption order for the Fund will be effective as of
the Business Day received if such order is received before 12:00 noon, Eastern
time, on such Business Day and the proceeds are to be sent in federal funds.
Shares are purchased and redeemed for shareholders who are cash sweep customers
of Summit Bank ("Cash Sweep Shareholders") in accordance with their cash sweep
agreement with Summit Bank. Investors may become Cash
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Sweep Shareholders by executing a cash sweep agreement with Summit Bank. Please
call Summit Bank at 1-888-8SUMMIT for more information about cash sweep
accounts. See "Purchase and Redemption of Shares."
Is There a Minimum Investment? The minimum initial investment is
$5,000,000 for shares of the Fund. Subsequent investments may be made in any
amount. The minimum aggregate account balance in the Fund is also $5,000,000,
which, if not maintained, will trigger an automatic exchange feature for Class I
Shares of the Trust's Prime Obligation Money Market Fund. See "Minimum
Investment and Account Sizes and Preauthorized Exchanges of Shares."
How are Dividends Paid? The net investment income (exclusive of capital
gains) of the Fund is determined and declared on each Business Day as a dividend
for Shareholders as of the close of business on that day. Any capital gains will
be distributed at least annually. Dividends are paid in additional shares unless
the Shareholder elects to take the payment in cash. See "Dividends."
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EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Institutional
Select
Money Market
Fund
- --------------------------------------------------------------------------------
Advisory Fees (after fee waivers) (1)..................... .03%
Other Expenses (2)........................................ .27%
- --------------------------------------------------------------------------------
Total Operating Expenses (after fee waivers) (1).......... .30%
================================================================================
(1) The Advisor has agreed to voluntarily waive a portion of its fees in an
amount that operates to limit Total Operating Expenses of the Fund to not
more than .30% of average daily net assets of the Fund. The Advisor
reserves the right to terminate its fee waiver at any time in its sole
discretion. Absent fee waivers for the Fund, the Advisory Fee would be .10%
and Total Operating Expenses would be .37% of the Fund's average daily net
assets. Additional information may be found under "The Advisor," "The
Administrator" and "The Distributor."
(2) Other Expenses for the Fund are based on estimated amounts for the current
fiscal year.
Example
- -------------------------------------------------------------------------------
1 yr. 3 yrs.
- -------------------------------------------------------------------------------
An investor in the Fund would pay the following
expenses on a $1,000 investment assuming (1)
a 5% annual return and (2) redemption at the
end of each time period:
Institutional Select Money Market Fund................ $ 3 $10
===============================================================================
The example should not be considered a representation of past or future
expenses. The Fund is new and actual expenses may be greater or less than those
shown. The purpose of the expense table and example is to assist the investor in
understanding the various costs and expenses that may be directly or indirectly
borne by investors in the Fund. Financial institutions may impose fees on their
customers in addition to those described above. Additional information may be
found under "The Advisor," "The Administrator" and "The Distributor."
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THE TRUST
The Pillar Funds (the "Trust") is an open-end management investment company that
consists of diversified and non-diversified portfolios. The Trust currently
offers units of beneficial interest ("shares") in seventeen separate investment
portfolios. The Trust offers shares of each portfolio through up to four
separate classes of shares (Class A (formerly, Class B), Class B, Class I
(formerly, Class A) and Class S) which provide for variations in distribution
costs, voting rights, sales loads, minimum investments, redemption fees,
transfer agency fees and dividends. Except for these differences between
classes, each share of each portfolio represents an undivided proportionate
interest in that portfolio. This Prospectus relates to shares of the
Institutional Select Money Market Fund (the "Fund"). The Fund is a diversified
mutual fund. Information regarding the Trust's other portfolios is contained in
separate prospectuses that may be obtained from the Trust's Distributor, SEI
Investments Distribution Co., Oaks, Pennsylvania 19456 or by calling
1-800-932-7782.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described below. For
additional information regarding risks and permitted investments of the Fund,
see "Description of Permitted Investments" in this Prospectus and "Description
of Permitted Investments" and "Description of Ratings" in the Statement of
Additional Information. There is no assurance that the investment objective of
the Fund will be met.
The investment objective of the Fund is to preserve principal value and maintain
a high degree of liquidity while providing current income.
The Fund will invest in "eligible securities" consisting of: (i) commercial
paper and short-term corporate obligations of U.S. issuers that satisfy the
Fund's quality criteria; (ii) obligations (certificates of deposit, time
deposits and bankers' acceptances) of U.S. commercial banks, U.S. savings and
loan institutions and U.S. and London branches of foreign banks, provided such
institutions have total assets of $500 million or more as shown on their last
published financial statements at the time of investment and are insured by the
FDIC (the Fund may not invest more than 25% of its total assets in obligations
issued by foreign branches of U.S. banks and London branches of foreign banks);
(iii) bills, notes and bonds issued by the U.S. Treasury and separately traded
interest and principal component parts of such obligations that are transferable
through the federal book-entry system ("U.S. Treasury Obligations"); (iv)
obligations issued or guaranteed as to principal and interest by the agencies or
instrumentalities of the U.S. Government ("U.S. Government Agencies"); and (v)
repurchase agreements involving any of such obligations. In addition, the Fund
may also engage in securities lending.
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The Fund intends to comply with regulations of the Securities and Exchange
Commission ("SEC") applicable to money market funds using the amortized cost
method for calculating net asset value. These regulations impose certain
quality, maturity and diversification restraints on investments by the Fund.
Under these regulations, the Fund will invest only in U.S. dollar-denominated
securities, will maintain an average maturity on a dollar-weighted basis of 90
days or less, and will acquire only "eligible securities" that present minimal
credit risks and have a maturity of 397 days or less.
INVESTMENT LIMITATIONS
The investment objective and the following investment limitations are
fundamental policies of the Fund. In addition, it is a fundamental policy of the
Fund to use its best efforts to maintain a constant net asset value of $1.00 per
share although there can be no assurance the Fund will be able to do so.
Fundamental policies cannot be changed without the consent of the holders of a
majority of the Fund's outstanding shares.
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
involving such securities) if, as a result, more than 5% of the total assets of
the Fund would be invested in the securities of such issuer. See "Description of
Permitted Investments -- Restraint on Investments by Money Market Funds."
2. Purchase any securities which would cause more than 25% of the total assets
of any Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in the obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, repurchase agreements
involving such securities and obligations issued by domestic branches of U.S.
banks or U.S. branches of foreign banks subject to the same regulation as U.S.
banks or to investments in tax exempt securities issued by governments or
political subdivisions of governments.
3. Make loans, except that the Fund may (a) purchase or hold debt instruments in
accordance with its investment objective and policies; (b) enter into repurchase
agreements; and (c) engage in securities lending as described in this Prospectus
and in the Statement of Additional Information.
The foregoing percentage limitations apply at the time of the purchase of a
security. Additional investment limitations are set forth in the Statement of
Additional Information.
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It is a non-fundamental policy of the Fund to invest no more than 10% of its net
assets in illiquid securities (as defined under "Description of Permitted
Investments").
THE ADVISOR
Summit Bank Investment Management Division, a division of Summit Bank (the
"Advisor"), serves as the investment advisor to the Trust. The Advisor makes the
investment decisions for the assets of the Fund and continuously reviews,
supervises and administers the Fund's investment program subject to the
supervision of, and policies established by, the Trustees of the Trust.
Summit Bank, 210 Main Street, Hackensack, New Jersey 07601, was chartered in
1899 and has been exercising trust powers and managing money since 1916. The
Investment Management Division began as a separate operating division of the
Bank in 1973. The Bank's investment professionals have, on average, over 20
years of experience in investment management. As of December 31, 1996, total
assets under management were approximately $6.7 billion.
Summit Bank is a wholly-owned subsidiary of Summit Bancorp, an interstate bank
holding company with over $22 billion in assets and over 340 banking offices,
predominantly in New Jersey and eastern Pennsylvania, as of December 31, 1996.
The Advisor is entitled to a fee from the Fund, which is calculated daily and
paid monthly at the annual rate of .10% of the Fund's average daily net assets.
The Advisor has voluntarily agreed to waive all or a portion of its fees to
limit the total operating expenses of the Fund to .30% of the Fund's average
daily net assets. The Advisor reserves the right to terminate any and all fee
waivers at any time in its sole discretion. Because the Fund is new, the Fund
did not pay advisory fees for the fiscal year ended December 31, 1996.
Summit Bank has also entered into a custodian agreement with the Trust, under
which it provides all securities safekeeping services as required by the Fund
and the Investment Company Act of 1940, as amended (the "1940 Act"). The
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Trust pays Summit Bank (referred to herein in its custodial capacity as the
"Custodian") a custodian fee, which is calculated daily and paid monthly, at an
annual rate of .025% of the average daily net assets of the Fund.
THE ADMINISTRATOR
SEI Fund Resources (the "Administrator") serves as the Administrator of the
Trust. The Administrator provides the Trust with administrative services, other
than investment advisory services, including all regulatory reporting, necessary
office space, equipment, personnel and facilities.
The Administrator is entitled to a fee, which is calculated daily and paid
monthly, at an annual rate of .10% of the average daily net assets of the Fund.
THE TRANSFER AGENT
State Street Bank and Trust Company (the "Transfer Agent"), 225 Franklin St.,
Boston, Massachusetts 02110 is the Trust's transfer agent.
THE SHAREHOLDER SERVICING AGENT
Boston Financial Data Services, 2 Heritage Drive, North Quincy, Massachusetts,
02171 is the Trust's dividend disbursing agent and shareholder servicing agent.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Corporation, acts as the distributor of the Trust's shares. No
compensation is paid to the Distributor for distribution services for shares of
the Fund. Shares of the Fund are offered without distribution fees to: (i) cash
sweep customers of Summit Bank; (ii) any individual or institution (including
Summit Bank, its affiliates and correspondent banks), for the investment of
funds held by such individual or institution in a fiduciary, agency, custodial
or other representative capacity; and (iii) any Qualified Customers.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are sold on a continuous basis and may be purchased on any
day that both the New York Stock Exchange is open for trading and the Federal
Reserve Bank is open (a "Business Day"). Generally, (i) an investor in the
shares of the Fund must pay for shares by federal funds and (ii) checks
(including third party and credit card checks), credit cards and cash will not
be accepted for payment of shares of the Fund. Cash Sweep Shareholders should
consult their cash sweep agreement for more information on purchases and
redemptions.
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A purchase or redemption order for shares of the Fund will be executed at a per
share price equal to the net asset value next determined after the appropriate
order is effective.
The net asset value per share of the Fund is determined by dividing the total
value of the Fund's investments and other assets that are allocated to its
shares, less any liabilities that are allocated to its shares, by the Fund's
total outstanding shares. The net asset value per share for the Fund is
calculated as of 12:00 noon, Eastern time, each Business Day based on the
amortized cost method as described under "Determination of Net Asset Value" in
the Statement of Additional Information. The purchase and redemption prices for
the Fund are expected to remain constant at $1.00 per share.
No certificates representing shares will be issued.
Neither the Trust nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for acting upon instructions that it reasonably
believes to be genuine. The Trust and the Transfer Agent will each employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If market conditions are extraordinarily active, or other extraordinary
circumstances exist, Shareholders who experience difficulties placing redemption
orders by telephone may wish to consider placing the redemption order by other
means.
The Trust reserves the right to reject a purchase order when the Distributor
determines that it is not in the best interest of the Trust, the Fund or its
Shareholders to accept such order.
A purchase order for the Fund will be effective as of the Business Day received
by the Distributor if the Distributor receives the order and payment in federal
funds before 12:00 noon, Eastern time. All other purchase orders will be
effective on the next Business Day. Purchased shares begin earning dividends on
the Business Day the purchase order for those shares is effective. Financial
institutions may impose an earlier cut-off time for receipt of purchase orders
directed through them to allow time for processing and transmittal of these
orders to the Distributor for effectiveness the same day.
For redemption orders received before 12:00 noon, Eastern time, payment will
normally be made the same day by the transfer of federal funds. Otherwise,
payment will be made on the next Business Day and, in any event, within seven
Business Days after the redemption order is effective. Redeemed shares are not
entitled to dividends declared the day the redemption order is effective.
The Fund intends to pay cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, payment may be made wholly or
partially in portfolio securities with a market value equal to the redemption
price. In such cases, an investor may incur brokerage costs in converting such
securities to cash.
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Minimum Investment and Account Sizes and Preauthorized Exchanges of Shares
For a Fund account, the minimum initial investment and minimum account sizes are
$5,000,000. If a Shareholder has multiple accounts in the Fund, the Trust will
aggregate the amounts held in those accounts when calculating the minimum
account requirements.
The Trust will automatically exchange a Shareholder's shares in the Fund for
Class I Shares of the Trust's Prime Obligation Money Market Fund if the value of
his or her Fund account(s) falls below $5,000,000 because of Shareholder
redemption(s). In such a case, the Fund will notify the Shareholder, and if the
account value remains below $5,000,000 for a continuous 30-day period, the
shares in such account(s) will be subject to automatic exchange by the Fund for
Class I shares of the Trust's Prime Obligation Money Market Fund. Shareholders
will receive a current prospectus of the Class I Shares of the Prime Obligation
Money Market Fund in connection with such an exchange.
The Fund reserves the right to modify or terminate the preauthorized exchange
feature of the shares as stated above at any time upon 60 days' notice to
Shareholders. The foregoing initial investment and account balance minimums and
preauthorized exchange feature do not apply to the Summit Bancorp Savings
Incentive Plan. Additionally, the Fund reserves the right to waive the initial
investment and account balance minimums and preauthorized exchange feature in
its sole discretion.
PERFORMANCE
Computation of Yield
From time to time the Fund may advertise "current yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "current yield" of the Fund refers to the
income generated by an investment in the Fund 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 "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
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TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action. No attempt has been made to present a detailed
explanation of the federal, state or local income tax treatment of the Fund or
its Shareholders. Accordingly, Shareholders are urged to consult their tax
advisors regarding specific questions as to federal, state and local income
taxes.
Tax Status of the Fund
The Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other investment portfolios. The Fund intends to
continue to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so as to be relieved of federal income tax on that part of its net
investment income and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) which is distributed to Shareholders.
Tax Status of Distributions
The Fund will distribute substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to Shareholders.
Dividends from net investment income will be taxable to Shareholders as ordinary
income whether received in cash or in additional shares and will not qualify for
the dividends-received deduction otherwise available to corporate shareholders.
Any dividends from net capital gain (the excess of net long-term capital gain
over net short-term capital loss) will be distributed annually and will be
treated as long-term capital gains regardless of how long the Shareholder has
held shares. Capital gains distributions also will not qualify for the
dividends-received deduction. The Fund will make annual reports to Shareholders
of the federal income tax status of all distributions.
Interest received on direct U.S. Government obligations that is exempt from tax
at the state level when received directly may be exempt, depending on the state,
when received by a Shareholder from the Fund, provided certain conditions are
satisfied. Interest received on repurchase agreements normally is not exempt
from state taxation. The Fund annually will inform Shareholders of the
percentage of income and distributions derived from direct U.S. Government
obligations. Shareholders should consult their tax advisors to determine whether
any portion of the income dividends received from the Fund is considered
tax-exempt in their particular states.
Certain securities purchased by the Fund (such as STRIPs, TRs, TIGRs and CATs,
defined under "Description of Permitted Investments"), are sold at original
issue discount and thus generally do not make periodic cash interest payments.
The Fund will be required to include as part of its current income the accreted
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because the Fund distributes
all of its net investment income to its Shareholders, the Fund may have to sell
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portfolio securities to distribute such imputed income which may occur at a time
when the Advisor would not have chosen to sell such securities and which may
result in a taxable gain or loss.
Dividends declared by the Fund in October, November or December of any year and
payable to Shareholders of record on a date in these months will be deemed to
have been paid by the Fund and received by the Shareholders on December 31 if
paid by the Fund at any time during the following January.
The Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax.
The sale, exchange or redemption of Fund shares is a taxable event to the
Shareholder.
Generally, gain or loss on the sale, exchange or redemption of a share will be
capital gain or loss which will be long-term if the share has been held for more
than one year and otherwise will be short-term. However, if a Shareholder
realizes a loss on the sale, exchange or redemption of a share held for six
months or less and has previously received a capital gains distribution with
respect to the share (or any undistributed capital gains of the Fund with
respect to such share are included in determining the Shareholder's long-term
capital gains), the Shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund which have been included in
determining such Shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the shares). Investors should
particularly note that this loss disallowance rule will apply to shares received
through the reinvestment of dividends during the 61-day period.
GENERAL INFORMATION
The Trust
The Trust was organized as a Massachusetts business trust under a Declaration of
Trust dated September 9, 1991. The Declaration of Trust permits the Trust to
offer separate portfolios of shares and different classes of each portfolio. In
addition to the Fund, the Trust currently consists of the U.S. Treasury
Securities Plus Money Market Fund, U.S. Treasury Securities Money Market Fund,
Prime Obligation Money Market Fund, Tax-Exempt Money Market Fund, Short-Term
Investment Fund, GNMA Fund, Fixed Income Fund, New Jersey Municipal Securities
Fund, Pennsylvania Municipal Securities Fund, Intermediate-Term Government
Securities Fund, Equity Growth Fund, Equity Value Fund, Equity Income Fund, Mid
Cap Fund, Balanced Fund and International Growth Fund. All consideration
received by the Trust for
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shares of any portfolio and all assets of such portfolio belong to that
portfolio and would be subject to liabilities related thereto.
The Fund pays its expenses, including fees of its service providers, audit and
legal expenses, expenses of preparing prospectuses, proxy solicitation material
and reports to Shareholders, costs of custodial services, registering the shares
under federal laws and filing with state securities commissions, pricing,
insurance expenses, litigation and other extraordinary expenses, brokerage
costs, interest charges, taxes and organization expenses.
Trustees of the Trust
The management and affairs of the Trust are supervised by the Trustees under the
laws governing business trusts in the Commonwealth of Massachusetts. The
Trustees have approved contracts under which, as described above, certain
companies provide essential management services to the Trust.
Voting Rights
Each share held entitles a Shareholder of record to one vote. The Shareholders
of each portfolio or class will vote separately on matters relating solely to
that portfolio or class. As a Massachusetts business trust, the Trust is not
required to hold annual meetings of Shareholders, but approval will be sought
for certain changes in the operation of the Trust and for the election of
Trustees under certain circumstances. In addition, a Trustee may be removed by
the remaining Trustees or by Shareholders at a special meeting called upon
written request of Shareholders owning at least 10% of the outstanding shares of
the Trust. In the event that such a meeting is requested the Trust will provide
appropriate assistance and information to the Shareholders requesting the
meeting.
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Reporting
The Trust issues unaudited financial information semi-annually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to Shareholders of record.
Shareholder Inquiries
Shareholder inquiries should be directed to The Pillar Funds, P.O. Box 8523,
Boston, MA 02266-8523.
Dividends
The net investment income (exclusive of capital gains) of the Fund is determined
and declared on each Business Day as a dividend to Shareholders of record as of
the close of business on that day. Dividends are paid by the Fund on or about
the first Business Day of the following month. Redeemed shares are not entitled
to dividends declared the day the redemption order is effective.
Counsel and Independent Public Accountants
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of certain permitted investments and associated
risk factors for the Fund:
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BANKERS' ACCEPTANCES--Bankers' acceptances are bills of exchange or time drafts
drawn on and accepted by a commercial bank. They are used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT--Certificates of deposit are interest-bearing
instruments with a specific maturity. They are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. Certificates of deposit with
penalties for early withdrawal will be considered illiquid.
COMMERCIAL PAPER--Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from a few to 270 days.
ILLIQUID SECURITIES--Illiquid securities are securities that cannot be disposed
of within seven business days at approximately the price at which they are being
carried on a Fund's books. Not more than 10% of the net assets of a Fund will be
invested in such instruments. An illiquid security includes a demand instrument
with a demand notice period exceeding seven days, if there is no secondary
market for such security. Restricted securities, including Rule 144A securities,
that meet the criteria established by the Trustees of the Trust will be
considered liquid.
INVESTMENT COMPANIES--The Fund may invest up to 10% of its total assets in
shares of other investment companies. The Fund does not intend to invest in
other investment companies unless, in the judgment of the Advisor, the potential
benefits of such investment exceed the associated costs relative to the benefits
and costs associated with direct investments in the underlying securities. As a
shareholder in an investment company, the Fund would bear its ratable share of
that investment company's expenses, including its advisory and administration
fees.
REPURCHASE AGREEMENTS--Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price on an agreed upon date within a number of days
from the date of purchase. The Fund will have actual or constructive possession
of the security as collateral for the repurchase agreement. A Fund bears a risk
of loss in the event the other party defaults on its obligations and the Fund is
delayed or prevented from its right to dispose of the collateral securities or
if
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the Fund realizes a loss on the sale of the collateral securities. A Fund will
enter into repurchase agreements only with financial institutions deemed to
present minimal risk of bankruptcy during the term of the agreement based on
established guidelines. Repurchase agreements are considered loans under the
1940 Act.
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS--Investments by a money market
fund are subject to limitations imposed under regulations adopted by the SEC.
Under these regulations, money market funds may only acquire obligations that
present minimal credit risks and that are "eligible securities," which means
they are (i) rated, at the time of investment, by at least two NRSROs (one if it
is the only organization rating such obligation) in the highest short-term
rating category or, if unrated, determined to be of comparable quality (a "first
tier security"), or (ii) rated according to the foregoing criteria in the second
highest short-term rating category or, if unrated, determined to be of
comparable quality ("second tier security"). A security is not considered to be
unrated if its issuer has outstanding obligations of comparable priority and
security that have a short-term rating. The Advisor will determine that an
obligation presents minimal credit risks or that unrated instruments are of
comparable quality in accordance with guidelines established by the Trustees. In
the case of taxable money market funds, investments in second tier securities
are subject to the further constraint that (i) no more than 5% of the Fund's
assets may be invested in such securities in the aggregate, and (ii) any
investments in such securities of one issuer is limited to the greater of 1% of
a Fund's total assets or $1 million.
SECURITIES LENDING--In order to generate additional income, the Fund may lend
securities which it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash, securities of the U.S.
Government or its agencies equal to at least 102% of the market value of the
securities lent. The Fund continues to receive interest on the securities lent
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent. The Fund pays lending and
other fees in connection with securities loans.
STANDBY COMMITMENTS AND PUTS--Securities subject to standby commitments or
puts permit the holder thereof to sell the securities at a fixed price prior to
maturity. Securities subject to a standby commitment or put may be sold at any
time at the current market price. However, unless the standby commitment or put
was an integral part of the security as originally issued, it may not be
marketable or assignable; therefore, the standby commitment or put would only
have value to the Fund owning the security to which it relates. In certain
cases, a premium may be paid for a standby commitment or put, which premium will
have the effect
17
<PAGE>
of reducing the yield otherwise payable on the underlying security. The Fund
will limit standby commitment or put transactions to institutions believed to
present minimal credit risk.
TIME DEPOSITS--Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits maturing in more than seven days
are considered to be illiquid securities.
U.S. GOVERNMENT AGENCIES--Obligations issued or guaranteed by agencies of the
U.S. Government, including, among others, the Federal Farm Credit Bank, the
Federal Housing Administration and the Small Business Administration, and
obligations issued or guaranteed by instrumentalities of the U.S. Government,
including, among others, the Federal Home Loan Mortgage Corporation, the Federal
Land Banks and the U.S. Postal Service. Some of these securities are supported
by the full faith and credit of the U.S. Treasury (e.g., Government National
Mortgage Association), others are supported by the right of the issuer to borrow
from the Treasury (e.g., Federal Farm Credit Bank), while still others are
supported only by the credit of the instrumentality (e.g., Federal National
Mortgage Association). Guarantees of principal by agencies or instrumentalities
of the U.S. Government may be a guarantee of payment at the maturity of the
obligation so that in the event of a default prior to maturity there might not
be a market and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of these securities nor to the value of a Fund's shares.
U.S. TREASURY OBLIGATIONS--U.S. Treasury obligations consist of bills, notes and
bonds issued by the U.S. Treasury and separately traded interest and principal
component parts of such obligations that are transferable through the federal
book-entry system known as Separately Traded Registered Interest and Principal
Securities ("STRIPS").
VARIABLE AND FLOATING RATE INSTRUMENTS--Certain obligations may carry
variable or floating rates of interest, and may involve a conditional or
unconditional demand feature. Such instruments bear interest at rates which are
not fixed, but which vary with changes in specified market rates or indices. The
interest rates on these securities may be reset daily, weekly, quarterly or some
other reset period, and may have a floor or ceiling on interest rate changes.
There is a risk that the current interest rate on such obligations may not
accurately reflect existing market interest rates. A demand instrument with a
demand notice exceeding seven days may be considered illiquid if there is no
secondary market for such security.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES--When-issued or delayed
delivery basis transactions involve the purchase of an instrument with payment
and delivery taking place in the future. Delivery of and payment for these
securities may occur a month or more after the date of the purchase commitment.
The Fund will maintain with the Custodian a
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<PAGE>
separate account with liquid assets or cash in an amount at least equal to these
commitments.
The interest rate realized, if any, on these securities is fixed as of the
purchase date and no interest accrues to the Fund before settlement. These
securities may be subject to market fluctuation due to changes in market
interest rates and it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. Although the Fund generally purchases securities
on a when-issued or forward commitment basis with the intention of actually
acquiring securities, the Fund may dispose of a when-issued security or forward
commitment prior to settlement if it deems such action appropriate.
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TABLE OF CONTENTS Page No.
- -------------------------------------------------------------------------------
Summary.......................................................................2
Expense Summary...............................................................3
The Trust.....................................................................4
Investment Objective and Policies ............................................4
Investment Limitations........................................................5
The Advisor...................................................................5
The Administrator.............................................................6
The Transfer Agent............................................................6
The Shareholder Servicing Agent...............................................6
The Distributor ..............................................................6
Purchase and Redemption of Shares.............................................7
Performance.................................................................. 8
Taxes........................................................................ 9
General Information..........................................................10
Description of Permitted Investments.........................................12
The Pillar Funds is a registered service mark of Summit Bank. Your Investment
Foundation, Pillar and the stylized "P" logo are service marks of Summit Bank.
Reach Higher, Summit and Summit Bancorp are registered service marks of Summit
Bancorp. Summit Bank is a service mark of Summit Bancorp.
20
<PAGE>
ADVISOR:
[ SUMMIT BANK LOGO ]
DISTRIBUTOR:
SEI INVESTMENTS DISTRIBUTION CO.
----------------
Oaks, Pennsylvania 19456
1-800-932-7782
PIL-F-028-01
[ LOGO ]
THE PILLAR
FUNDS
YOUR INVESTMENT FOUNDATION
Institutional Select Money Market Fund
Prospectus June 30, 1997
21
<PAGE>
THE PILLAR FUNDS
Investment Advisor:
Summit Bank Investment Management Division,
a division of Summit Bank
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of The
Pillar Funds (the "Trust") and should be read in conjunction with the Trust's
Prospectuses dated April 30, 1997 for the following: U.S. Treasury Securities
Plus Money Market, U.S. Treasury Securities Money Market, Prime Obligation Money
Market, Tax-Exempt Money Market, Fixed Income, New Jersey Municipal Securities,
Pennsylvania Municipal Securities, Intermediate-Term Government Securities,
Equity Growth, Equity Value, Equity Income, Mid Cap, International Growth,
Balanced, GNMA and Short-Term Investment Funds; and the Trust's Prospectus dated
June 30, 1997 for the Institutional Select Money Market Fund. Prospectuses may
be obtained through the Distributor, SEI Investments Distribution Co., Oaks, PA
19456, or by calling 1-800-932-7782.
TABLE OF CONTENTS
Investment Objectives and Policies..........................................S- 3
Description of Permitted Investments...............................S- 3
Investment Limitations.............................................S-33
Management of the Trust............................................S-35
Trustees and Officers of the Trust.................................S-35
The Advisor........................................................S-38
The Sub-Advisor....................................................S-40
The Administrator..................................................S-40
Fund Transactions...........................................................S-42
General............................................................S-42
Trading Practices and Brokerage....................................S-42
The Distributor and the Distribution Plans..................................S-47
Performance.................................................................S-50
Computation of Yield...............................................S-50
Calculation of Total Return........................................S-53
Purchase and Redemption of Shares...........................................S-55
Shareholder Services........................................................S-56
Determination of Net Asset Value............................................S-56
General Information and History.............................................S-58
The Trust..........................................................S-58
Description of Shares..............................................S-59
Shareholder Liability..............................................S-64
Limitation of Trustees' Liability..................................S-64
Taxes.......................................................................S-65
Federal Taxes......................................................S-65
State Taxes........................................................S-68
Experts.....................................................................S-68
Financial Statements........................................................S-68
Appendix....................................................................A- 1
Description of Ratings ............................................A- 1
April 30, 1997, as supplemented June 30, 1997
PIL-F-027-01
<PAGE>
The Pillar Funds is a registered service mark of Summit Bank. Your Investment
Foundation, Pillar and the stylized "P" logo are service marks of Summit Bank.
Reach Higher, Summit and Summit Bancorp are registered service marks of Summit
Bancorp. Summit Bank is a service mark of Summit Bancorp.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
DESCRIPTION OF PERMITTED INVESTMENTS
Asset Backed Securities. The Short-Term Investment, Fixed Income, Equity Growth
and Balanced Funds may invest in asset-backed securities including company
receivables, truck and auto loans, leases, and credit card receivables. These
securities, like mortgage-backed securities, represent ownership of a pool of
obligations. The payment of principal and interest on non-mortgage asset-backed
securities may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution (such as a bank or
insurance company) unaffiliated with the issuers of such securities. In
addition, these issues typically have a short to intermediate maturity structure
depending on the paydown characteristics of the underlying financial assets that
are passed through to the security holder. The purchase of non-mortgage
asset-backed securities raises risk considerations peculiar to the financing of
the instruments underlying such securities. For example, due to the manner in
which the issuing organizations may perfect their interests in their respective
obligations, there is a risk that another party could acquire an interest in the
obligations superior to that of the holders of the asset-backed securities.
Also, in most states the security interest in a motor vehicle must be noted on
the certificate of title to perfect a security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, the possibility exists that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owned on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the card holder. Asset-backed securities entail prepayment risk, which may
vary depending on the type of asset but is generally less than the prepayment
risk associated with mortgage-backed securities.
The development of non-mortgage asset-backed securities is at an earlier stage
than that of mortgage-backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for non-mortgage
asset-backed securities is not as well developed as that for mortgage-backed
securities guaranteed by government agencies or
S - 3
<PAGE>
instrumentalities. The Advisor intends to limit purchases of non-mortgage
asset-backed securities to a securities that are readily marketable at the time
or purchase.
Foreign Securities. The Short-Term Investment, Fixed Income, Equity Growth and
International Growth Funds may invest in the securities of foreign issuers. In
addition, the Equity Growth (formerly, Growth), Equity Value, Equity Income, Mid
Cap (formerly, Mid Cap Value), Balanced (formerly, Balanced Growth) and
International Growth Funds may invest in American Depositary Receipts, American
Depositary Shares and New York Shares, and each reserves the right to invest up
to 25% of its assets in foreign equity securities denominated in foreign
currencies, except for the International Growth Fund which will invest at least
65% of its assets in foreign equity securities. The Equity Growth and
International Growth Funds may also invest in European Depositary Receipts,
Continental Depositary Receipts and Global Depositary Receipts. These
instruments may subject the Funds to investment risks that differ in some
respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization, or expropriation of foreign deposits, the
possible establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in currency exchange rates, or the adoption
of other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may also
entail higher custodial fees and sales commission than domestic investments.
Foreign issuers of securities or obligations are often subject to accounting
treatment and engage in business practices different from those respecting
domestic issuers of similar securities or obligations. Foreign branches of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than those applicable to domestic branches of U.S. banks. In addition, foreign
markets may be characterized by lower liquidity, greater price volatility, less
regulation and higher transaction costs than U.S. markets.
Forward Foreign Currency Contracts. The International Growth Fund may invest in
forward foreign currency contracts. Forward foreign currency contracts involve
an obligation to purchase or sell a specified currency at a future date at a
price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow
the Fund to establish a rate of exchange for a future point in time.
When entering into a contract for the purchase or sale of a security in a
foreign currency, the Fund may enter into a foreign forward currency contract
for the amount of the purchase or sale price to protect against variations,
between the date the security is purchased or sold and the date on which payment
is made or received, in the value of the foreign currency relative to the United
States dollar or other foreign currency.
S - 4
<PAGE>
Also, when the Sub-Advisor anticipates that a particular foreign currency may
decline substantially relative to the United States dollar or other leading
currencies, in order to reduce risk, the Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of its securities denominated in such foreign currency. With respect to
any such forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to changes in the values of such securities resulting
from market movements between the date the forward contract is entered into and
the date it matures. In addition, while forward currency contracts may offer
protection from losses resulting from declines in value of a particular foreign
currency, they also limit potential gains which might result from increases in
the value of such currency. The Fund will also incur costs in connection with
forward foreign currency contracts and conversions of foreign currencies into
U.S. dollars.
Lower Rated Securities. The Equity Growth and International Growth Funds may
invest in lower-rated bonds commonly referred to as "junk bonds" or
high-yield/high-risk securities. These securities are rated "Ba" or lower by
Moody's Investors Service, Inc. ("Moody's") or "BB" or lower by Standard &
Poor's Ratings Group ("S&P"), Fitch Investors Services, Inc. ("Fitch"), Duff &
Phelps, Inc. ("Duff"), IBCA Limited ("IBCA") and Thomson BankWatch ("Thomson").
These ratings indicate that the obligations are speculative and may be in
default. See the Appendix for a description of the foregoing agencies' ratings.
In addition, the Funds may invest in unrated securities subject to the
restrictions stated in the Prospectus.
Certain Risk Factors Relating to High-Yield, High-Risk Securities. The
descriptions below are intended to supplement the discussion in the Prospectus
under "Risk Factors."
Growth of High-Yield Bond, High-Risk Bond Market. The widespread
expansion of government, consumer and corporate debt within the U.S. economy has
made the corporate sector more vulnerable to economic downturns or increased
interest rates. Further, an economic downturn could severely disrupt the market
for lower rated bonds and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest.
Sensitivity to Interest Rate and Economic Changes. Lower rated bonds
are very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay interest
or principal or entered into bankruptcy proceedings, a Fund may incur losses or
expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and change can be expected to result
S - 5
<PAGE>
in increased volatility of market prices of high-yield, high-risk bonds and a
Fund's net asset value.
Payment Expectations. High-yield, high-risk bonds may contain
redemption or call provisions. If an issuer exercised these provisions in a
declining interest rate market, a Fund would likely have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Conversely, a high-yield, high-risk bond's value will decrease in a rising
interest rate market, as will the value of the Fund's assets. If a Fund
experiences significant unexpected net redemptions, this may force it to sell
high-yield, high-risk bonds without regard to their investment merits, thereby
decreasing the asset base upon which expenses can be spread and possibly
reducing the Fund's rate of return.
Liquidity and Valuation. There may be little trading in the secondary
market for particular bonds, which may adversely affect a Fund's ability to
value accurately or dispose of such bonds. Adverse publicity and investor
perception, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
Legislation. Federal laws require the divestiture by federally insured
savings and loan associations of their investments in lower rated bonds and
limit the deductibility of interest by certain corporate issuers of high yield
bonds. These laws could adversely affect a Fund's net asset value and investment
practices, the secondary market for high-yield securities, the financial
condition of issuers of these securities and the value of outstanding high-yield
securities.
Taxes. The Funds may purchase debt securities (such as zero-coupon or
pay-in-kind securities) that contain original issue discount. Original issue
discount that accrues in a taxable year is treated as earned by a Fund and
therefore is subject to the distribution requirements of the Internal Revenue
Code of 1986, as amended (the "Code"). Because the original issue discount
earned by a Fund in a taxable year may not be represented by cash income, the
Funds may have to dispose of other securities and use the proceeds to make
distributions to Shareholders.
Illiquid Securities. An illiquid security is a security which cannot be disposed
of within seven days in the usual course of business at approximately the price
at which it is being carried on a Fund's books, and includes repurchase
agreements maturing in more than seven days, time deposits with a withdrawal
penalty, non-negotiable instruments and instruments for which no market exists.
Mortgage-Backed Securities. Each of the Funds except the U.S. Treasury
Securities Money Market and U.S. Treasury Securities Plus Money Market Funds may
invest in mortgage-
S - 6
<PAGE>
backed securities issued or guaranteed by U.S. Government agencies or
instrumentalities such as the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). The GNMA Fund may invest in securities issued
and guaranteed by Federal Home Loan Banks. In addition, the Short-Term
Investment and Fixed Income Funds may invest in privately issued mortgage-backed
securities. Obligations of GNMA are backed by the full faith and credit of the
U.S. Government. Obligations of FNMA, FHLMC and Federal Home Loan Banks are not
backed by the full faith and credit of the U.S. Government but are considered to
be of high quality since they are considered to be instrumentalities of the
United States. The market value and interest yield of these mortgage-backed
securities can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages. These securities represent ownership in a
pool of federally insured mortgage loans with a maximum maturity of 30 years.
However, due to scheduled and unscheduled principal payments on the underlying
loans, these securities have a shorter average maturity and, therefore, less
principal volatility than a comparable 30-year bond. Since prepayment rates vary
widely, it is not possible to predict accurately the average maturity of a
particular mortgage-backed security. The scheduled monthly interest and
principal payments relating to mortgages in the pool will be "passed through" to
investors. Government mortgage-backed securities differ from conventional bonds
in that principal is paid back to the certificate holders over the life of the
loan rather than at maturity. As a result, there will be monthly scheduled
payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although these securities may offer yields higher than those available from
other types of U.S. Government securities, mortgage-backed securities may be
less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment feature. For instance, when
interest rates decline, the value of these securities likely will not rise as
much as comparable debt securities due to the prepayment feature. In addition,
these prepayments can cause the price of a mortgage-backed security originally
purchased at a premium to decline in price to its par value, which may result in
a loss.
CMOs. The Short-Term Investment, Fixed Income and Balanced Funds may also invest
in mortgage-backed securities issued by non-governmental entities. The
mortgage-backed securities these Funds may purchase are collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs")
that are rated in one of the two top categories by S&P or Moody's and which are
backed solely by GNMA certificates or other mortgage pass-throughs issued or
guaranteed by the U.S. Government or its agencies and instrumentalities. CMOs
are securities collateralized by mortgages, mortgage pass-throughs, mortgage
"pay-through" bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and "mortgage-backed" bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached
S - 7
<PAGE>
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. Government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed by U.S.
Government agencies or instrumentalities.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Advisor believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine the average maturity of a Fund, the Advisor will use an estimate of
the average life of a mortgage-backed security. An average life estimate is a
function of an assumption regarding anticipated prepayment patterns. The
assumption is based upon current interest rates, current conditions in the
relevant housing markets and other factors. The assumption is necessarily
subjective, and thus different market participants could produce somewhat
different average life estimates with regard to the same security. There can be
no assurance that the average life as estimated by the Advisor will be the
actual average life.
Municipal Securities. The Tax-Exempt Money Market, New Jersey Municipal
Securities and Pennsylvania Municipal Securities Funds may invest in the
following:
Municipal notes consist of general obligation notes, tax anticipation notes
(notes sold to finance working capital needs of the issuer in anticipation of
receiving taxes on a future date), revenue anticipation notes (notes sold to
provide needed cash prior to receipt of expected non-tax revenues from a
specific source), bond anticipation notes, certificates of indebtedness, demand
notes and construction loan notes.
S - 8
<PAGE>
Municipal bonds consist of general obligation bonds, revenue or special
obligation bonds and private activity bonds, the interest paid on which is
excludable from federal income tax. Private activity bonds are issued by or on
behalf of states or political subdivisions thereof to finance privately-owned or
operated facilities for business and manufacturing, housing, sports, and
pollution control and to finance activities of and facilities for charitable
institutions. Private activity bonds are also used to finance public facilities
such as airports, mass transit systems, ports, parking and low-income housing.
The payment of the principal and interest on private activity bonds is not
backed by a pledge of tax revenues and is dependent solely on the ability of the
facility's operator to meet its financial obligations and may be secured by a
pledge of real and personal property so financed.
The Funds may also purchase variable and floating rate demand notes and
synthetic variable rate demand notes. Investments in such floating rate
instruments will normally involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate) at a major commercial bank, and
that the Fund involved can demand payment of the obligation at all times or at
stipulated dates on short notice (not to exceed 30 days) at par plus accrued
interest. Such obligations are frequently secured by letters of credit or other
credit support arrangements provided by banks. The Advisor will monitor the
earning power, cash flow and liquidity ratios of the issuers of such instruments
and the ability of an issuer of a demand instrument to pay principal and
interest on demand. The Funds may also purchase participation interests in
municipal securities (such as industrial development bonds and municipal
lease/purchase agreements). A participation interest gives the Fund an undivided
interest in the underlying municipal security. If it is unrated, the
participation interest will be backed by an irrevocable letter of credit or
guarantee of a creditworthy financial institution or the payment obligation
otherwise will be collateralized by U.S. Government securities. Participation
interests may have fixed, variable or floating rates of interest and may include
a demand feature. A participation interest without a demand feature or a
participation interest or demand note with a demand feature exceeding seven days
may be deemed to be an illiquid security subject to each Fund's investment
limitations restricting its purchases of illiquid securities to not more than
15% (10% with respect to the Tax-Exempt Money Market Fund) of its total assets.
The Advisor may purchase other types of tax-exempt instruments as long as they
are of a quality equivalent to the bond or commercial paper ratings applicable
to each Fund and satisfy other applicable requirements.
New Jersey Municipal Securities and Special Considerations Relating Thereto. The
concentration of investments in New Jersey Municipal Securities by the New
Jersey Municipal Securities Fund raises special investment considerations. In
particular, changes in the economic condition and governmental policies of the
State of New Jersey or its municipalities could adversely affect the value of
this Fund and the securities held by it.
S - 9
<PAGE>
The following information is based on official statements relating to
securities offerings of the State of New Jersey (the "State") and various local
agencies that have come to the Fund's attention and available as of the date of
this Statement of Additional Information. The New Jersey Municipal Securities
Fund has not independently verified any of the information contained in the
official statement but is not aware of any fact which would render such
information inaccurate.
General. New Jersey is located at the center of the Middle Atlantic
region which extends from Boston to Washington, D.C., and which includes over
one-fifth of the country's population. The extensive facilities of the Port
Authority of New York and New Jersey, the Delaware River Port Authority and the
South Jersey Port Corporation across the Delaware River from Philadelphia
augment the air, land and water transportation complex which has influenced much
of the State's economy. This central location in the northeastern corridor, the
transportation and port facilities and proximity to New York City make the State
an attractive location for corporate headquarters and international business
offices. A number of Fortune Magazine's top 500 companies maintain headquarters
or major facilities in New Jersey, and many foreign-owned firms have located
facilities in the State.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey has the Atlantic sea-shore on
the east and lakes and mountains in the north and northwest, which provide
recreation for residents as well as for out-of-state visitors. In 1976, voters
approved casino gambling for Atlantic City, which has become an important State
tourist attraction.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. It is the most densely populated state in the United
States with an average of 1,062 persons per square mile. New Jersey's population
grew rapidly in the years following World War II, before slowing to an annual
rate of .27% in the 1970's. Between 1980 and 1990, the annual growth rate was
.49% and between 1990 and 1994 accelerated to .52%. While this rate of growth is
less than that for the United States, it compares favorably with other Middle
Atlantic States.
After enjoying an extraordinary boom during the mid-1980's, New Jersey,
as well as the rest of the Northeast, slipped into a slowdown well before the
onset of the national recession, which began in July 1990. By the beginning of
the national recession, construction activity had already been declining in New
Jersey for nearly two years. The onset of recession caused an acceleration of
New Jersey's job losses in construction and manufacturing, as well as an
employment downturn in such previously growing sectors as wholesale trade,
retail trade, finance, utilities and trucking and warehousing.
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Reflecting the downturn, the rate of unemployment in the State rose
from a peacetime low of 3.6% during the first quarter of 1989 to a recessionary
peak of 8.4% during 1992. Since then, the unemployment rate fell to an average
of 6.4% during the first ten months of 1995. The average annualized unemployment
rate remained at 6.4% for the fourth quarter of 1995.
Financial Accounting. The State prepares its financial statements on a
"modified accrual" basis utilizing the fund method of accounting. Accordingly,
the State prepares separate statements for the General Fund, Special Revenue
Funds, Debt Service Funds, Capital Project Funds, Trust and Agency Funds,
Component Units-Authorities Funds, College and University Funds, General Fixed
Asset Account Group and its General Long-Term Debt Account Group and its
component units.
The General Fund is the fund into which all State revenues not
otherwise restricted by statute are deposited and from which appropriations are
made. The largest part of the total financial operations of the State is
accounted for in the General Fund. Revenues received from taxes and unrestricted
by statute, most federal revenue and certain miscellaneous revenue items are
recorded in the General Fund. The appropriations act provides the basic
framework for the operation of the General Fund.
Special Revenue Funds are used to account for resources legally
restricted to expenditure for specified purposes. Special Revenue Funds include
the Casino Control Fund, the Casino Revenue Fund, the Gubernatorial Elections
Fund and the Property Tax Relief Fund. Other Special Revenue Funds have been
created which are either reported ultimately in the General Fund or are created
to hold revenues derived from private sources.
Debt Service Funds are used to account for the accumulation of
resources for, and the payment of, principal and redemption premium, if any, of,
and interest on, general obligation bonds. Capital Project Funds are used to
account for financial resources to be used for the acquisition or construction
of major State capital facilities. Trust and Agency Funds are used to account
for assets held in a trust capacity or as an agent for individuals, private
organizations, other governments and/or other funds. The General Fixed Asset
Account Group accounts for the State's fixed assets acquired or constructed for
general governmental purposes. The General Long-Term Debt Account Group accounts
for the unmatured general long-term liabilities of the State.
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Component Unit-Authorities account for operations where the intent of
the State is that the cost of providing goods or services to the general public
on a continuing basis be financed or recovered primarily through user charges,
or where periodic measurement of the results of operations is appropriate for
capital maintenance, public policy, management control or accountability. The
College and University Funds account for the operations of Rutgers, the State
University, the University of Medicine and Dentistry of New Jersey, the New
Jersey Institute of Technology, and the nine State colleges including their
foundations and associations, in accordance with existing authoritative
accounting and reporting principles applicable to universities and hospitals.
The State operates on a fiscal year beginning July 1 and ending June
30. The State Constitution provides that all monies for the support of State
government and all other State purposes, as far as can be ascertained or
reasonably foreseen, must be provided for in one general appropriation law
covering the same fiscal year. No general appropriations law or other law
appropriating money for any State purpose can be enacted if the amount of money
appropriated therein, together with all other prior appropriations made for the
same fiscal year, exceeds the total amount of revenue on hand and anticipated to
be available for such fiscal year, as certified by the Governor.
During the course of the fiscal year, the Governor may take steps to
reduce State expenditures if it appears that revenues have fallen below those
originally anticipated. There are additional means by which the Governor may
ensure that the State does not incur a deficit. No supplemental appropriation
may be enacted after adoption of an appropriations act except where there are
sufficient revenues on hand or anticipated, as certified by the Governor, to
meet such appropriation.
Financial Results and Projections.
Revenues. Estimated receipts from State taxes and revenues are
forecasts based on the best information available at the time of such forecasts.
The principal taxes in New Jersey are the Sales and Use Tax, the Gross Income
Tax, and the Corporation Business Tax. The fiscal year 1996 Appropriation Act
forecasts Sales and Use Tax collections of $4,356 million, a 5.5% increase over
receipts estimated for fiscal year 1995; Gross Income Tax collections of $4,580
million, a 9.0% increase over receipts estimated in the revised estimates for
fiscal year 1995; and Corporation Business Tax collections of $1,145 million, a
8.6% increase over receipts estimated in the revised estimates for fiscal year
1995. Changes in economic activity in the State and the nation, consumption of
durable goods, corporate financial performance and other factors that are
difficult to predict may result in actual collections being more or less than
forecasted.
Appropriations. The State appropriated approximately $14,737 million
for fiscal year 1993 and $15,492 million for fiscal year 1994. Estimated
appropriations for fiscal years 1995
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and 1996 total $15,528 million and $15,995 million, respectively. Of the
estimated $15,995 million appropriated in fiscal year 1995 from the General
Fund, the Property Tax Relief Fund, the Casino Control Fund, the Casino Revenue
Fund, and the Gubernatorial Elections Fund, $6,423.5 million (40.2%) is
appropriated for State aid to local governments, $3,708 million (23.2%) is
appropriated for grants-in-aid (payments to individuals or public or private
agencies for benefits to which a recipient is entitled to by law, or for the
provision of services on behalf of the State), $5,179.6 million (32.4%) for
direct State services, $466.3 million (2.9%) for debt service on State general
obligation bonds and $443.9 million (2.9%) for capital construction.
Fund Balances. The undesignated Fund balances are available for
appropriations in succeeding fiscal years. There have been positive Fund
balances in the General Fund at the end of each year since the State
Constitution was adopted in 1947. Total ending Fund balances for fiscal years
1992, 1993 and 1994 were $836.2 million, $1,149.6 million and $1,264.6 million,
respectively. General Fund balances accounted for $1.4 million, $760.8 million
and $937.4 million of the total ending Fund balances in fiscal years 1992, 1993
and 1994, respectively. Total ending Fund balances are estimated to be $965.7
million for the fiscal year 1995, of which the General Fund balance is expected
to account for $926.0 million. The estimates for fiscal year 1995 are
preliminary and are subject to change upon completion of the State's year-end
audit. The estimates for Total and General Fund balances for the fiscal year
ended 1995 are $549.3 million and $563 million, respectively. The estimates for
fiscal 1996 reflect amounts contained in the Fiscal Year 1996 Appropriations Act
and Supplemental Appropriations enacted through September 1, 1993. It should be
noted that an adverse determination in certain litigation in which the State is
a party would have a significant impact on fiscal 1995 and subsequent fiscal
year fund balances (see "Litigation" section).
Indebtedness of the State.
General Obligation Bonds. The primary method for State financing of
capital projects is through the sale of the general obligation bonds of the
State. These bonds are backed by the full faith and credit of the State. State
tax revenues and certain other fees are pledged to meet the principal payments,
interest payments and if provided, redemption premium payments, if any, required
to fully pay the bonds. As of June 30, 1995, the outstanding general obligation
bonded indebtedness of the State was approximately $3.7 billion. The amount
provided by the General Fund to the Debt Service Fund for interest and principal
payments for the fiscal year ended June 30, 1995 was $103.5 million. This is
reflected in the Statement of Revenues, Expenditures and Changes in Fund
Balances as a Transfer to other funds in the General Fund and a Transfer from
other funds in the Debt Service Fund.
Tax and Revenue Anticipation Notes. In fiscal year 1992 the State
initiated a program under which it issued tax and revenue anticipation notes to
aid in providing effective cash flow management to fund balances which occur in
the collection and disbursement of the General
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Fund and Property Tax Relief Fund revenues. There are presently no tax and
revenue anticipation notes outstanding. It is anticipated that this program will
be continued in fiscal year 1997. Such tax and revenue anticipation notes do not
constitute a general obligation of the State or a debt or liability within the
meaning of the State Constitution. These notes constitute special obligations of
the State payable solely from moneys on deposit in the General Fund and the
Property Tax Relief Fund and legally available for such payment.
State Related Obligations.
Lease Financing. The State has entered into a number of leases relating
to the financing of certain real property and equipment. Lease financing
obligations outstanding as of December 31, 1992 totaled $804.8 million.
State Supported School and County College Bonds. Legislation provides
for future appropriations for State Aid to local school districts equal to debt
service on a maximum principal amount of $280.0 million of bonds issued by such
local school districts for construction and renovation of school facilities and
for State Aid to counties equal to debt service on up to $80.0 million of bonds
issued by counties for construction of county college facilities. The State
Legislature is not legally bound to make such future appropriations, but has
done so to date on all outstanding obligations issued under these laws. As of
December 31, 1995, the maximum amount of $280.0 million of school district bonds
has been approved for State support. Bonds or notes in the amount of $274.1
million have been issued by local school districts, of which $240.6 million have
been retired and $33.4 million are still outstanding. As of June 30, 1995, $32.8
million of county college bonds or notes are outstanding. In addition to these
acts, there is legislation which establishes a school bond reserve within the
constitutionally dedicated fund for the Support of Free Public Schools.
Moral Obligation Financing. The authorizing legislation for certain
State entities provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such legislation, a
designated official is required to certify any deficiency in a debt service
reserve fund maintained to meet payments of principal of and interest on the
obligations, and a State appropriation in the amount of the deficiency is to be
made. However, the State Legislature is not legally bound to make such an
appropriation. Bonds issued pursuant to authorizing legislation of this type are
sometimes referred to as "moral obligation" bonds. There is no statutory
limitation on the amount of moral obligation bonds which may be issued by
eligible State entities. The State has periodically provided the South Jersey
Port Corporation with funds to cover all debt service and property tax
requirements when earned revenues are anticipated to be insufficient to cover
these obligations. All other entities with moral obligation bonds are expected
to generate revenues sufficient to cover debt service requirements thereon. As
of June 30, 1995, outstanding moral obligation indebtedness totalled $735.9
million, with an approximate maximum annual debt service Subject to Moral
Obligation of $67.9 million.
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New Jersey Transportation Trust Fund Authority. In July 1984, the State
created the New Jersey Transportation Trust Authority (the "Authority"), an
instrumentality of the State organized and existing under the New Jersey
Transportation Trust Fund Authority Act of 1984, as amended (the "Act"), for the
purpose of funding a portion of the State's share of the cost of improvements to
the State's transportation system. Pursuant to the Act, the Authority, the State
Treasurer and the Commissioner of Transportation executed a contract (the
"Contract") which provides for the payment of certain amounts prescribed to the
Authority. The payment of all such amounts is subject to and dependent upon
appropriations being made by the State Legislature and there is no requirement
that the Legislature make such appropriations. On May 30, 1995, the State
Legislature amended the New Jersey Transportation Trust Fund Act of 1984 to
provide, among other things, for (i) the funding of transportation projects
through June 30, 2000, (ii) the issuance of debt in an aggregate principal
amount in excess of the statutory debt limitation in effect prior to the
enactment of the 1995 Amendments, (iii) an increase in the amount of revenues
available to the Authority and (iv) broadening the scope of transportation
projects.
Pursuant to the Act, the principal amount of the Authority's bonds,
notes or other obligations which may be issued in any fiscal year generally may
not exceed $7.0 million plus amounts carried over from prior fiscal years. These
bonds are special obligations of the Authority payable from the payments made by
the State pursuant to the Contract.
Economic Recovery Fund Bonds. Legislation enacted during 1992 by the
State authorizes the New Jersey Economic Development Authority ("NJEDA") to
issue bonds for various economic development purposes. Pursuant to that
legislation, NJEDA and the State Treasurer have entered into an agreement (the
"ERF Contract") through which NJEDA has agreed to undertake the financing of
certain projects and the State Treasurer has agreed to credit to the Economic
Recovery Fund from the General Fund amounts equivalent to payments due to the
State under an agreement with the Port Authority of New York and New Jersey. The
payment of all amounts under the ERF Contract is subject to and dependent upon
appropriations being made by the State Legislature. On June 1, 1994, NJEDA
issued $705.3 million in Economic Recovery Fund Bonds.
Miscellaneous. Other State related obligations include bonds of the New
Jersey Sports and Exposition Authority. Amounts outstanding as of June 30, 1995
totaled $615.1 million for this organization.
State Employees. The State, as a public employer, is covered by the New
Jersey Public Employer-Employee Relations Act, as amended, which guarantees
public employees the right to negotiate collectively through employee
organizations certified or recognized as the exclusive collective negotiations
representatives for units of public employees found to be appropriate for
collective negotiations purposes. Approximately 64,500 employees are paid
through the State
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payroll system. Of the 64,500 employees, 56,800 are represented by certified or
recognized exclusive majority representatives and are organized into various
negotiation units. The State is conducting negotiations for successor agreement
with various negotiation units affecting approximately 54,400 employees. The
current agreement expired on June 30, 1994. Negotiations have commenced with
three units of State Police employees, representing approximately 2,400
Troopers, Sergeants and Lieutenants whose three-year contract expired on June
30, 1996. Their agreements call for a 4% wage increase effective June 24, 1995.
The fiscal year 1996 budget is expected to reduce the workforce through
attrition, voluntary furlough and layoff of State employees during the fiscal
year.
Counties and Municipalities. The Local Budget Law imposes specific
budgetary procedures upon counties and municipalities ("local units"). Every
local unit must adopt an operating budget which is balanced on a cash basis, and
items of revenue and appropriation must be examined by the Director of the
Division (the "Director"). This process ensures that every municipality and
county annually adopts a budget balanced on a cash basis, within limitations on
appropriations or tax levies, respectively, and making adequate provision for
principal of and interest on indebtedness falling due in the fiscal year,
deferred charges and other statutory expenditure requirements. The Director also
oversees changes to local budgets after adoption as permitted by law, and
enforces regulations pertaining to execution of adopted budgets and financial
administration. In addition to the exercise of regulatory and oversight
functions, the Division offers expert technical assistance to local units in all
aspects of financial administration, including revenue collection and cash
management procedures, contracting procedures, debt management and
administrative analysis.
State law also regulates the issuance of debt by local units. The Local
Budget Law limits the amount of tax anticipation notes that may be issued by
local units and requires the repayment of such notes within 120 days of the end
of the fiscal year (six months in the case of the counties) in which they were
issued. The Local Bond Law governs the issuance of bonds and notes by the local
units. No local unit is permitted to issue bonds for the payment of current
expenses (other than Fiscal Year Adjustment bonds). Local units may not issue
bonds to pay outstanding bonds, except for refunding purposes, and then only
with the approval of the Local Finance Board. Local units may issue bond
anticipation notes for temporary periods not exceeding in the aggregate
approximately ten years from the date of first issue. The debt that any local
unit may authorize is limited to a percentage of its equalized valuation basis,
which is the average of the equalized value of all taxable real property and
improvements within the geographic boundaries of the local unit, as annually
determined by the Director of the Division of Taxation, for each of the three
most recent years.
State law authorizes State officials to supervise fiscal administration
in any municipality which is in default on its obligations or upon the
occurrence of certain other events. State
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officials are authorized to continue such supervision for as long as any of the
conditions exist and until the municipality operates for a fiscal year without
incurring a cash deficit.
School Districts. New Jersey's school districts operate under the same
comprehensive review and regulation as do its counties and municipalities.
Certain exceptions and differences are provided, but the State supervision of
school finance closely parallels that of local governments.
Litigation. Certain litigation is pending or threatened in which the
State has the potential for either a significant loss of revenue or a
significant unanticipated expenditure, including suits relating to the following
matters:
(a) Several cases are pending in the State courts challenging the
methods by which the State Department of Human Services shares with
county governments the maintenance recoveries and costs for residents
in State psychiatric hospitals and residential facilities for the
developmentally disabled.
(b) Suits have been initiated by various counties in the State seeking
the return of moneys paid by the counties since 1980 for the
maintenance of Medicaid or Medicare eligible residents of institutions
for the developmentally disabled. In March 1994, the State Superior
Court ruled that the counties were entitled to credits for payments
made since 1989. In February 1995, all but one county had resolved its
cost-sharing disputes with the State. One county has filed for
administrative review to contest the State's calculation of the
credits.
(c) A class action on behalf of all New Jersey long-term care
facilities avers that the State has implemented unreasonably low
Medicaid payment rates. A final decision in favor of the plaintiffs
could require the State to make substantial expenditures. A plaintiffs'
motion for a preliminary injunction was denied on May 25, 1995, and
that denial is being appealed to the Third Circuit.
(d) Litigation is pending challenging various portions of the State's
Fair Automobile Insurance Reform Act of 1990, which substantially
altered the State's statutory scheme governing private passenger
automobile insurance.
(e) At any given time, there are various numbers of claims and cases
pending against the State, its agencies and employees seeking recovery
of damages paid out of a fund created pursuant to the State's Tort
Claims Act. The State is unable to estimate its exposure for these
claims and cases. An independent study estimated an aggregate potential
exposure of $50 million for tort claims pending as of January 1, 1982.
It is estimated that were a
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similar study made of claims currently pending, the amount of such
estimated exposure would be somewhat higher.
(f) At any given time, there are various claims of contract and other
claims against the State and State agencies, including environmental
claims arising from the alleged disposal of hazardous waste. The State
is unable to estimate its exposure for these claims.
(g) At any given time, there are various numbers of claims and cases
pending against the University of Medicine and Dentistry (the
"University") and its employees seeking recovery of damages that are
paid out of the Self Insurance Reserve Fund created pursuant to the
State's Tort Claims Act. An independent study estimated an aggregate
potential exposure of $82.5 million for claims pending as of December
31, 1995. In addition, various other claims are pending against the
University seeking damages or other relief which, if granted, would
require the expenditure of funds (amount not estimated).
(h) An individual plaintiff filed a suit against two members of the New
Jersey Bureau of Securities alleging various causes of action for
defamation, injury to reputation, abuse of process and improper
disclosure of private facts. The State was granted a Motion for Summary
Judgment on January 11, 1995. Plaintiff filed an appeal and the State
has responded. On June 12, 1996, the Appellate Division affirmed the
dismissal. The time to appeal the matter on certification to the
Supreme Court has passed.
(i) Fifteen counties have filed suits against various State agencies
and employees, seeking a portion of $412 million in federal funding the
State received for disproportionate share hospital payments made to
county psychiatric facilities. The State contends that it does not have
to share the federal funding because it already paid the counties their
portion of disproportionate share hospital payments. The court heard
oral argument on May 30, 1996. On July 15, 1996, in a unanimous
decision of the Appellate Division, the court affirmed the
Commissioner's decision not to share the federal funds with the
counties. Additionally, the court held that it could not provide
equitable relief to the counties because the Legislature chose not to
direct the Commissioner to share the funds and therefore separation of
powers precluded the relief.
(j) In October 1993, a suit was filed against the Governor and various
State Commissioners alleging violations of numerous laws allegedly
resulting from the existence of chromium contamination in the
State-owned Liberty Park in Jersey City. No immediate relief was
sought, but injunctive and monetary relief was asked for. The
complaints were amended and the plaintiffs filed another suit seeking
cessation of all construction and penalties against the transporter of
soil to the park. The cases have been
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consolidated and referred to mediation. The State intends to
vigorously defend these suits.
(k) Various labor unions filed suit on October 17, 1994, challenging
State legislation dealing with the funding of several public employee
pension funds. The suit alleges, among other things, that certain
provisions of the legislation violate the contract, due process and
taking clauses of the United States and New Jersey Constitutions, and
that the changes constitute a breach of the State's fiduciary duty to
two of the pension systems. Plaintiffs seek to permanently enjoin the
State from administering the changes. An adverse determination in this
matter would have a significant impact on the State's fiscal 1996
budget. The State has filed motions to dismiss and for summary
judgment. Discovery is proceeding in this matter.
(l) A case has been filed in federal district court seeking injunctive
relief and damages in excess of $19 million from the State's Department
of Environmental Protection and several of its officers based on
alleged violations of the Commerce Clause and Contracts Clause of the
U.S. Constitution. The State intends to vigorously defend this action.
(m) A complaint was filed in Tax Court on March 23, 1994 against the
State and certain of its officials challenging the constitutionality of
waste licensure renewal fees collected by the Department of
Environmental Protection. The State is unable to estimate its exposure
for this claim and intends to defend this suit vigorously.
Pennsylvania Municipal Securities and Special Considerations Relating Thereto.
The following information as to certain Pennsylvania risk factors has been
provided in view of the policy of concentrating in Pennsylvania Municipal
Securities by the Pennsylvania Municipal Securities Fund. This information
constitutes only a brief summary, does not purport to be a complete description
of Pennsylvania risk factors and is principally drawn from official statements
relating to securities offerings of the Commonwealth of Pennsylvania that have
come to the attention of the Pennsylvania Municipal Securities Fund and were
available as of the date of this Statement of Additional Information. The Fund
has not independently verified any of this information but is not aware of any
fact which would render such information inaccurate.
General. Pennsylvania has historically been dependent on heavy industry
although recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic growth
in Pennsylvania are in the service sector, including trade, medical and health
services, education and financial institutions. Agriculture continues to be an
important component of the Commonwealth's economic structure, with nearly
one-third of the Commonwealth's total land area devoted to cropland, pasture and
farm woodlands.
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In 1995, the population of Pennsylvania was 12.07 million people.
According to the U.S. Bureau of the Census, Pennsylvania experienced a slight
increase from the 1986 estimate of 11.78 million. Pennsylvania has a high
proportion of persons 65 or older. The Commonwealth is highly urbanized, with
79% of the 1990 census population residing in metropolitan statistical areas.
The cities of Philadelphia and Pittsburgh, the Commonwealth's largest
metropolitan statistical areas, together comprise approximately 44% of the
Commonwealth's total population.
Pennsylvania's average annual unemployment rate remained below the
national average between 1986 and 1990. Slower economic growth caused the rate
to rise to 6.9% in 1991 and 7.5% in 1992. The resumption of faster economic
growth resulted in a decrease in the Commonwealth's unemployment rate to 7.0% in
1993. Seasonally adjusted data for March 1996, the most recent month for which
data is available, shows an unemployment rate of 5.6%, the same rate as that for
the United States.
Financial Accounting. Pennsylvania utilizes the fund method of
accounting and over 150 funds have been established for the purpose of recording
receipts and disbursements, of which the General Fund is the largest. Most of
the operating and administrative expenses are payable from the General Fund. The
Motor License Fund is a special revenue fund that receives tax and fee revenues
relating to motor fuels and vehicles (except one-half cent per gallon of the
liquid fuels tax which is deposited in the Liquid Fuels Tax Fund for
distribution to local municipalities) and all such revenues are required to be
used for highway purposes. Other special revenue funds have been established to
receive specified revenues appropriated to specific departments, boards and/or
commissions. Such funds include the Game, Fish, Boat, Banking Department, Milk
Marketing, State Farm Products Show, State Racing and State Lottery Funds. The
General Fund, all special revenue funds, the Debt Service Funds and the Capital
Project Funds combine to form the Governmental Fund Types.
Enterprise funds are maintained for departments or programs operated
like private enterprises. The largest of the Enterprise funds is the State
Stores Fund, which is used for the receipts and disbursements of the
Commonwealth's liquor store system. Sale and distribution of all liquor within
Pennsylvania is a government enterprise.
Financial information for the funds is maintained on a budgetary basis
of accounting ("Budgetary"). Since 1984, the Commonwealth has also prepared
financial statements in accordance with generally accepted accounting principles
("GAAP"). The GAAP statements have been audited jointly by the Auditor General
of the Commonwealth and an independent public accounting firm. The Budgetary
information is adjusted at fiscal year end to reflect appropriate accruals for
financial reporting in conformity with GAAP. The Commonwealth maintains a June
30th fiscal year end.
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The Constitution of Pennsylvania provides that operating budget
appropriations may not exceed the actual and estimated revenues and available
surplus in the fiscal year for which funds are appropriated. Annual budgets are
enacted for the General Fund and for certain special revenue funds which
represent the majority of expenditures of the Commonwealth.
Revenues and Expenditures. Pennsylvania's Governmental Fund Types
receive over 57% of their revenues from taxes levied by the Commonwealth.
Interest earnings, licenses and fees, lottery ticket sales, liquor store
profits, miscellaneous revenues, augmentations and federal government grants
supply the balance of the receipts to these funds. Revenues not required to be
deposited in another fund are deposited in the General Fund. The major tax
sources for the General Fund are the 6% sales and use tax (34.1% of General Fund
revenues in fiscal 1995), the 2.8% personal income tax (31.3% of General Fund
revenues in fiscal 1995) and the 9.99% corporate net income tax (11.7% of
General Fund revenues in fiscal 1995). Tax and fee proceeds relating to motor
fuels and vehicles are constitutionally dedicated to highway purposes and are
deposited into the Motor License Fund. The major sources of revenue for the
Motor License Fund include the liquid fuels tax, the oil company franchise tax,
aviation taxes and revenues from fees levied on heavy trucks. These revenues are
restricted to the repair and construction of highway bridges and aviation
programs. Lottery ticket sales revenues are deposited in the State Lottery Fund
and are reserved by statute for programs to benefit senior citizens.
Pennsylvania's major expenditures include funding for education ($6.7
billion of fiscal 1995 expenditures, the projected $6.9 billion of the fiscal
1996 budget and the proposed almost $7.0 billion of the fiscal 1997 budget) and
public health and human services ($12.4 billion of fiscal 1995 expenditures, the
projected $13.1 billion of the fiscal 1996 budget and the proposed decreases of
the fiscal 1997 $12.9 billion budget).
Governmental Fund Types: Financial Condition/Results of Operations
(GAAP Basis). Reduced revenue growth and increased expenses contributed to
negative unreserved-undesignated fund balances of the Governmental Fund Types at
the end of the 1990 and 1991 fiscal years, largely due to operating deficits in
the General Fund and State Lottery Fund during those years. Actions taken during
fiscal 1992, to bring the General Fund back into balance, including tax
increases and expenditure restraints, resulted in a $1.1 billion reduction to
the unreserved-undesignated fund deficit for combined Governmental Fund Types
and a return to a positive fund balance. The fund balance for the Governmental
Fund Types, as restated, has increased during the 1993, 1994 and 1995 fiscal
years. At June 30, 1995, the fund balance totaled $1,927.6 million including an
unreserved-undesignated fund balance of $104.8 million.
General Fund: Financial Condition/Results of Operations.
Five-Year Overview (GAAP Basis). For the five-year period fiscal 1991
through fiscal 1995, total revenues and other sources rose at a 9.1 percent
average annual rate while total
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expenditures and other uses grew by 7.4 percent annually. Over two-thirds of the
increase in total revenues and other sources during this period occurred during
fiscal 1992 when a $2.7 billion tax increase was enacted to address a fiscal
1991 budget deficit and to fund increased expenditures for fiscal 1992. For the
four-year period fiscal 1992 through fiscal 1995, total revenues and other
sources increased at an annual average of 3.3 percent, less than one-half the
rate of increase for the five-year period beginning with fiscal 1991. This
slower rate of growth was due, in part, to tax rate reductions and other tax law
revisions that restrained the growth of tax receipts for fiscal years 1993, 1994
and 1995.
Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal 1991 through
fiscal 1995 period. Program areas having the largest increase in costs for the
fiscal 1991 to fiscal 1995 period were for protection of persons and property,
due to an expansion of state prisons, and for public health and welfare, due to
rising caseloads, program utilization and increased prices. Recently, efforts to
restrain the rapid expansion of public health and welfare program costs have
resulted in expenditure increases at or below the total rate of increase for
total expenditures in each fiscal year. For the period fiscal 1992 through
fiscal 1995, public health and welfare costs increased by an average annual rate
of 3.5 percent, well below the 5.2 percent average for total expenditures and
other uses during the same period.
During fiscal 1992 enactment of over $2.7 billion in General Fund tax
increases and implementation of expenditure control initiatives have helped the
General Fund balance return to a surplus at June 30, 1992, of $87.5 million. The
actions taken to increase revenues and restrain expenditure growth were
necessary to offset the effects on General Fund finances of a period of slow
economic growth including a national economic recession. The recession caused
tax revenues during fiscal 1991 to be below the amount received during fiscal
1990 while spending, particularly for public health and welfare programs to
support needy individuals, increased by over 21%. Public health and welfare
expenditures continued their rapid increase with a 23.9% increase during fiscal
1992 as caseloads and costs continued upward. Some of these increased costs were
met through the use of pooled financing techniques that use private
contributions and intergovernmental transfers to substitute for state funds
match for federal governmental grants-in-aid. Debt service expenditures
escalated as the amount of tax anticipation note borrowing increased in response
to the fiscal pressures brought about by slow economic growth and the recession.
Fiscal 1992 Financial Results (GAAP Basis). During fiscal 1992, the
General Fund recorded a $1.1 billion operating surplus. This operating surplus
was achieved through legislated tax rate increases and tax base broadening
measures enacted in August 1991, and by controlling expenditures through
numerous cost reduction measures implemented during the fiscal year. As a result
of the operating surplus, the General Fund balance increased to $87.5 million at
June 30, 1992.
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Fiscal 1993 Financial Results (GAAP Basis). The fund balance of the
General Fund increased by $611.4 million during the fiscal year, led by an
increase in the unreserved balance of $576.8 million over the prior fiscal year
balance. At June 30, 1993, the fund balance totaled $698.9 million and the
unreserved-undesignated balance totaled $64.4 million.
Fiscal 1994 Budget (GAAP Basis). The fund balance of the General Fund
increased by $194.0 million due largely to an increased reserve for encumbrances
and an increase in other designated funds. The fund balance for June 30, 1994,
was restated for the fiscal 1995 financial statements. That restatement totaled
$116.7 million to recognize previously unreported revenues and expenditures for
fiscal 1994. The fund balance for June 30, 1994, as restated, was $776.3 million
and the unreserved-undesignated balance totaled $79.1 million. A continuing
recovery of the Commonwealth's financial condition from the effects of the
national economic recession of 1990 and 1991 is demonstrated by this increase in
the balance and a return to a positive unreserved-undesignated balance. For the
third consecutive fiscal year the increase in the unreserved-undesignated
balance exceeded the increase recorded in the budgetary basis unappropriated
surplus during the fiscal year.
Fiscal 1995 Budget (GAAP Basis). Revenues and other sources totaled
$23,771.6 million, an increase of $1,135.0 million (0.5 percent) over the prior
fiscal year. The largest increase was $817.9 million in taxes which represents a
5.6 percent increase over taxes in the prior fiscal year. Expenditures and other
uses rose by $1,364.1 million to $23,821.4 million, an increase over the prior
fiscal year of 6.1 percent. Consequently, an operating deficit of $49.8 million
was recorded for the fiscal year and led to a decline in fund balance to $688.3
million at June 30, 1995. Two items predominately contributed to the fund
balance decline. First, a more comprehensive procedure was used for fiscal 1995
to compute the liabilities for certain public welfare programs leading to an
increase for the year-end accruals. Second, a change to the methodology to
calculate the year-end accrual for corporate tax payables increased the tax
refund liability by $72 million for the 1995 fiscal year when compared to the
previous fiscal year.
Proposed Fiscal 1996 Budget (Budgetary Basis). The approved fiscal 1996
budget provides for $16,165.7 million in appropriations from Commonwealth funds,
an increase of 2.7 percent over appropriations, including supplemental
appropriations, for fiscal 1995. The budget includes a reform of the
state-funded public assistance program that added certain categories of
eligibility to the program but also limited the availability of such assistance
to other eligible persons. Education subsidies to local school districts were
increased by $132.2 million to continue the increased funding for the poorest
school districts in the state.
The fiscal 1996 budget is based on anticipated Commonwealth revenues,
net of enacted tax changes, of $16,268.7 million, an increase over actual fiscal
1995 Commonwealth revenues of 0.3 percent. Excluding the estimated effects of
the tax changes enacted in 1994 and 1995, Commonwealth revenues for fiscal 1996
are estimated to increase by approximately 2.9 percent.
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The fiscal 1996 revenue estimate is base on a forecast of the national economy
for gross domestic product growth to slow from 4.1 percent in 1994 to an average
annual rate for 1995 of 2.4 percent and then to 1.3 percent in 1996.
Tax changes enacted with the fiscal 1996 budget totaled a net reduction
of $282.9 million, representing an approximate 1.7 percent of base revenues. The
largest dollar value changes were in the corporate net income tax where the
scheduled 1997 reduction of the tax rate to 9.99 percent was accelerated to the
1995 tax year; a double-weighting was provided for the sales factor of the
corporate net income apportionment calculation; and the maximum annual allowance
for the net operating loss deduction was increased from $500,000 to $1 million.
The fiscal 1996 cost of these corporate income tax changes is estimated to be
$210.8 million representing approximately 75 percent of the fiscal year's tax
reduction. Other major components of the tax reduction include a $12.1 million
decrease for the capital stock and franchise tax from an increase in the basic
exemption; $24.7 million from the repeal of the tax on annuities; and $27.9
million from an acceleration of the scheduled phase-out of the inheritance tax
on transfers of certain property to a surviving spouse. A 90-day amnesty program
was also authorized in the tax bill. The amnesty program was available to
taxpayers from October 1995 through January 1996. Tax and interest revenues
received from the tax amnesty program after payment of administration costs were
credited to the appropriate fund. Receipts credited to the General Fund in
excess of $67 million, plus any shortfall in delinquent tax collections below
those in fiscal 1995, are to be deposited into a restricted account in the
General Fund for later distribution.
Increases in authorized spending for fiscal 1996 emphasize education.
Appropriations for the basic subsidy for public schools were increased $143
million representing a 4.4 percent increase. This increase reversed a four-year
trend of a declining budget share for education. A limited program to permit
certain residents to choose the school district or private school to provide
their children's education was funded in the budget, but enabling legislation
for the program has yet to be enacted. The budget also contemplates several
changes to certain public welfare programs. The enacted budget also included
most of the Governor's proposed consolidation and elimination of several
organizations and/or appropriations. The consolidated programs were absorbed
within existing organizations. Savings of $5.2 million are anticipated to result
from these consolidations and eliminations.
Revised estimates for the fiscal 1996 budget were included in the
Governor's February 1996 submission of his fiscal 1997 budget proposal.
Supplemental appropriations funding needs were recommended totaling $54.2
million, representing 0.3 percent of approved appropriations for fiscal 1996.
The majority of the supplemental appropriations are for the Department of
Corrections to meet the additional operational costs arising from a larger
inmate population than budgeted, and for the Department of Education to meet
local school subsidy costs which were underestimated in the adopted budget. All
anticipated supplemental appropriation needs for the
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Department of Public Welfare are expected to be met from a re-allocation of
appropriation authority within the Department. Funding for the requested
supplemental appropriations will be provided by appropriation lapses anticipated
during the fiscal year. Appropriation lapses totaling $50 million from prior
fiscal years' appropriations and $90 million from current fiscal year
appropriations are expected. The $140 million total appropriation lapses
estimated for fiscal 1996 compares to actual appropriation lapses totaling $205
million and $194 million during fiscal 1995 and fiscal 1994 respectively. The
General Assembly has not yet approved the requested supplemental appropriations.
Commonwealth revenues for fiscal 1996 are anticipated to be $2.5
million (less than 0.1 percent) over the official estimate of revenues for the
fiscal year. Within the revised estimate, receipts from the corporate net income
tax and interest earnings are anticipated to exceed the official estimate while
receipts from the sales and use tax, the personal income tax and the gross
receipts tax are anticipated to fall below their official estimate levels.
Fiscal 1997 Proposed Budget. In February 1996, the Governor presented
his proposed fiscal 1997 budget to the General Assembly. Proposed appropriations
from General Fund Commonwealth revenues totals $16,189.9 million, a reduction
from the estimated $16,219.9 million (including proposed supplemental
appropriations) for fiscal 1996. The proposed reductions represent a decline of
approximately 0.2 percent in appropriations from the prior fiscal year. Revenue
receipts are estimated to increase by $403.9 million, or 2.5 percent, over
anticipated receipts for fiscal 1996. The anticipated increased revenues,
together with the projected $140 million of appropriation lapses during fiscal
1996 and the proposed drawdown of approximately $95 million of surplus provide
the funding sources for the proposed budget. The proposed drawdown of the fiscal
1996 unappropriated surplus produces a projected 1997 fiscal year-end surplus of
under $5 million, without any consideration of possible appropriation lapses for
fiscal 1997.
The decline in appropriation authority over the prior fiscal year in
the proposed budget relies on several program changes. The largest changes
proposed are $329 million of cost containment efforts in public health and
welfare programs. The largest savings are generated by proposed changes in
eligibility criteria. Savings of $249 million are projected from the elimination
of medical assistance benefits for able-bodied adults without children and $40
million from tightened standards of employability for those collecting benefits.
Other proposed changes, including changes contained in proposed federal welfare
reform measures, provide an additional $39 million of budgetary savings. Program
reductions are also planned for the residential portion of the mental
health/mental retardation program that could involve a limited number of staff
cuts at state institutions. The budget also relies on certain provisions of
proposed federal welfare reforms. In particular, an increase in the proportion
of federal funding for medical assistance is assumed which is anticipated to
provide $261.8 million of additional federal funds and a commensurate reduction
in required state funds. Other significant cost
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restraints include reductions to appropriations for the state-aided colleges and
universities and no increases for the state-related colleges and universities.
Funds for basic education programs to local school districts are proposed to
increase slightly. The largest increase, $33.3 million, is proposed for an
initiative to improve the use of technology in learning. A restructuring of the
economic development programs and incentives of the Commonwealth are also
proposed to combine and improve the delivery of such programs. A proposed
securitization of current loans held by the Sunny Day Fund is budgeted to
provide a portion of the initial capitalization for the realigned programs. The
current trend of escalating costs of the corrections program continues in this
budget. An amount of $80.3 million is included to meet the increased costs of
the rising prison population.
The proposed fiscal 1997 budget includes tax reductions totaling $60.2
million. Included in the proposed reductions are a 0.25 mill reduction to the
tax rate for the capital stock and franchise taxes, an exemption of certain
computer services from the sales and use tax, and a $1,000 per job tax credit
for newly created jobs. All require legislative enactment.
The General Assembly is considering the Governor's proposed budget in
committee deliberations and floor action on implementing legislation. The
various legislative bills required to implement the proposed budget have begun
to move through the legislative process. However, legislation enacting medical
assistance program changes estimated in the proposed budget to produce
approximately $249 million in savings was approved by the Senate but rejected by
the House of Representatives. Delay in the enactment of the proposed changes
beyond March 1996 will impede timely implementation of the proposed changes and,
in the absence of other budgetary measures, result in higher spending than
anticipated in the proposed fiscal 1997 budget. Appropriations committees of the
General Assembly are considering 1997 fiscal year budget appropriations, and
upon committee approval of appropriation bills, will be considered by each
house. The General Assembly may change, eliminate or add amounts and items to
the proposed budget submitted by the Governor and there can be no assurance that
the budget, as proposed by the Governor, will be enacted into law.
Commonwealth Debt. Current constitutional provisions permit
Pennsylvania to issue the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt, (iii) debt for capital projects subject to an aggregate debt
limit of 1.75 times the annual average tax revenues of the preceding five fiscal
years, (iv) tax anticipation notes payable in the fiscal year of issuance. All
debt except tax anticipation notes must be amortized in substantial and regular
amounts.
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General obligation debt totaled $5,045.4 million at June 30, 1995, a
decrease of $30.4 million from June 30, 1994. Over the ten-period ended June 30,
1995, total outstanding general obligation debt increased at an annual rate of
1.1% and for the five years ended June 30, 1994, at an annual rate of 1.7%. All
outstanding general obligation bonds of the Commonwealth are rated AA- by
Standard and Poor's Corporation, A1 by Moody's Investors Service, and AA- by
Fitch Investors Service. The ratings reflect only the views of the rating
agencies.
Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes which must mature within
the fiscal year of issuance. The principal amount issued, when added to that
already outstanding, may not exceed in aggregate 20% of the revenues estimated
to accrue to the appropriate fund in the fiscal year. The Commonwealth is not
permitted to fund deficits between fiscal years with any form of debt. All
year-end deficit balances must be funded within the succeeding fiscal year's
budget. Pennsylvania issued a total of $500.0 million of tax anticipation notes
for the account of the General Fund in fiscal 1996, all of which matured on June
30, 1996, and will be paid from fiscal 1996 General Fund receipts.
Pending the issuance of bonds, Pennsylvania may issue bond anticipation
notes subject to the applicable statutory and constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed three
years. Currently, there are no bond anticipation notes outstanding.
State-Related Obligations. Certain state-created agencies have
statutory authorization to incur debt for which no legislation providing for
state appropriations to pay debt service thereon is required. The debt of these
agencies is supported by assets of, or revenues derived from, the various
projects financed and the debt of such agencies is not an obligation of
Pennsylvania although some of the agencies are indirectly dependent on
Commonwealth appropriations. In addition, Pennsylvania may choose to take action
to financially assist these organizations. The following agencies had debt
currently outstanding as of December 31, 1995: Delaware River Joint Toll Bridge
Commission ($55.1 million), Delaware River Port Authority ($185.5 million),
Pennsylvania Economic Development Financing Authority ($1,050.8 million),
Pennsylvania Energy Development Authority ($121.0 million), Pennsylvania Higher
Education Assistance Agency ($1,408.8 million), Pennsylvania Higher Educational
Facilities Authority ($2,115.1 million), Pennsylvania Industrial Development
Authority ($344.8 million), Pennsylvania Infrastructure Investment Authority
($213.1 million), Pennsylvania Turnpike Commission ($1,228.7 million),
Philadelphia Regional Port Authority ($62.6 million) and the State Public School
Building Authority ($316.2 million). In addition, the Governor is statutorily
required to place in the budget of the Commonwealth an amount sufficient to make
up any deficiency in the capital reserve fund created for, or to avoid default
on, bonds issued by the Pennsylvania Housing Finance Agency ($2,164.8 million of
revenue bonds outstanding as of December 31, 1995), and an amount of funds
sufficient to alleviate any deficiency that may arise in the debt
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service reserve fund for bonds issued by The Hospitals and Higher Education
Facilities Authority of Philadelphia ($1.49 million of the loan principal was
outstanding as of December 31, 1995). The budget as finally adopted by the
legislation may or may not include the amounts requested by the Governor.
Litigation. 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: (a)
approximately 3,500 suits are pending against the Commonwealth pursuant to the
General Assembly's 1978 approval of a limited waiver of sovereign immunity which
permits recovery of damages for any loss up to $250,000 per person and
$1,000,000 per accident ($32.0 million appropriated from the Motor License Fund
in fiscal 1994 has been decreased to $27.0 million for fiscal 1995; (b) the ACLU
filed suit in April 1990 in federal court demanding additional funding for child
welfare services (no available estimates of potential liability), which the
Commonwealth then sought dismissal based on, among other things, the settlement
in a similar Commonwealth court action that provided for more funding in fiscal
1991 as well as a commitment to pay to counties $30.0 million over five years
(on April 12, 1993, the court dismissed all claims except for the constitutional
claims of some of the plaintiffs and two Americans with Disabilities Act
claims). The district court has since denied the ACLU's motion for class
certification. The parties have stipulated to a judgment against the plaintiffs
in order for plaintiffs to appeal the denial of class certification to the Third
Circuit. In December of 1994, the Third Circuit reversed Judge Kelly's ruling,
finding that he erred in refusing to certify the class. Consistent with the
Third Circuit's ruling, the District Court recently certified the class, and the
parties have resumed discovery; (c) in 1987, the Supreme Court of Pennsylvania
held that the statutory scheme for county funding of the judicial system was in
conflict with the Pennsylvania Constitution but stayed judgment pending
enactment by the legislature of funding consistent with the opinion (the
legislature has yet to consider legislation implementing the judgment); (d)
several banks have filed suit against the Commonwealth contesting the
constitutionality of a 1989 law imposing a bank shares tax on banking
institutions. Pursuant to a Settlement Agreement dated as of April 2, 1995, the
Commonwealth agreed to enter a credit in favor of Fidelity in the amount of
$4,100,000 in settlement of the constitutional and non-constitutional issues
including interest. Pursuant to a separate Settlement Agreement dated as of
April 21, 1995, the Commonwealth settled with the intervening banks, referred to
as "New Banks." As part of the settlement, the Commonwealth agreed neither to
assess nor attempt to recoup any new bank tax credits which had been granted or
taken by any of the intervening banks; (e) in November 1990, the ACLU brought a
class action suit on behalf of the inmates in thirteen Commonwealth correctional
institutions challenging confinement conditions and including a variety of other
allegations. On August 1, 1994, the parties submitted a proposed settlement
agreement to the Court for its review. The Court held hearings on the proposed
Settlement Agreement in December 1994. The Court approved the Settlement
Agreement with a January 17, 1995 Memorandum. On February 3, 1995, the
Commonwealth paid $1.3 million in attorney's fees to the plaintiffs' attorneys
in accordance with the Agreement. The remaining
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$100,000 in attorneys' fees will be paid upon dismissal of the preliminary
injunction relating to certain health issues. The parties are currently
complying with monitoring provisions outlined in the Agreement. The monitoring
phase will expire on January 6, 1998; (f) in 1991, a consortium of public
interest law firms filed a class action suit alleging that the Commonwealth had
failed to comply with the 1989 federal mandate with respect to certain services
for Medicaid-eligible children under the age of 21. In July 1994, the Court
denied the plaintiffs' request to proceed as a class action and dismissed five
of the eighteen plaintiff organizations from the case. The parties have reached
a tentative settlement agreement which they have submitted to the court for
approval; (g) 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
resolution of the state case and the state case is in the pre-trial discovery
stage. The trial has not yet been scheduled. Following a status conference among
counsel, Judge Pellegrini issued an Order, dated May 30, 1996, to consider,
inter alia, the report of the Governor's Commission on Public School Finance and
the course of future proceedings including trial; (h) The Pennsylvania Medical
Society sued the Commonwealth for payment of the full Medicare co-pay and
deductible for outpatient services to medical assistance clients who are also
eligible for Medicare. The Commonwealth received a favorable decision in the
United Stated District Court but the Pennsylvania Medical Society appealed the
decision and won a reversal in the United States Third Circuit Court. After
similarly unfavorable decisions by every other appellate court that addressed
the issue, the Commonwealth implemented a new payment system effective January
23, 1995. Preliminary estimated costs to the Commonwealth are approximately $50
million per year; and (i) on November 11, 1993, the Commonwealth of
Pennsylvania, Department of Transportation and Envirotest/Synterra Partners
("Envirotest"), a partnership, entered into a "Contract for Centralized
Emissions Inspection Facilities." Thereafter, Envirotest acquired certain land
and constructed approximately 85 automobile emissions inspection facilities
throughout various regions of the Commonwealth. By Act of the General Assembly
in October 1994 (Act No. 1994-95), the program was suspended and the Department
of Transportation was prohibited from expending funds to implement the program.
On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
(successor to Envirotest/Synterra Partners) and the Commonwealth of Pennsylvania
entered into a Settlement Agreement pursuant to which the parties settled all
claims which Envirotest might have had against the Commonwealth arising from the
suspension of the emissions testing program. Under the Agreement, Envirotest is
to receive $145 million, with interest at 6% per annum, payable $25 million in
1995, $40 million each in 1996, 1997, and 1998. An additional $15 million may be
required to be paid in 1998, depending upon the results of property liquidations
by Envirotest.
Philadelphia. (For the fiscal year ending June 30, 1991, Philadelphia
experienced a cumulative General Fund balance deficit of $153.5 million. The
audit findings for the fiscal year ending June 30, 1992 place the cumulative
General Fund balance deficit at $224.9 million.)
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Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist Philadelphia in
remedying fiscal emergencies was enacted by the General Assembly and approved by
the Governor in June 1991. PICA is designed to provide assistance through the
issuance of funding debt and to make factual findings and recommendations to the
assisted city concerning its budgetary and fiscal affairs. At this time,
Philadelphia is operating under a five-year fiscal plan approved by PICA on
April 17, 1995.
To date, PICA has issued $1,418,680,000 of its Special Tax Revenue
Bonds. This financial assistance has included the refunding of certain city
general obligation bonds, funding of capital projects and the liquidation of the
Cumulative General Fund balance deficit as of June 30, 1992, of $224.9 million.
The audited General Fund balance of the city as of June 30, 1995, showed a
surplus of approximately $80.5 million, up from approximately $1.54 million as
of June 30, 1994.
No further bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing a
cash flow deficit expires on December 31, 1996.
Repurchase Agreements. Each of the Funds except the U.S. Treasury Securities
Money Market Fund may invest in repurchase agreements. Repurchase agreements are
agreements by which a person (e.g., a portfolio) obtains a security and
simultaneously commits to return the security to the seller (a financial
institution deemed to present minimal risk of bankruptcy during the term of the
agreement based on guidelines established by the Trustees of the Trust) at an
agreed-upon price (including principal and interest) on an agreed-upon date
within a number of days (usually not more than seven) from the date of purchase.
The resale price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the underlying
security. A repurchase agreement involves the obligation of the seller to pay
the agreed-upon price, which obligation is in effect secured by the value of the
underlying security.
Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Funds will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Advisor or
Sub-Advisor monitors compliance with this requirement). Under all repurchase
agreements entered into by the Funds, a Fund takes actual or constructive
possession of the underlying collateral. However, if the seller defaults, a Fund
could realize a loss on the sale of the underlying security to the extent that
the proceeds of sale including accrued interest are less than the resale price
provided in the agreement including interest. In addition, even though the
United States Bankruptcy Code provides protection for most repurchase
agreements, if the seller should be involved in bankruptcy or insolvency
proceedings, a Fund may incur delay and costs in selling the underlying security
or may suffer
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a loss of principal and interest if a Fund is treated as an unsecured creditor
and required to return the underlying security to the seller's estate.
Securities Lending. Each Fund may lend securities pursuant to agreements
requiring that the loans be continuously secured by cash, U.S. Government
securities, or any combination of cash and such securities, as collateral equal
at all times to 100% of the market value of the securities lent. Such loans will
not be made if, as a result, the aggregate amount of all outstanding securities
loans for the Fund exceed one-third of the value of a Fund's total assets taken
at fair market value. A Fund will continue to receive interest or dividends on
the securities lent while simultaneously earning interest on the investment or
dividends on the securities lent while simultaneously earning interest on the
investment of the cash collateral in U.S. Government securities. However, a Fund
will normally pay lending fees to such broker-dealers and related expenses from
the interest earned on invested collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
fail financially. However, loans are made only to borrowers deemed by the
Advisor or the Sub-Advisor to be of good standing and when, in the judgment of
the Advisor or the Sub-Advisor, the consideration which can be earned currently
from such securities loans justifies the attendant risk. Any loan may be
terminated by either party upon reasonable notice to the other party. The Funds
may use SEI Investments Distribution Company ("SEI Investments" or the
"Distributor") or a broker/dealer affiliate of the Advisor as a broker in these
transactions.
Standby Commitments and Puts. The Tax-Exempt Money Market, New Jersey Municipal
Securities and Pennsylvania Municipal Securities Funds may purchase securities
at a price which would result in a yield to maturity lower than that generally
offered by the seller at the time of purchase when they can simultaneously
acquire the right to sell the securities back to the seller, the issuer, or a
third party (the "writer") at an agreed-upon price at any time during a stated
period or on a certain date. Such a right is generally denoted as a "standby
commitment" or a "put." The purpose of engaging in transactions involving
standby commitments or puts is to maintain flexibility and liquidity to permit
the Funds to meet redemptions and remain as fully invested as possible in
municipal securities. The right to put the securities depends on the writer's
ability to pay for the securities at the time the put is exercised. The Funds
will limit their put transactions to institutions which the Advisor believes
present minimum credit risks, and the Advisor will use its best efforts to
initially determine and continue to monitor the financial strength of the
sellers of the options by evaluating their financial statements and such other
information as is available in the marketplace. It may, however, be difficult to
monitor the financial strength of the writers because adequate current financial
information may not be available. In the event that any writer is unable to
honor a put for financial reasons, the Fund would be a general creditor (i.e.,
on a parity with all other unsecured creditors) of the writer. Furthermore,
particular provisions of the contract between the Fund and the writer may excuse
the writer from repurchasing the securities; for example, a change in the
published rating of the underlying
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municipal securities or any similar event that has an adverse effect on the
issuer's credit or a provision in the contract that the put will not be
exercised except in certain special cases, for example, to maintain portfolio
liquidity. The Fund could, however, at any time sell the underlying portfolio
security in the open market or wait until the portfolio security matures, at
which time it should realize the full par value of the security.
Municipal Securities purchased subject to a put may be sold to third persons at
any time, even though the put is outstanding, but the put itself, unless it is
an integral part of the security as originally issued, may not be marketable or
otherwise assignable. Therefore, the put would have value only to the Fund. Sale
of the securities to third parties or lapse of time with the put unexercised may
terminate the right to put the securities. Prior to the expiration of any put
option, the Fund could seek to negotiate terms for the extension of such an
option. If such a renewal cannot be negotiated on terms satisfactory to the
Fund, the Fund could, of course, sell the portfolio security. The maturity of
the underlying security will generally be different from that of the put. There
will be no limit to the percentage of portfolio securities that a Fund may
purchase subject to a standby commitment or put, but the amount paid directly or
indirectly for all standby commitments and puts, which are not integral parts of
the security as originally issued, held in the Fund will not exceed 1/2 of 1% of
the value of the total assets of such Fund calculated immediately after any such
put is acquired.
Variable Amount Master Demand Notes. The Tax-Exempt Money Market, Equity Growth,
Equity Income, Balanced and International Growth Funds may invest in variable
amount master demand notes which may or may not be backed by bank letters of
credit. These notes permit the investment of fluctuating amounts at varying
market rates of interest pursuant to direct arrangements between the Trust, as
lender, and the borrower. Such notes provide that the interest rate on the
amount outstanding varies on a daily, weekly or monthly basis depending upon a
stated short-term interest rate index. Both the lender and the borrower have the
right to reduce the amount of outstanding indebtedness at any time. There is no
secondary market for the notes. It is not generally contemplated that such
instruments will be traded.
When-Issued Securities. The Funds may acquire fixed income and equity securities
on a when-issued basis, in which case delivery and payment normally take place
within 45 days after the date of commitment to purchase. The Funds will only
make commitments to purchase obligations on a when-issued basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities may be subject to market
fluctuation, and no interest accrues on a fixed income security to the purchaser
during this period. The payment obligation and the interest rate that will be
received on the fixed income securities are each fixed at the time the purchaser
enters into the commitment. Purchasing obligations on a when-issued basis is a
form of leveraging and can involve a risk that the yields available in the
market when the delivery takes place may actually
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be higher than those obtained in the transaction itself. In that case there
could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the Custodian, and the Funds will
maintain liquid assets in an amount at least equal in value to the Funds'
commitments to purchase when-issued securities. If the value of these assets
declines, the Funds will place additional liquid assets in the account on a
daily basis so that the value of the assets in the account is at all times equal
to the amount of such commitments.
INVESTMENT LIMITATIONS
The following investment limitations are fundamental policies of each Fund which
cannot be changed with respect to a Fund without the consent of the holders of a
majority of that Fund's outstanding shares. The term "majority of the
outstanding shares" means the vote of (i) 67% or more of a Fund's shares present
at a meeting, if more than 50% of the outstanding shares of a Fund are present
or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares,
whichever is less.
Each Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer, with
the exception of the International Growth Fund which may invest more
than 5% of its total assets in the securities of a single issuer.
2. Invest in companies for the purpose of exercising control; provided,
that this limitation does not apply to the Equity Growth Fund.
3. Borrow money except for temporary or emergency purposes and then only
in an amount not exceeding 10% of the value of total assets. Any
borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of the Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, the Fund shall, within three days
thereafter or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount of
its borrowings to such an extent that the asset coverage of such
borrowings shall be at least 300%. This borrowing provision is included
for temporary liquidity or emergency purposes. All borrowings in excess
of 5% of the value of a Fund's total assets will be repaid before
making additional investments and any interest paid on such borrowings
will reduce income.
4. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed
10% of total assets taken at
S - 33
<PAGE>
current value at the time of the incurrence of such loan, except as
permitted with respect to securities lending.
5. Purchase or sell real estate, real estate limited partnership
interests, futures contracts, commodities or commodities contracts;
provided that this shall not prevent a Fund from investing in readily
marketable securities of issuers which own or invest in real estate, or
commodities or commodities contracts; and provided that the Equity
Growth Fund and the International Growth Fund can invest in futures
contracts, commodities and commodities contracts.
6. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term
credits as necessary for the clearance of security transactions.
7. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a Fund security.
8. Purchase securities of other investment companies except as permitted
by the Investment Company Act of 1940, as amended (the "1940 Act"), and
the rules and regulations thereunder. Under these rules and
regulations, as currently in effect, a Fund is prohibited from
acquiring the securities of other investment companies if, as a result
of such acquisition, the Fund owns more than 3% of the total voting
stock of the company; securities issued by any one investment company
represent more than 5% of the Fund's total assets; or securities (other
than treasury stock) issued by all investment companies represent more
than 10% of the Fund's total assets.
9. Issue senior securities (as defined in the 1940 Act) except in
connection with permitted borrowings as described above or as permitted
by rule, regulation or order of the Securities and Exchange Commission.
10. Purchase or retain securities of an issuer if, to the knowledge of the
Trust, an officer, trustee, partner or director of the Trust or any
investment advisor of the Trust owns beneficially more than 1/2 of 1%
of the shares or securities of such issuer and all such officers,
trustees, partners and directors owning more than 1/2 of 1% of such
shares or securities together own more than 5% of such shares or
securities; provided that limitation does not apply to the Equity
Growth Fund.
Non-Fundamental Policies. The following investment policies are non-fundamental
policies that may be changed by the Board of Trustees without shareholder
approval.
No Fund may:
S - 34
<PAGE>
1. Invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases; provided that this
limitation does not apply to the Equity Growth Fund.
2. Except for the Equity Growth Fund and the International Growth Fund,
write or purchase puts, calls, options, warrants, or combinations
thereof; except that (i) the Tax-Exempt Money Market, New Jersey
Municipal Securities and Pennsylvania Municipal Securities Funds may
purchase securities subject to a put and (ii) the Equity Value, Equity
Income, Mid Cap and Balanced Funds may purchase warrants. However, the
Equity Value, Equity Income, Mid Cap and Balanced Funds each may not
invest more than 5% of its net assets in warrants; provided that of
this 5%, no more than 2% may be in warrants not listed on the New York
Stock Exchange or the American Stock Exchange.
The following non-fundamental policies are additional policies with respect to
the Equity Growth Fund only.
The Equity Growth Fund may not:
1. Purchase or retain securities of an issuer if, to the knowledge of the
Trust, an officer, trustee, partner or director of the Trust or any
investment advisor of the Trust owns beneficially more than 1/2 of 1%
of the shares or securities of such issuer and all such officers,
trustees, partners and directors owning more than 1/2 of 1% of such
shares or securities together own more than 5% of such shares or
securities.
2. Invest in companies for the purpose of exercising control.
The foregoing percentages apply at the time of the purchase of a security.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Unless otherwise noted, the business address of each Trustee and each
Executive Officer is SEI Investments Company ("SEI"), Oaks, Pennsylvania 19456.
S - 35
<PAGE>
Certain officers of the Trust also serve as officers of some or all of the
following: The Achievement Funds Trust, The Advisors' Inner Circle Fund, The
Arbor Fund, ARK Funds, Bishop Street Funds, CoreFunds, Inc., CrestFunds, Inc.,
CUFUND, FMB Funds, Inc., First American Funds, Inc., First American Investment
Funds, Inc., First American Strategy Funds, Inc, HighMark Funds, Marquis
Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The PBHG Funds, Inc.,
Profit Funds Investment Trust, Rembrandt Funds(R), Santa Barbara Group of Mutual
Funds, Inc., 1784. Funds(R), SEI Asset Allocation Trust, SEI Daily Income Trust,
SEI Index Funds, SEI Institutional Investments Trust, SEI Institutional Managed
Trust, SEI International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
STI Classic Funds, STI Classic Variable Trust and TIP Funds, each of which is an
open-end management investment company managed by SEI Fund Resources or its
affiliates and, except for Profit Funds Investment Trust, Rembrandt Funds(R),
and Santa Barbara Group of Mutual Funds, Inc., are distributed by SEI
Investments Distribution Company.
JAMES B. GRECCO - Trustee - Date of Birth: 02/17/33 - President, Grecco Auto
Body Inc. (1986 - present); President, Grecco Auto Imports, Inc. (1970 -
present); President, Joyce Motor Corp. (1979 - present); President, Grecco Auto
Leasing Inc. (1964 - present); President, Grecco Lincoln Mercury Inc. (1964 -
present).
CHRISTINE H. YACKMAN - Trustee - Date of Birth: 12/30/61 - Executive and
Corporate Officer, Edgeboro Disposal, Inc. and Affiliated Companies (1991 -
present); Officer Manager, Herbert Sand Co., Inc. (1981 - 1986).
ARTHUR L. BERMAN - Trustee - Date of Birth: 07/27/27 - President of Bertek, Inc.
(1972 - 1994).
RAY KONRAD - Trustee - Date of Birth: 9/17/36 - Chairman and Chief Executive
Officer of American Compressed Gases, Inc. (1961 - present).
ROBERT A. NESHER - Chairman of the Board of Trustees* - Date of Birth: 08/17/46
- - Retired since 1994. Director, Executive Vice President of SEI Corporation
(1986 - 1994). Director and Executive Vice President of the Administrator and
Distributor (1981 - 1994). Trustee of The Arbor Fund, Marquis Funds(R),
Advisors' Inner Circle Fund, SEI Asset Allocation Trust, SEI Daily Income Trust,
SEI Index Funds, SEI Institutional Managed Trust, SEI International Trust, SEI
Institutional Investments Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
1784 Funds(R), The Pillar Funds and Rembrandt Funds.
DAVID G. LEE - President, Chief Executive Officer - Date of Birth: 4/16/52 -
Senior Vice President of the Distributor since 1993. Vice President of the
Distributor since 1991. President, GW Sierra Trust Funds prior to 1991.
S - 36
<PAGE>
KEVIN P. ROBINS - Vice President, Assistant Secretary - Date of Birth: 4/15/61 -
Senior Vice President, General Counsel and Assistant Secretary of SEI, Senior
Vice President, General Counsel and Secretary of the Administrator and the
Distributor since 1994. Vice President and Assistant Secretary of SEI, the
Administrator and Distributor (1992 - 1994). Associate, Morgan, Lewis & Bockius
LLP (law firm), (1988 - 1992).
KATHRYN L. STANTON - Vice President, Assistant Secretary - Date of Birth:
11/19/58 - Vice President and Assistant Secretary, Deputy General Counsel, Vice
President and Assistant Secretary of SEI, Vice President and Assistant Secretary
of the Administrator and Distributor since 1994. Associate, Morgan, Lewis &
Bockius LLP (law firm), (1989 - 1994).
RICHARD W. GRANT - Secretary - Date of Birth: 10/25/45 - 2000 One Logan Square,
Philadelphia, PA 19103, Partner of Morgan, Lewis & Bockius LLP (law firm),
Counsel to the Trust, Administrator and Distributor.
SANDRA K. ORLOW - Vice President, Assistant Secretary - Date of Birth: 10/18/53
- - Vice President and Assistant Secretary of the Administrator and Distributor
since 1988.
MARK NAGLE - Controller and Chief Financial Officer - Date of Birth: 10/20/59 -
Vice President of Fund Accounting and Administration of SEI Fund Resources since
November 1996. Vice President of Fund Accounting, BISYS Fund Services, September
1995 to November 1996. Senior Vice President and Site Manager, Fidelity
Investments, 1981 to September 1995.
TODD B. CIPPERMAN - Vice President, Assistant Secretary - Date of Birth: 2/14/66
- - Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine (law firm) (1994 - 1995).
Associate, Winston & Strawn (law firm) (1991 - 1994).
BARBARA A. NUGENT - Vice President, Assistant Secretary - Date of Birth: 6/18/56
- - Vice President and Assistant Secretary of SEI, the Administrator and
Distributor since 1996. Associate, Drinker Biddle & Reath (law firm), 1994 -
1996. Assistant Vice President/Administration, Delaware Service Company, Inc.,
1992 - 1993; Assistant Vice President, Operations of Delaware Service Company,
Inc., 1988 - 1992.
MARC H. CAHN - Vice President, Assistant Secretary - Date of Birth: 6/19/57 -
Vice President and Assistant Secretary of SEI, the Distributor and Administrator
since 1996. Associate General Counsel, Barclays Bank PLC, 1995 - 1996. ERISA
Counsel for First Fidelity Bancorporation, 1994 - 1995. Associate, Morgan, Lewis
& Bockius LLP (law firm), 1989 - 1994.
- --------------------
* "Interested person" within the meaning of the 1940 Act.
S - 37
<PAGE>
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for Trustees who are not affiliated
with the Administrator. During the fiscal year ended December 31, 1996, the
Trust paid approximately $28,000.00 in fees to the unaffiliated Trustees.
Compensation of officers and Trustees of the Trust affiliated with the
Administrator is paid by the Administrator.
Compensation Table
<TABLE>
<CAPTION>
Total Compensation
From Registrant and
Fund Complex Paid to
Name of Person, Aggregate Pension or Retirement Estimated Annual Trustees for the Fiscal
Position Compensation From Benefits Accrued As Benefits Upon Year Ended December
Registrant (1) Part of Fund Expenses Retirement 31, 1996 (2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arthur L. Berman, $7,000 N/A N/A $7,000 for services on
Trustee 1 board
- ---------------------------------------------------------------------------------------------------------------------------
Ray Konrad, Trustee $7,000 N/A N/A $7,000 for services on
1 board
- ---------------------------------------------------------------------------------------------------------------------------
James B. Grecco, $7,000 N/A N/A $7,000 for services on
Trustee 1 board
- ---------------------------------------------------------------------------------------------------------------------------
Christine H. Yackman, $7,000 N/A N/A $7,000 for services on
Trustee 1 board
- ---------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, $0 N/A N/A $0
Trustee (3)
===========================================================================================================================
</TABLE>
(1) Amounts do not include travel expenses.
(2) There are no other investment companies in the "Fund Complex" (as that
term is defined in the Securities and Exchange Act of 1934, as
amended).
(3) Mr. Nesher is an "interested person" as defined in the 1940 Act.
THE ADVISOR
The Trust and Summit Bank Investment Management Division, a division of Summit
Bank (the "Advisor"), have entered into an advisory agreement (the "Advisory
Agreement"). The Advisory Agreement provides that the Advisor shall not be
protected against any liability to the Trust or its shareholders by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its obligations or
duties thereunder.
The Advisor will not be required to bear expenses of the Trust to an extent
which would result in a Fund's inability to qualify as a regulated investment
company under provisions of the Code.
The continuance of the Advisory Agreement, after the first two years, must be
specifically approved at least annually (i) by the vote of the Trustees, and
(ii) by the vote of a majority of the Trustees who are not parties to the
Agreement or "interested persons" of any party thereto, cast
S - 38
<PAGE>
in person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement will terminate automatically in the event of its assignment,
and is terminable at any time without penalty by the Trustees of the Trust or,
with respect to the Funds by a majority of the outstanding shares of that Fund,
on not less than 30 days', nor more than 60 days', written notice to the
Advisor, or by the Advisor on 90 days' written notice to the Trust.
The Glass-Steagall Act restricts the securities activities of banks such as
Summit Bank, but federal regulatory authorities permit such banks to provide
investment advisory and other services to mutual funds. Should this position be
challenged successfully in court or reversed by legislation, the Trust might
have to make other investment advisory arrangements.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Funds paid the
following advisory fees:
<TABLE>
<CAPTION>
Fund Fees Paid Fee Waivers
---- ------------------------------------ -----------------------------------
1994 (000) 1995 1996 1994 (000) 1995 1996
---------- ---- ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities Money Market Fund $1,489 $1,379,851 $1,483,256 $0 $11,367 $13,685
Prime Obligation Money Market Fund $481 $775,370 $1,249,323 $0 $11,245 $59,285
Tax-Exempt Money Market Fund $142 $169,810 $2,357,211 $11 $28,362 $19,962
Short-Term Investment Fund $184 $136,321 $147,156 $44 $53,137 $55,941
Fixed Income Fund $665 $549,172 $548,757 $112 $116,572 $132,719
New Jersey Municipal Securities Fund $298 $68,649 $169,521 $270 $214,460 $117,210
Pennsylvania Municipal Securities Fund $19 $0 $0 $19 $18,779 $23,653
Intermediate-Term Government Securities Fund $211 $112,419 $164,062 $51 $77,884 $20,823
GNMA Fund $75 $25,325 $22,158 $21 $30,565 $31,030
Equity Growth Fund * * * * * *
Equity Value Fund $527 $367,084 $503,319 $184 $208,115 $300,124
Equity Income Fund $318 $208,394 $282,807 $119 $135,831 $181,061
Mid Cap Fund $302 $191,285 $228,182 $113 $129,856 $149,082
Balanced Fund $71 $166,657 $161,262 $264 $115,294 $110,920
International Growth Fund * $15,494 $103,626 * $25,007 $30,671
U.S. Treasury Securities Plus Money Market Fund $95 $43,958 $35,739 $52 $41,490 $65,612
Institutional Select Money Market Fund * * * * * *
========== ========== ========== ========== ========== ==========
</TABLE>
* An asterisk indicates that the Fund had not commenced operations as of the
period indicated.
S - 39
<PAGE>
THE SUB-ADVISOR
The Advisor and Wellington Management Company, LLP, which acts as investment
sub-advisor to the International Growth Fund (the "Sub-Advisor"), have entered
into a sub-advisory agreement (the "Sub-Advisory Agreement"). The Sub-Advisory
Agreement provides that the Sub-Advisor shall not be protected against any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard of its obligations or duties thereunder.
The continuance of the Sub-Advisory Agreement, after 2 years, must be
specifically approved at least annually (i) by the vote of the Trustees, and
(ii) by the vote of a majority of the Trustees who are not parties to the
Agreement or "interested persons" of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval. The Sub-Advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Trustees of the Trust or, with
respect to the Fund by a majority of the outstanding shares of the Fund on not
less than 30 days', nor more than 60 days', written notice to the Sub-Advisor,
or by the Sub-Advisor on 90 days' written notice to the Trust.
For the fiscal periods ended December 31, 1994, 1995 and 1996, the Sub-Advisor
received the following fees from the Advisor:
<TABLE>
<CAPTION>
Fees Paid Fee Waivers
Fund -------------------------------- -------------------------------------
---- 1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
International Growth Fund N/A* $12,151 $81,600 N/A* $12,151 $0
=== ======= ======= === ======= ==
</TABLE>
* The International Growth Fund commenced operations on May 1, 1995.
THE ADMINISTRATOR
The Trust and SEI Fund Resources (the "Administrator") are parties to an
Administration Agreement. Formerly, SEI Financial Management Corporation ("SFM")
served as administrator to the Trust. The Administration Agreement provides that
the Administrator shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Trust in connection with the matters to
which the Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Administrator in
the performance of its duties or from reckless disregard by it of its duties and
obligations thereunder. The Administration Agreement shall remain in effect for
a period of five years after the date of the Agreement; thereafter shall
continue in effect for a period of three years; and thereafter for successive
periods of two years subject to review at least annually by the Trustees of the
Trust.
S - 40
<PAGE>
The Administration Agreement is also subject to termination by either party on
not less than 90 days' written notice to the other party.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, PA 19456. SEI Financial Management Corporation ("SFM"), a wholly-owned
subsidiary of SEI, is the owner of all beneficial interest in the Administrator.
SEI and its subsidiaries and affiliates, including the Administrator, are
leading providers of funds evaluation services, trust accounting systems, and
brokerage and information services to financial institutions, institutional
investors and money managers. The Administrator and its affiliates also serve as
administrator to the following other mutual funds: The Achievement Funds Trust,
The Advisors' Inner Circle Fund, The Arbor Fund, ARK Funds, Bishop Street Funds,
CoreFunds, Inc., CrestFunds, Inc., CUFUND, FMB Funds, Inc., First American
Funds, Inc., First American Investment Funds, Inc., First American Strategy
Funds, Inc., HighMark Funds, Marquis Funds(R), Monitor Funds, Morgan Grenfell
Investment Trust, The PBHG Funds, Inc., The Profit Funds Investment Trust,
Rembrandt Funds(R), Santa Barbara Group of Mutual Funds, Inc., 1784 Funds(R),
SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone
Funds, STI Classic Funds, STI Classic Variable Trust and TIP Funds.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Funds paid the
following administrative fees:
<TABLE>
<CAPTION>
Fund Fees Paid Fee Waivers
---- ---------------------------------- ----------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities Money Market Fund $852,000 $794,951 $855,185 $0 $0 $0
Prime Obligation Money Market Fund $276,000 $449,500 $747,383 $0 $0 $0
Tax-Exempt Money Market Fund $81,000 $112,391 $146,103 $0 $0 $0
Short-Term Investment Fund $61,000 $63,153 $67,701 $0 $0 $0
Fixed Income Fund $222,000 $221,916 $227,160 $0 $0 $0
New Jersey Municipal Securities Fund $99,000 $56,645 $86,863 $57,000 $33,587 $8,714
Pennsylvania Municipal Securities Fund $6,000 $0 $0 $6,000 $5,076 $7,884
Intermediate-Term Government Securities Fund $70,000 $63,435 $61,629 $0 $0 $0
GNMA Fund $25,000 $18,630 $17,729 $0 $0 $0
Equity Growth Fund * * * * * *
Equity Value Fund $141,000 $153,388 $214,253 $0 $0 $0
Equity Income Fund $85,000 $91,794 $123,705 $0 $0 $0
Mid Cap Fund $80,000 $85,638 $100,599 $0 $0 $0
</TABLE>
S - 41
<PAGE>
<TABLE>
<CAPTION>
Fund Fees Paid Fee Waivers
---- ---------------------------------- ----------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $71,000 $75,188 $72,586 $0 $0 $0
International Growth Fund * $8,100 $26,860 * $0 $0
U.S. Treasury Securities Plus Money Market Fund $223,000 $199,381 $235,806 $0 $0 $0
Institutional Select Money Market Fund * * * * * *
======== ======== ======== ======== ======== ========
</TABLE>
* An asterisk indicates that the Fund had not commenced operations as of the
period indicated.
FUND TRANSACTIONS
GENERAL
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Trustees, the Advisor and/or Sub-Advisor is responsible for
placing the orders to execute transactions for the Fund. In placing orders, it
is the policy of the Trust to seek to obtain the best net results taking into
account such factors as price (including the applicable dealer spread), the
size, type and difficulty of the transaction involved, the firm's general
execution and operational facilities, and the firm's risk in positioning the
securities involved. While the Advisor and/or Sub-Advisor generally seeks
reasonably competitive spreads or commissions, the Trust will not necessarily be
paying the lowest spread or commission available.
The money market securities in which the Funds invest are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the Advisor
and/or Sub-Advisor will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Money market securities are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. The cost of
executing portfolio securities transactions of the Trust will primarily consist
of dealer spreads and underwriting commissions.
TRADING PRACTICES AND BROKERAGE
The Advisor and/or Sub-Advisor selects brokers or dealers to execute
transactions for the purchase or sale of portfolio securities on the basis of
its judgment of their professional capability to provide the service. The
primary consideration is to have brokers or dealers execute transactions at best
price and execution. Best price and execution refers to many factors, including
the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors
S - 42
<PAGE>
affecting the overall benefit obtained by the account on the transaction. The
Advisor's and/or Sub-Advisor's determination of what are reasonably competitive
rates is based upon the professional knowledge of the Advisor's and/or
Sub-Advisor's trading department as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, the Trust
pays a minimal share transaction cost when the transaction presents no
difficulty.
As described above, bonds, debentures and money market securities are bought and
sold directly with a dealer without payment of a brokerage commission. In these
instances, while there is no direct commission charged, there is a spread (the
difference between the buy and sell price) which is the equivalent of a
commission.
The Advisor and/or Sub-Advisor may allocate, out of all commission business
generated by all of the funds and accounts under management by the Advisor
and/or Sub-Advisor, brokerage business to brokers or dealers who provide
brokerage and research services. These research services include advice, either
directly or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; furnishing of
analyses and reports concerning issuers, securities or industries; providing
information on economic factors and trends, assisting in determining portfolio
strategy, providing computer software used in security analyses, and providing
portfolio performance evaluation and technical market analyses. Such services
are used by the Advisor and/or Sub-Advisor in connection with its investment
decision-making process with respect to one or more funds and accounts managed
by it, and may not be used exclusively with respect to the fund or account
generating the brokerage.
As provided in the Securities Exchange Act of 1934, higher commissions may be
paid to brokers or dealers who provide brokerage and research services than to
brokers or dealers who do not provide such services if such higher commissions
are deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to brokers or dealers who
provide such brokerage and research services, the Trust believes that the
commissions paid to such brokers or dealers are not, in general, higher than
commissions that would be paid to brokers or dealers not providing such services
and that such commissions are reasonable in relation to the value of the
brokerage and research services provided. In addition, portfolio transactions
which generate commissions or their equivalent are directed to brokers or
dealers who provide daily portfolio pricing services to the Trust or who have
agreed to defray other Trust expenses such as custodian fees. Subject to best
price and execution, commissions used for pricing may or may not be generated by
the funds receiving the pricing service.
For the fiscal year ended December 31, 1996, the following commissions were paid
on brokerage transactions, pursuant to an agreement or understanding, to brokers
because of research services provided by the brokers:
S - 43
<PAGE>
<TABLE>
<CAPTION>
Total Dollar Amount of
Transactions Involving Directed
Total Dollar Amount of Brokerage Brokerage Commissions for
Fund Commissions for Research Services Research Services
---- --------------------------------- -------------------------------
<S> <C> <C>
U.S. Treasury Securities Money Market Fund N/A N/A
Prime Obligation Money Market Fund N/A N/A
Tax-Exempt Money Market Fund N/A N/A
Short-Term Investment Fund N/A N/A
Fixed Income Fund N/A N/A
New Jersey Municipal Securities Fund N/A N/A
Pennsylvania Municipal Securities Fund N/A N/A
Intermediate-Term Government Securities Fund N/A N/A
GNMA Fund N/A N/A
Equity Growth Fund * *
Equity Value Fund $114,021 $0
Equity Income Fund $37,450 $0
Mid Cap Fund $32,012 $0
Balanced Fund $32,959 $0
International Growth Fund $359,648 $582
U.S. Treasury Securities Plus Money Market Fund N/A N/A
Institutional Select Money Market Fund * *
</TABLE>
* An asterisk indicates that the Fund had not commenced operations as of the
period indicated.
The Advisor and/or Sub-Advisor may place a combined order for two or more
accounts or funds engaged in the purchase or sale of the same security if, in
its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or fund. It is
believed that the ability of the accounts to participate in volume transactions
will generally be beneficial to the accounts and funds. Although it is
recognized that, in some cases, the joint execution of orders could adversely
affect the price or volume of the security that a particular account or trust
may obtain, it is the opinion of the Advisor and/or Sub-Advisor and the Trust's
Board of Trustees that the advantages of combined orders outweigh the possible
disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Advisor
and/or Sub-Advisor may, at the request of the Distributor, give consideration to
sales of shares of the Trust as a factor in the selection of brokers and dealers
to execute Trust portfolio transactions.
It is expected that the Trust may execute brokerage or other agency transactions
through the Distributor or Summit Discount Brokerage Co., an affiliate of the
Advisor, both of which are registered brokers or dealers, for a commission in
conformity with the 1940 Act, the Securities
S - 44
<PAGE>
Exchange Act of 1934, as amended, and rules promulgated by the Securities and
Exchange Commission (the "SEC"). Under these provisions, the Distributor or
Summit Discount Brokerage Co. is permitted to receive and retain compensation
for effecting portfolio transactions for the Trust on an exchange if a written
contract is in effect between the Distributor and the Trust expressly permitting
the Distributor or Summit Discount Brokerage Co., to receive and retain such
compensation. These rules further require that commissions paid to the
Distributor by the Trust for exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." The Trustees, including those who are not "interested persons" of the
Trust, have adopted procedures for evaluating the reasonableness of commissions
paid to the Distributor and will review these procedures periodically.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Funds paid the
following brokerage commissions:
<TABLE>
<CAPTION>
Total Brokerage Commissions Amount Paid to SEI Investments(1)
Fund ------------------------------- --------------------------------
---- 1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities Money Market Fund N/A N/A N/A N/A N/A $0
Prime Obligation Money Market Fund N/A N/A N/A N/A N/A $53,399
Tax-Exempt Money Market Fund N/A N/A N/A N/A N/A $0
Short-Term Investment Fund N/A N/A N/A N/A N/A N/A
Fixed Income Fund N/A N/A N/A N/A N/A N/A
New Jersey Municipal Securities Fund N/A N/A N/A N/A N/A N/A
Pennsylvania Municipal Securities Fund N/A N/A N/A N/A N/A N/A
Intermediate-Term Government Securities Fund N/A N/A N/A N/A N/A N/A
GNMA Fund N/A N/A N/A N/A N/A N/A
Equity Growth Fund * * * * * *
Equity Value Fund $120,600 $210,169 $289,752 $46,550 $13,100 $6,360
Equity Income Fund $87,892 $96,146 $194,728 $10,080 $750 $1,000
Mid Cap Fund $46,214 $83,236 $129,497 $7,050 $660 N/A
Balanced Fund $32,932 $35,560 $50,970 $13,000 $180 $1,008
International Growth Fund * $44,707 $60,818 * N/A N/A
U.S. Treasury Securities Plus Money Market Fund N/A N/A N/A N/A N/A $16,774
Institutional Select Money Market Fund * * * * * *
</TABLE>
* An asterisk indicates that the Fund had not commenced operations for the
period indicated.
(1) The amounts paid to SEI Investments reflect fees paid in connection with
repurchase agreement transactions.
S - 45
<PAGE>
For the fiscal years indicated, the Funds paid the following brokerage
commissions:
<TABLE>
<CAPTION>
Total $ Amount of Brokerage
Total $ Amount of Brokerage Commissions Paid to Affiliated
Fund Commissions Paid Brokers(1)
---- --------------------------- ------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities Money Market Fund N/A N/A N/A N/A N/A N/A
Prime Obligation Money Market Fund N/A N/A N/A $16,759 $34,101 $53,399
Tax-Exempt Money Market Fund N/A N/A N/A N/A N/A N/A
Short-Term Investment Fund N/A N/A N/A N/A N/A N/A
Fixed Income Fund N/A N/A N/A N/A N/A N/A
New Jersey Municipal Securities Fund N/A N/A N/A N/A N/A N/A
Pennsylvania Municipal Securities Fund N/A N/A N/A N/A N/A N/A
Intermediate-Term Government Securities Fund N/A N/A N/A N/A N/A N/A
GNMA Fund N/A N/A N/A N/A N/A N/A
Equity Growth Fund * * * * * *
Equity Value Fund $120,600 $210,169 $289,752 $46,550 $13,100 $6,360
Equity Income Fund $87,892 $96,146 $194,728 $10,080 $750 $1,000
Mid Cap Fund $46,214 $83,236 $129,497 $7,050 $660 N/A
Balanced Fund $32,932 $35,560 $50,970 $13,000 $180 $1,008
International Growth Fund * $44,707 $60,818 * N/A N/A
U.S. Treasury Securities Plus Money Market Fund N/A N/A N/A $19,818 $14,103 $16,774
Institutional Select Money Market Fund * * * * * *
</TABLE>
<TABLE>
<CAPTION>
% of Total
% of Total Brokerage
Brokerage Transactions Total $ Amount
Commissions Effected of Brokerage
Paid to the Through Commissions
Affiliated Affiliated Paid for
Fund Brokers Brokers Research
---- ----------- ------------ --------------
1996 1996 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury Securities Money Market Fund N/A N/A N/A
Prime Obligation Money Market Fund N/A N/A N/A
Tax-Exempt Money Market Fund N/A N/A N/A
Short-Term Investment Fund N/A N/A N/A
Fixed Income Fund N/A N/A N/A
New Jersey Municipal Securities Fund N/A N/A N/A
Pennsylvania Municipal Securities Fund N/A N/A N/A
Intermediate-Term Government N/A N/A N/A
Securities Fund
GNMA Fund N/A N/A N/A
Equity Growth Fund * * *
Equity Value Fund 6.23% 0.27% N/A
Equity Income Fund 0.78% 0.26% N/A
Mid Cap Fund 0.79% 0.40% N/A
Balanced Fund 0.51% 0.26% N/A
International Growth Fund N/A N/A N/A
U.S. Treasury Securities Plus Money Market Fund N/A N/A N/A
Institutional Select Money Market Fund * * *
</TABLE>
* An asterisk indicates that the Fund had not commenced operations as of the
period indicated.
(1) The amounts paid to SEI Investments reflect fees paid in connection with
repurchase agreement transactions.
"Regular brokers or dealers" of the Trust are the ten brokers or dealers that,
during the most recent fiscal year, (i) received the greatest dollar amounts of
brokerage commissions from the Trust's portfolio transactions, (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust,
or (iii) sold the largest dollar amounts of the Trust's shares. At December 31,
1996, the following Funds held securities of the Trust's "regular brokers or
dealers" as follows: The Prime Obligation Money Market Fund held $14,956,000 in
commercial paper with Merrill Lynch, $27,549,000 in repurchase agreements with
J.P. Morgan and $8,986,000 in repurchase agreements with Nomura Securities; The
Short-Term Investment Fund held $250,000 in corporate bonds with Morgan Stanley;
The Equity Value Fund held $2,441,000 in stock with J.P. Morgan; The Equity
Income Fund held $1,269,000 in stock with J.P. Morgan; The Balanced Fund
S - 46
<PAGE>
held $342,000 in stock with J.P. Morgan; The International Growth Fund held
$774,000 in repurchase agreements with J.P. Morgan; and The U.S. Treasury
Securities Plus Money Market Fund held $13,189,000 in repurchase agreements with
J.P. Morgan and $13,296,000 in repurchase agreements with Nomura Securities.
THE DISTRIBUTOR AND THE DISTRIBUTION PLANS
SEI Investments Distribution Co., a wholly owned subsidiary of SEI, and the
Trust are parties to a distribution agreement (the "Distribution Agreement")
dated February 28, 1992 which applies to Class A Shares and Class I Shares of
the Funds and a distribution and service agreement (the "Class B Distribution
Agreement") dated February 20, 1997, which applies to the Class B Shares of the
Funds. The Distributor has an obligation to use its best efforts to distribute
shares of the Fund on a continuous basis. The Distributor receives no
compensation for distribution of Class I shares, although it does receive
compensation pursuant to a distribution plan with respect to the U.S. Treasury
Securities Plus Money Market Fund as described below.
The Distribution Agreement and the Class B Distribution Agreement are renewable
annually and may be terminated by the Distributor, the Qualified Trustees, or by
a majority vote of the outstanding securities of the Trust upon not more than 60
days' written notice by either party. "Qualified Trustees" are Trustees of the
Trust who are not interested persons and have no financial interest in the
Distribution Agreement, Class B Distribution Agreement or any related agreement
or plan.
The Distribution Plan adopted by the U.S. Treasury Securities Plus Money Market
Fund shareholders (the "Distribution Plan") provides that the Trust will pay the
Distributor a fee of up to .03% of the Portfolio's average daily net assets
which the Distributor can use to compensate brokers or dealers and service
providers, including Summit Bank and its affiliates, which provide distribution
related services to shareholders or their customers who beneficially own shares
of the Fund.
The distribution plan for Class A Shares (the "Class A Distribution Plan")
provides that the Trust will pay the Distributor a fee of up to .25% of the
Class A Shares average daily net assets which the Distributor can use to
compensate brokers or dealers and service providers, including Summit Bank and
its affiliates, which provide distribution related services to Class A
shareholders or their customers who beneficially own Class A Shares.
The distribution and service plan for Class B Shares (the "Class B Distribution
Plan") provides that the Trust will pay the Distributor a Rule 12b-1 fee of up
to .75% of the Class B Shares, average daily net assets, which the Distributor
can use to compensate brokers or dealers and service providers, including Summit
Bank and its affiliates, that provide distribution-related services to Class B
Shareholders or their customers who beneficially own Class B Shares. In
addition, the Class B Distribution Plan provides that the Trust will pay the
Distributor a
S - 47
<PAGE>
shareholder servicing fee of up to .25% of the Class B Shares, average daily net
assets, which the Distributor can use to compensate service providers, including
Summit Bank and its affiliates.
Services under the Distribution Plan, the Class A Distribution Plan and the
Class B Distribution Plan (collectively, the "Plans") may include establishing
and maintaining customer accounts and records; aggregating and processing
purchase and redemption requests from customers; placing net purchase and
redemption orders with the Distributor; automatically investing customer account
cash balances; providing periodic statements to customers; arranging for wires;
answering customer inquiries concerning their investments; assisting customers
in changing dividend options, account designations, and addresses; performing
sub-accounting functions; processing dividend payments from the Trust on behalf
of customers; and forwarding shareholder communications from the Trust (such as
proxies, shareholder reports, and dividend distribution and tax notices) to
these customers with respect to investments in the Trust. Certain state
securities laws may require those financial institutions providing such
distribution services to register as dealers pursuant to state law.
Although banking laws and regulations prohibit banks from distributing shares of
open-end investment companies such as the Trust, according to an opinion issued
to the staff of the SEC by the Office of the Comptroller of the Currency,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as providing shareholder services. Should future
legislative, judicial or administrative action prohibit or restrict the
activities of financial institutions in connection with providing shareholder
services, the Trust may be required to alter materially or discontinue its
arrangements with such financial institutions.
The Trust has adopted each Plan in accordance with the provisions of Rule 12b-1
under the 1940 Act which regulates circumstances under which an investment
company may directly or indirectly bear expenses relating to the distribution of
its shares.
Continuance of each Plan must be approved annually by a majority of the Trustees
of the Trust and by a majority of the Qualified Trustees. Each Plan requires
that quarterly written reports of amounts spent under the respective Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees.
No Plan may be amended to increase materially the amount which may be spent
thereunder without approval by a majority of the outstanding shares of the
Trust. All material amendments of a Plan will require approval by a majority of
the Trustees of the Trust and of the Qualified Trustees.
The following Funds imposed a front-end sales charge upon their Class A shares
in the amounts shown for the fiscal years ended December 31, 1994, 1995 and
1996:
<TABLE>
<CAPTION>
Dollar Amount of Loads
Fund Dollar Amount of Loads Retained by SID
---- --------------------------------------- ---------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Short-Term Investment Fund $5,749 $15,342 $4,187 $0 $161 $407
</TABLE>
S - 48
<PAGE>
<TABLE>
<CAPTION>
Dollar Amount of Loads
Fund Dollar Amount of Loads Retained by SEI Investments
---- ---------------------------------------- ----------------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund $62,111 $54,106 $45,951 $83 $2,113 $6,252
New Jersey Municipal Securities Fund $91,704 $75,388 $26,191 $0 $3,083 $3,531
Pennsylvania Municipal Securities Fund $1,415 $560 $648 $1 $36 $72
Intermediate-Term Government
Securities Fund $35,942 $54,745 $19,783 $10 $1,768 $2,774
GNMA Fund $20,344 $5,637 $4,405 $0 $286 $514
Equity Growth Fund * * * * * *
Equity Value Fund $33,476 $133,599 $57,084 $0 $4,978 $8,140
Equity Income Fund $92,897 $111,481 $99,330 $0 $4,040 $13,726
Mid Cap Fund $120,627 $46,673 $18,446 $103 $1,351 $2,605
Balanced Fund $54,010 $54,484 $38,379 $0 $1,315 $5,421
International Growth Fund N/A $17,356 $13,212 N/A $673 $1,868
</TABLE>
* The Equity Growth Fund had not commenced operations as of the periods
indicated.
The U.S. Treasury Securities Money Market Fund, Prime Obligation Money Market
Fund and Tax-Exempt Money Market Fund offer Class A Shares without a sales
charge, and therefore, no information is provided with respect to such Funds.
Class B Shares were not operational as of December 31, 1996 and, therefore, no
information regarding Class B Shares sales charges is presented. Class I Shares,
the U.S. Treasury Securities Plus Money Market Fund and the Institutional Select
Money Market Fund do not impose sales charges.
For the fiscal year ended December 31, 1996, the Class A Shares of the Funds
incurred the following distribution expenses:
<TABLE>
<CAPTION>
Total Distribution
Total Distribution Expenses (as a % Printing Other
Fund Expenses of net assets) Sales Expenses Costs Costs
---- ------------------ ------------------ -------------- -------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities Money Market Fund $8,757 .25% $8,757 N/A N/A
Prime Obligation Money Market Fund $21,448 .25% $21,448 N/A N/A
Tax-Exempt Money Market Fund $9,628 .25% $9,628 N/A N/A
Short-Term Investment Fund $3,719 .25% $3,719 N/A N/A
Fixed Income Fund $15,048 .25% $15,048 N/A N/A
New Jersey Municipal Securities Fund $58,111 .25% $58,111 N/A N/A
Pennsylvania Municipal Securities Fund $764 .25% $764 N/A N/A
Intermediate-Term Government Securities Fund $8,102 .25% $8,102 N/A N/A
GNMA Fund $3,925 .25% $3,925 N/A N/A
Equity Growth Fund * * * * *
Equity Value Fund $22,472 .25% $22,472 N/A N/A
</TABLE>
S - 49
<PAGE>
<TABLE>
<CAPTION>
Total Distribution
Total Distribution Expenses (as a % Printing Other
Fund Expenses of net assets) Sales Expenses Costs Costs
---- ------------------- ------------------ -------------- -------- -----
<S> <C> <C> <C> <C> <C>
Equity Income Fund $29,216 .25% $29,216 N/A N/A
Mid Cap Fund $14,623 .25% $14,623 N/A N/A
Balanced Fund $22,296 .25% $22,296 N/A N/A
International Growth Fund $2,260 .25% $2,260 N/A N/A
</TABLE>
* An asterisk indicates that the Fund had not commenced operations as of the
period indicated.
Class B Shares were not operational as of December 31, 1996 and, therefore, no
information regarding Class B Shares distribution expenses is presented. Class I
Shares do not have distribution expenses.
For the fiscal year ended December 31, 1996, the U.S. Treasury Securities Plus
Money Market Fund incurred the following distribution expenses:
<TABLE>
<CAPTION>
Total Total Distribution
U.S. Treasury Securities Plus Distribution Expenses (as a %
Money Market Fund Expenses of net assets) Sales Expenses Printing Costs Other Costs
- ------------------------------ ------------- ------------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
1996 $18,153 .03% $18,153 N/A N/A
</TABLE>
For the fiscal year ended December 31, 1996, the Institutional Select Money
Market Fund had not commenced operations.
PERFORMANCE
COMPUTATION OF YIELD
Money Market Funds. From time to time the U.S. Treasury Securities Money Market,
U.S. Treasury Securities Plus Money Market, Prime Obligation Money Market,
Tax-Exempt Money Market and Institutional Select Money Market Funds advertise
their "current yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Funds refers to the income generated by an investment in a Fund
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 "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
a Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment.
The current yield of the Funds will be calculated daily based upon the seven
days ending on the date of calculation ("base period"). The yield is computed by
determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing shareholder account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge
S - 50
<PAGE>
reflecting deductions from shareholder accounts, and dividing such net change by
the value of the account at the beginning of the same period to obtain the base
period return and multiplying the result by (365/7). Realized and unrealized
gains and losses are not included in the calculation of the yield. The effective
compound yield of the Funds is determined by computing the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account 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 compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula: Effective Yield = [(Base
Period Return + 1) 365/7)] - 1. The current and the effective yields reflect the
reinvestment of net income earned daily on portfolio assets.
The Tax-Exempt Money Market Fund may also calculate its tax equivalent yield as
described under "Other Yields" below.
For the 7-day period ended December 31, 1996, the Money Market Funds' current,
effective and tax-equivalent yields were as follows:
<TABLE>
<CAPTION>
Tax-Equivalent
Fund Class* Current Yield Effective Yield Yield
- ---- ------ ------------- --------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities Money Market Fund I 4.38% 4.48% N/A
A 4.13% 4.22% N/A
Prime Obligation Money Market Fund I 4.76% 4.88% N/A
A 4.52% 4.63% N/A
Tax-Exempt Money Market Fund I 3.21% 3.26% 4.65%
A 2.96% 3.00% 4.29%
U.S. Treasury Securities Plus Money Market Fund N/A 4.76% 4.87% N/A
Institutional Select Money Market Fund ** ** ** **
</TABLE>
* Class B Shares were not operational as of December 31, 1996 and, therefore,
no yield information is provided for Class B Shares of the Prime Obligation
Money Market Fund.
** Institutional Select Money Market Fund was not operational as of December 31,
1996.
Other Yields. The Short-Term Investment, Fixed Income, New Jersey Municipal
Securities, Pennsylvania Municipal Securities, Intermediate-Term Government
Securities, GNMA, Equity Value, Equity Income, Mid Cap, Balanced and
International Growth Funds may advertise a 30-day yield. These figures will be
based on historical earnings and are not intended to indicate future
performance. The yield of these Funds refers to the annualized income generated
by an investment in the Funds over a specified 30-day period and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
Yield = 2[{(a-b)/cd + 1}6 - 1] where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of reimbursement); c = the
average daily number of shares
S - 51
<PAGE>
outstanding during the period that were entitled to receive dividends; and d =
the maximum offering price per share on the last day of the period.
The tax equivalent yield for the Tax-Exempt Money Market, New Jersey Municipal
Securities and Pennsylvania Municipal Securities Funds is computed by dividing
that portion of the Fund's yield which is tax-exempt by one minus a stated
federal and/or state income tax rate and adding the product to that portion, if
any, of the Fund's yield that is not tax-exempt. (Tax equivalent yields assume
the payment of federal income taxes at a rate of 31% and, if applicable, New
Jersey income taxes at a rate of 6.5% and Pennsylvania income taxes at a rate of
2.8%).
Yields are one basis upon which investors may compare the Funds with other
funds; however, yields of other funds and other investment vehicles may not be
comparable because of the factors set forth above and differences in the methods
used in valuing portfolio instruments.
The yield of these Funds fluctuates, and the annualization of a week's dividend
is not a representation by the Trust as to what an investment in the Fund will
actually yield in the future. Actual yields will depend on such variables as
asset quality, average asset maturity, the type of instruments the Fund invests
in, changes in interest rates on money market instruments, changes in the
expenses of the Fund and other factors.
For the 30-day period ended December 31, 1996 the yields on the Fixed Income
Funds were as follows:
<TABLE>
<CAPTION>
Fund Class* Current Yield Tax Equivalent Yield
- ---- ------ ------------- ---------------------
<S> <C> <C> <C>
Short-Term Investment Fund I 4.71% N/A
A 4.43% N/A
Fixed Income Fund I 5.62% N/A
A 5.15% N/A
New Jersey Municipal I 3.90% 4.17%
Securities Fund A 3.63% 3.88%
Pennsylvania Municipal I 4.21% 4.33%
Securities Fund A 3.92% 4.03%
Intermediate-Term I 5.57% N/A
Government Securities Fund A 5.10% N/A
GNMA Fund I 6.00% N/A
A 5.58% N/A
</TABLE>
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<PAGE>
* Class B Shares were not operational as of December 31, 1996 and, therefore, no
yields are provided for Class B Shares.
CALCULATION OF TOTAL RETURN
From time to time, the Short-Term Investment, Fixed Income, New Jersey Municipal
Securities, Pennsylvania Municipal Securities, Intermediate-Term Government
Securities, GNMA, Equity Growth, Equity Value, Equity Income, Mid Cap, Balanced
and International Growth Funds may advertise total return on an "average annual
total return" basis and on an "aggregate total return" basis for various
periods. Average annual total return reflects the average annual percentage
change in the value of an investment in a Fund over the particular measuring
period. Aggregate total return reflects the cumulative percentage change in
value over the measuring period. Aggregate total return is computed according to
a formula prescribed by the SEC. The formula can be expressed as follows: P (1 +
T)n = ERV, where P = a hypothetical initial payment of $1,000; T = average
annual total return; n = number of years; and ERV = ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the designated time period
as of the end of such period or the life of the fund. The formula for
calculating aggregate total return can be expressed as (ERV/P)-1.
The calculation of total return assumes reinvestment of all dividends and
capital gain distribution on the reinvestment dates during the period and that
the entire investment is redeemed at the end of the period. In addition the
maximum sales charge for each Fund is deducted from the initial $1,000 payment.
Total return may also be shown without giving effect to any sales charges.
Based on the foregoing, the average total returns for the Funds from inception
through December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------------------
Five Ten Since
Fund Class(1) One Year Year Year Inception*
---- -------- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Short-Term Investment Fund I 4.86% ** ** 4.16%
A (no load) 4.39% ** ** 3.93%
A (load) 3.36% ** ** 3.71%
Fixed Income Fund I 2.94% ** ** 7.02%
A (no load) 2.68% ** ** 6.74%
A (load) (1.45%) ** ** 5.82%
New Jersey Municipal Securities Fund I 3.42% ** ** 6.10%
A (no load) 3.08% ** ** 5.73%
A (load) 2.04% ** ** 5.50%
</TABLE>
S - 53
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------------------------
Five Ten Since
Fund Class(1) One Year Year Year Inception*
---- -------- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Pennsylvania Municipal Securities Fund I 3.89% ** ** 4.46%
A (no load) 3.74% ** ** 4.28%
A (load) 2.73% ** ** 4.00%
Intermediate-Term Government Securities I 3.26% ** ** 5.62%
Fund A (no load) 3.01% ** ** 5.36%
A (load) (1.10%) ** ** 4.45%
GNMA Fund I 3.09% ** ** 5.00%
A (no load) 2.73% ** ** 4.64%
A (load) (.38%) ** ** 3.77%
Equity Growth Fund I ** ** ** **
A (no load) ** ** ** **
A (load) ** ** ** **
Equity Value Fund I 21.69% ** ** 13.14%
A (no load) 21.15% ** ** 12.82%
A (load) 16.34% ** ** 11.85%
Equity Income Fund I 21.01% ** ** 14.38%
A (no load) 20.70% ** ** 14.10%
A (load) 15.83% ** ** 13.12%
Mid Cap Fund I 13.56% ** ** 9.54%
A (no load) 13.32% ** ** 9.27%
A (load) 8.80% ** ** 8.33%
Balanced Fund I 13.77% ** ** 10.27%
A (no load) 13.39% ** ** 9.97%
A (load) 8.88% ** ** 9.02%
International Growth Fund I 11.17% ** ** 11.46%
A (no load) 10.88% ** ** 11.18%
A (load) 6.42% ** ** 8.48%
</TABLE>
* April 1, 1992 except for the New Jersey Municipal Securities Fund, which
commenced operations on May 4, 1992. The Pennsylvania Municipal Securities
Fund-Class I and GNMA Fund-Class I commenced operations on May 3, 1993. The
Pennsylvania Municipal Securities Fund-Class A and the GNMA Fund-Class A
commenced operations on May 13, 1993 and May 5, 1993, respectively. The
International Growth Fund-Class I and International Growth Fund-Class A
commenced operation as of May 1, 1995 and May 4, 1995, respectively. The Equity
Growth Fund had not commenced operations as of December 31, 1996.
S - 54
<PAGE>
** Not in operation during period.
(1) Class B Shares were not operational as of December 31, 1996 and, therefore,
no total return information is provided for Class B Shares.
The Funds' performance may from time to time be compared to other mutual funds
tracked by mutual fund rating services (such as Lipper Analytical Services) or
financial and business publications and periodicals, broad groups of comparable
mutual funds, unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs or
to other investment alternatives. The Funds may quote Morningstar, Inc., a
service that ranks mutual funds on the basis of risk-adjusted performance. The
Funds may quote Ibbotson Associates of Chicago, Illinois, which provides
historical returns of the capital markets in the U.S. The Funds may use long
term performance of these capital markets to demonstrate general long-term risk
versus reward scenarios and could include the value of a hypothetical investment
in any of the capital markets. The Funds may also quote financial and business
publications and periodicals as they relate to fund management, investment
philosophy, and investment techniques.
The Funds may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
PURCHASE AND REDEMPTION OF SHARES
It is currently the Trust's policy to pay for each Fund's redemptions in cash.
The Trust retains the right, however, to alter this policy to provide for
redemptions in whole or in part by a distribution in-kind of securities held by
the Funds in lieu of cash. Shareholders may incur brokerage charges on the sale
of any such securities so received in payment of redemptions. However, a
shareholder will at all times be entitled to aggregate cash redemptions from all
Funds of the Trust during any 90-day period of up to the lesser of $250,000 or
1% of the Trust's net assets.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of
disposal or valuation of the Fund's securities is not reasonably practicable, or
for such other periods as the SEC has by order permitted. The Trust also
reserves the right to suspend sales of shares of a Fund for any period during
which the New
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<PAGE>
York Stock Exchange, the Advisor and/or Sub-Advisor, the Administrator and/or
the Custodian are not open for business.
SHAREHOLDER SERVICES
Distribution Investment Option: Distributions of dividends and capital gains
made by the Funds may be automatically invested in shares of one of the Funds if
shares of the Funds are available for sale. Such investments will be subject to
initial investment minimums, as well as additional purchase minimums. A
shareholder considering the Distribution Investment Option should obtain and
read the prospectus of the other Funds and consider the differences in
objectives and policies before making any investment.
Reinstatement Privilege: A shareholder who has redeemed his or her shares of any
of the Funds has a one-time right to reinvest the redemption proceeds in shares
of any of the Funds at their net asset value as of the time of reinvestment.
Such a reinvestment must be made within 30 days of the redemption and is limited
to the amount of the redemption proceeds. Although redemptions and repurchases
of shares are taxable events, a reinvestment within such 30-day period in the
same Fund is considered a "wash sale" and results in the inability to recognize
currently all or a portion of a loss realized on the original redemption for
federal income tax purposes. The investor must notify the Transfer Agent at the
time the trade is placed that the transaction is a reinvestment.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Money Market Funds is calculated by adding
the value of securities and other assets, subtracting liabilities and dividing
by the number of outstanding shares. Securities will be valued by the amortized
cost method which involves valuing a security at its cost on the date of
purchase and thereafter (absent unusual circumstances) assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuations in general market rates of interest on the value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which a security's value, as determined by this method, is higher or
lower than the price a Fund would receive if it sold the instrument. During
periods of declining interest rates, the daily yield of a Fund may tend to be
higher than a like computation made by a company with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio securities. Thus, if the use of amortized cost
by a Fund resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in that Fund would be able to obtain a somewhat higher
yield than would result from investment in a company utilizing solely market
values, and existing investors in the Fund would experience a lower yield. The
converse would apply in a period of rising interest rates.
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<PAGE>
The Money Market Funds' use of amortized cost and the maintenance of each Fund's
net asset value at $1.00 are permitted by regulations promulgated by Rule 2a-7
under the 1940 Act, provided that certain conditions are met. The regulations
also require the Trustees to establish procedures which are reasonably designed
to stabilize the net asset value per share at $1.00 for the Funds. Such
procedures include the determination of the extent of deviation, if any, of the
Funds current net asset value per share calculated using available market
quotations from the Funds amortized cost price per share at such intervals as
the Trustees deem appropriate and reasonable in light of market conditions and
periodic reviews of the amount of the deviation and the methods used to
calculate such deviation. In the event that such deviation exceeds 1/2 of 1%,
the Trustees are required to consider promptly what action, if any, should be
initiated, and, if the Trustees believe that the extent of any deviation may
result in material dilution or other unfair results to shareholders, the
Trustees are required to take such corrective action as they deem appropriate to
eliminate or reduce such dilution or unfair results to the extent reasonably
practicable. Such actions may include the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind; or establishing a net
asset value per share by using available market quotations. In addition, if the
Funds incur a significant loss or liability, the Trustees have the authority to
reduce pro rata the number of shares of the Funds in each shareholder's account
and to offset each shareholder's pro rata portion of such loss or liability from
the shareholder's accrued but unpaid dividends or from future dividends while
each other Fund must annually distribute at least 90% of its investment company
taxable income.
Shares will normally be issued for cash only. Transactions involving the
issuance of shares for securities or assets other than cash will be limited to a
bona fide reorganization, statutory merger or will be limited to other
acquisitions of portfolio securities (except for municipal debt securities
issued by state political subdivisions or their agencies or instrumentalities)
which: meet the investment objectives and policies of the investment company;
are acquired for investment and not for resale; are liquid securities which are
not restricted as to transfer either by law or liquidity of market; and have a
value which is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange or NASDAQ.
The securities of the Equity and Balanced Funds are valued by the Administrator.
The Administrator may use an independent pricing service to obtain valuations of
securities. The pricing service relies primarily on prices of actual market
transactions as well as trader quotations. However, the service may also use a
matrix system to determine valuations of fixed income securities, which system
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of the
Trustees. Although the methodology and procedures are identical, the net asset
value per share of Class I, Class A and Class B
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<PAGE>
shares of these Funds may differ because of the distribution expenses and
shareholders servicing fees charged to Class A and/or Class B shares.
A pricing service values portfolio securities, which are primarily traded on a
domestic exchange, at the last sale price on that exchange or, if there is no
recent sale, at the last current bid quotation. A Fund security that is
primarily traded on a foreign securities exchange is generally valued at its
preceding closing value on the exchange, provided that if an event occurs after
the security is so valued that is likely to have changed its value, then the
fair value of those securities will be determined through consideration of other
factors by or under the direction of the Board of Trustees. A security that is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. For valuation
purposes, quotations of foreign securities in foreign currency are converted to
U.S. dollars equivalent at the prevailing market rate on the day of valuation.
Certain of the securities acquired by a Fund may be traded on foreign exchanges
or over-the-counter markets on days on which the Fund's net asset value is
calculated. In such cases, the net asset value of the Fund's shares may be
significantly affected on days when investors can neither purchase nor redeem
shares of the Fund.
GENERAL INFORMATION AND HISTORY
THE TRUST
The Trust is an open-end management investment company established under
Massachusetts law as a Massachusetts business trust under a Declaration of Trust
dated September 9, 1991. The Declaration of Trust permits the Trust to offer
separate series of units of beneficial interest ("shares") and different classes
of shares of each series. This Statement of Additional Information relates to
the shares of the Trust's: (i) U.S. Treasury Securities Plus Money Market and
Institutional Select Money Market Funds; (ii) Class I Shares and Class A Shares
of the Trust's U.S. Treasury Securities Money Market, Tax-Exempt Money Market,
Short-Term Investment, New Jersey Municipal Securities, Pennsylvania Municipal
Securities, Intermediate-Term Government Securities, GNMA and Mid Cap Funds; and
(iii) to the Class I, Class A and Class B shares of the Trust's Prime Obligation
Money Market, Fixed Income, Equity Growth, Equity Value, Equity Income,
International Growth and Balanced Funds. Shareholders may purchase shares of the
Funds through the different classes as indicated above. The different classes
provide for variations in distribution and transfer agent costs, voting rights
and dividends. In addition, a sales load is imposed on the sale of Class A and
Class B Shares of certain of the Funds. See "Description of Shares."
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<PAGE>
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the Funds each of which represents an equal proportionate interest in
that Fund with each other share. Shares are entitled upon liquidation to a pro
rata share in the net assets of the Funds; shareholders have no preemptive
rights. The Declaration of Trust provides that the Trustees of the Trust may
create additional series of shares or classes of a series. All consideration
received by the Trust for shares of any additional series and all assets in
which such consideration is invested would belong to that series and would be
subject to the liabilities related thereto. Share certificates representing
shares will not be issued.
The names and addresses of the holders of 5% or more of the outstanding shares
of any Fund as of May 16, 1997 and the percentage of outstanding shares of
such Fund held by such shareholders as of such date are, to Trust management's
knowledge, as follows:
<TABLE>
<CAPTION>
Percent of
Beneficial
Fund Name and Address Ownership
- ---- ---------------- ----------
<S> <C> <C>
U.S. Treasury Securities Summit Bank 99.40%
Money Market Fund: Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Prime Obligation Summit Bank 80.18%
Money Market Fund: Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Lehigh Securities Corp. 17.67%
Attn: Richard Jennings
1457 MacArthur Road
Whitehall, PA 18052-5287
Acct # 2016795
Tax-Exempt Money Market Summit Bank 71.01%
Fund: Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
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<PAGE>
Percent of
Beneficial
Fund Name and Address Ownership
- ---- ---------------- ----------
<S> <C> <C>
Lehigh Securities Corp. 25.89%
Attn: Richard Jennings
1457 MacArthur Road
Whitehall, PA 18052-5287
Acct # 2016795
Short-Term Investment Summit Bank 97.94%
Fund: Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Equity Growth Fund: Summit Bank 78.83%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Summit Bank 21.13%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Fixed Income Fund: Summit Bank 52.49%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Summit Bank 47.51%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
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<PAGE>
Percent of
Beneficial
Fund Name and Address Ownership
- ---- ---------------- -----------
<S> <C> <C>
New Jersey Municipal Summit Bank 91.21%
Securities Fund: Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Summit Bank 7.84%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Intermediate-Term Summit Bank 56.82%
Government Attn: Patricia Kyritz
Securities Fund: P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Summit Bank 42.03%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Equity Value Fund: Summit Bank 57.72%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Summit Bank 41.21%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
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<PAGE>
Percent of
Beneficial
Fund Name and Address Ownership
- ---- ---------------- -----------
<S> <C> <C>
Equity Income Fund: Summit Bank 53.58%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Summit Bank 44.13%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Mid Cap Fund: Summit Bank 99.21%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Balanced Fund: Summit Bank 84.29%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Summit Bank 11.99%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
Pennsylvania Municipal Summit Bank 99.25%
Securities Fund: Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
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<PAGE>
Percent of
Beneficial
Fund Name and Address Ownership
- ---- ---------------- -----------
<S> <C> <C>
GNMA Fund: Summit Bank 75.03%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Summit Bank 22.84%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
International Growth Fund: Summit Bank 58.62%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 118
Summit Bank 40.75%
Attn: Patricia Kyritz
P.O. Box 547
Hackensack, NJ 07602-0547
Acct # 1181
U.S. Treasury Plus Money Logic Works Inc. 8.72%
Market Fund: Attn: Ken Zena
111 Campus Drive
Princeton, NJ 08540-6400
Acct # 464
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<PAGE>
Percent of
Beneficial
Fund Name and Address Ownership
- ---- ---------------- -----------
<S> <C> <C>
Integrity Packaging Corp. 6.74%
c/o Dannie Warren
122 Quentin Road
New Brunswick, NJ 08901-
3263
Acct # 6135
Pharmacopeia 6.54%
101 College Road East
Princeton, NJ 08540-6601
Acct # 2698
</TABLE>
Beneficial owners of 25% or more of a Fund may be deemed a "controlling person"
of such Fund within the meaning of the 1940 Act.
The Trust believes that most of the shares referred to above held by Summit Bank
were held in accounts for its fiduciary, agency or custodial customers.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the Trust. Even if, however, the Trust were held to be a partnership, the
possibility of the shareholders' incurring financial loss for that reason
appears remote because the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for obligations of the Trust and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by or on behalf of the Trust or the
Trustees, and because the Declaration of Trust provides for indemnification out
of the Trust property for any shareholder held personally liable for the
obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or
her own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisors, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any
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<PAGE>
liability for his or her willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Funds' prospectuses. No attempt has been made to present a detailed
explanation of the tax treatment of the Funds or their shareholders and the
discussion here and in the Funds' prospectuses is not intended as a substitute
for careful tax planning.
FEDERAL INCOME TAX
All Funds. In order to qualify for treatment as a regulated investment company
("RIC") under the Code, each Fund must distribute annually to its shareholders
at least the sum of 90% of its net interest income excludable from gross income
plus 90% of its investment company taxable income (generally, net investment
income plus the excess, if any, of net short-term capital gain over net
long-term capital loss)(the "Distribution Requirement") and also must meet
several additional requirements. Among these requirements are the following: (i)
at least 90% of the Fund's gross income each taxable year must be derived from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities or foreign currencies, or
certain other income; (ii) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of stock, securities
or certain other assets held for less than three months; (iii) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount that does not exceed 5% of
the value of the Fund's assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iv) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer or of two or more issuers which the
Fund controls and which are engaged in the same, similar or related trades of
businesses.
Notwithstanding the Distribution Requirement described above, which only
requires a Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), a
Fund will be subject to a nondeductible 4% excise tax to the extent it fails to
distribute by the end of any calendar year 98% of its ordinary income for that
year and 98% of its capital gain net income for the one-year period ending on
October 31 of that
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<PAGE>
year, plus certain other amounts. Each Fund intends to make sufficient
distributions prior to the end of each calendar year to avoid liability for
federal excise tax.
Any gain or loss recognized on a sale or redemption of shares of a Fund by a
shareholder who is not a dealer in securities generally will be treated as a
long-term capital gain or loss if the shares have been held for more than twelve
months and otherwise will be treated as a short-term capital gain or loss.
If shares on which a capital gain distribution has been received are
subsequently sold or redeemed and such shares have been held for six months or
less, any loss recognized will be treated as a long-term capital loss to the
extent of the capital gain distribution.
Distributions from the Funds generally will not be eligible for the dividends
received deduction available to corporate shareholders.
If for any taxable year a Fund does not qualify for the special tax treatment
afforded RICs, all of the taxable income of that Fund will be subject to federal
income tax at regular corporate rates (without any deduction for distributions
to Fund shareholders). In such event, all distributions made by the Fund
(whether or not derived from tax-exempt interest) would be taxable to
shareholders as dividends to the extent of the Fund's earnings and profits, and
such dividend distributions would be eligible for the dividends received
deduction available to corporate shareholders.
Additional Consideration for the International Growth, Equity Growth, Short-Term
Investment and Fixed Income Funds. Dividends and interest received by a Fund may
be subject to income, withholding or other taxes imposed by foreign countries
and United States possessions that would reduce the yield on a Fund's
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these taxes. Foreign countries generally do not impose taxes
on capital gains on investments by foreign investors. If more than 50% of the
value of a Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, a Fund will be eligible to, and may, file an
election with the Internal Revenue Service that will enable shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign and United States possessions income taxes paid by a Fund. Pursuant to
an election, a Fund will treat those taxes as dividends paid to its
shareholders. Each shareholder will be required to include a proportionate share
of those taxes in gross income as income received from a foreign source and must
treat the amount so included as if the shareholder had paid the foreign tax
directly. The shareholder may then either deduct the taxes deemed paid by him or
her in computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit (subject to significant
limitations) against the shareholder's federal income tax. If a Fund makes the
election, it will
S - 66
<PAGE>
report annually to its shareholders the respective amounts per share of the
Fund's income from sources within, and taxes paid to, foreign countries and
United States possessions.
Additional Considerations for the Tax-Exempt Money Market, New Jersey Municipal
Securities and Pennsylvania Municipal Securities Funds (the "Tax-Exempt Funds").
As noted in the prospectuses for the Tax-Exempt Money Market, New Jersey
Municipal Securities and Pennsylvania Municipal Securities Funds,
exempt-interest dividends are excludable from a shareholder's gross income for
regular federal income tax purposes. Exempt-interest dividends may nevertheless
be subject to the alternative minimum tax (the "Alternative Minimum Tax")
imposed by Section 55 of the Code or the environmental tax (the "Environmental
Tax") imposed by Section 59A of the Code. The Alternative Minimum Tax is imposed
at rates of 26% and 28% in the case of non-corporate taxpayers and at the rate
of 20% in the case of corporate taxpayers, to the extent it exceeds the
taxpayer's regular tax liability. The Environmental Tax is imposed at the rate
of 0.12% and applies only to corporate taxpayers. The Alternative Minimum Tax
and the Environmental Tax may be imposed in two circumstances. First,
exempt-interest dividends derived from certain "private activity bonds" issued
after August 7, 1986, will generally be an item of tax preference (and therefore
potentially subject to the Alternative Minimum Tax and the Environmental Tax)
for both corporate and non-corporate taxpayers. Second, in the case of
exempt-interest dividends received by corporate shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined in
Section 56(g) of the Code, in calculating the corporation's alternative minimum
taxable income for purposes of determining the Alternative Minimum Tax and the
Environmental Tax.
Any loss recognized by a shareholder upon the sale or redemption of shares of a
Tax-Exempt Fund held for six months or less will be disallowed to the extent of
any exempt-interest dividends the shareholder has received with respect to such
shares. Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Tax-Exempt Fund will not be deductible for federal income tax
purposes. The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Foreign corporations engaged in a trade or business in the United States will be
subject to a "branch profits tax" on their "dividend equivalent amount" for the
taxable year, which will include exempt-interest dividends. Certain Subchapter S
corporations may also be subject to taxes on their "passive investment income,"
which could include exempt-interest dividends. Up to 85% of the Social Security
benefits or railroad retirement benefits received by an individual during any
taxable year will be included in the gross income of such individual if the
individual's "modified adjusted gross income" (which includes exempt-interest
dividends) plus one-half of the Social Security benefits or railroad retirement
benefits received by such individual during that taxable year exceeds the base
amount described in Section 86 of the Code.
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<PAGE>
A Tax-Exempt Fund may not be an appropriate investment for persons (including
corporations and other business entities) who are "substantial users" (or
persons related to such users) of facilities financed by industrial development
or private activity bonds. A "substantial user" is defined generally to include
certain persons who regularly use a facility in their trade or business. Such
entities or persons should consult their tax advisors before purchasing shares
of a Tax-Exempt Fund.
Issuers of bonds purchased by a Tax-Exempt Fund (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Investors should be aware
that exempt-interest dividends derived from such bonds may become subject to
federal income taxation retroactively to the date thereof if such
representations are determined to have been inaccurate or if the issuer of such
bonds (or the beneficiary of such bonds) fails to comply with such covenants.
STATE TAXES
A Fund is not liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by the Funds
to shareholders and the ownership of shares may be subject to state and local
taxes.
EXPERTS
The financial statements, incorporated by reference into this Statement of
Additional Information, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
FINANCIAL STATEMENTS
The Trust's audited financial statements and the notes thereto and the Report of
the Independent Public Accountants dated February 14, 1997 for the fiscal year
ended December 31, 1996, relating to the financial statements and financial
highlights of the Trust are incorporated by reference herein. A copy of the
Trust's 1996 Annual Report to Shareholders must accompany delivery of this
Statement of Additional Information.
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<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
Description of Commercial Paper Ratings
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1 and 2, to indicate the relative degree of safety. Issues rated
A-1+ are those with an "overwhelming degree" of credit protection. Those rated
A-1 reflect a "very strong" degree of safety regarding timely payment. Those
rated A-2 have satisfactory capacity to meet its financial commitments.
Commercial paper issues rated Prime-1 by Moody's are judged by Moody's to be of
the "highest" quality on the basis of relative repayment capacity.
The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by
Fitch Investors Services, Inc. ("Fitch"). Paper rated Fitch-1 is regarded as
having the strongest degree of assurance for timely payment. The rating Fitch-2
(Very Good Grade) is the second highest commercial paper rating assigned by
Fitch which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff and
Phelps, Inc. ("Duff"). Paper rated Duff-1 is regarded as having very high
certainty of timely payment with excellent liquidity factors which are supported
by ample asset protection. Risk factors are minor. Paper rated Duff-2 is
regarded as having good certainty of timely payment, good access to capital
markets and sound liquidity factors and company fundamentals. Risk factors are
small.
The designation A1 by IBCA indicates that the obligation is supported by a very
strong capacity for timely repayment. Those obligations rated A1+ are supported
by the highest capacity for timely repayment, although such capacity may be
susceptible to adverse changes in business, economic or financial conditions.
The rating TBW-1 by Thomson indicates a very high likelihood that principal and
interest will be paid on a timely basis.
Description of Corporate Bond Ratings
Bonds which 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 an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
A-1
<PAGE>
most unlikely to impair the fundamentally strong position of such issues. Bonds
rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with bonds rated Aaa, 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 which are rated A possess many favorable investment attributes and are to
be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's bond ratings, where specified, are applied to senior bank obligations
and insurance company senior policyholder and claims obligations with an
original maturity in excess of one year. Obligations relying upon support
mechanisms such as letters-of-credit and bonds of indemnity are excluded unless
explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country
in which the branch is located. Unless noted as an exception, Moody's rating on
a bank's ability to repay senior obligations extends only to branches located in
countries which carry a Moody's sovereign rating. Such branch obligations are
rated at the lower of the bank's rating or Moody's sovereign rating for the bank
deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the
currency of the country in which the obligation is domiciled, Moody's ratings do
not incorporate an opinion as to whether payment of the obligation will be
affected by the actions of the government controlling
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the currency of denomination. In addition, risk associated with bilateral
conflicts between an investor's home country and either the issuer's home
country or the country where an issuer branch is located are not incorporated
into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company
obligations are exempt from registration under the U.S. Securities Act of 1933
or issued in conformity with any other applicable law or regulation. Nor does
Moody's represent that any specific bank or insurance company obligation is
legally enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of any
issuer whose securities or debt obligations you consider buying or selling.
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA 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
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. Debt rated BBB is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Debt rated BB is less vulnerable to nonpayment
than other speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that could
lead to the obligor's inadequate capacity to meet its financial commitment on
the obligation. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating. Debt rated B has
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 the obligor's capacity or willingness to meet its
financial commitment on the obligation. The B rating category also is used for
debt subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial
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commitment on the obligation. In the event of adverse business, financial or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation. An obligation rated CC is currently
highly vulnerable to nonpayment. The C rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
An obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the filing of
a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.
Bonds rated 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 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.
Bonds rated BB are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements. Bonds rated B
are considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.
Bonds rated CCC have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment. Bonds rated CC are minimally protected.
Default in payment of interest and/or principal seems probable over time. Bonds
rated C are in imminent default in payment of interest or principal.
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Bonds rated DDD, DD and D are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Bonds rated AAA by Duff are considered of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA+ , AA and AA- are considered to be of high credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions. Bonds rated A+, A and A- have
protection factors that are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Bonds rated BBB+, BBB and BBB- are considered to have below average protection
factors but are still considered sufficient for prudent investment. There is
considerable variability in risk during economic cycles. Bonds rated BB+, BB and
BB- are below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category. Bonds rated B+, B and B- are below investment
grade and possess risk that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating grade.
Bonds rated CCC are well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Bonds rated DD are defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
Bonds rated AAA by IBCA are obligations for which there is the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial, such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk substantially.
Bonds rated AA are obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly. Bonds rated A are
obligations for which there is 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.
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Bonds rated BBB are obligations for which there is currently a low expectation
of investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories. Bonds rated BB are obligations for which there is a
possibility of investment risk developing. Capacity for timely repayment of
principal and interest exists, but is susceptible over time to adverse changes
in business, economic or financial conditions. Bonds rated B are obligations for
which investment risk exists. Timely repayment of principal and interest is not
sufficiently protected against adverse changes in business, economic or
financial conditions.
Bonds rated CCC are obligations for which there is a current perceived
possibility of default. Timely repayment of principal and interest is dependent
on favorable business, economic or financial conditions. Bonds rated CC are
obligations which are highly speculative or which have a high risk of default.
Bonds rated C are obligations which are currently in default.
Bonds rated AAA by Thomson indicate that the ability to repay principal and
interest on a timely basis is very high. Bonds rated AA indicate a superior
ability to repay principal and interest on a timely basis, with limited
incremental risk compared to issues rated in the highest category. Bonds rated A
indicate the ability to repay principal and interest is strong. Issues rated A
could be more vulnerable to adverse developments (both internal and external)
than obligations with higher ratings.
Bonds rated BBB indicate 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. Bonds rated BBB are
the lowest investment grade category.
While not investment grade, the BB rating suggests that the likelihood of
default is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately service
debt obligations. Issues rated B show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and principal
on a timely basis.
Issues rated CCC clearly have a high likelihood of default, with little capacity
to address further adverse changes in financial circumstances. CC is applied to
issues that are subordinate to other obligations rated CCC and are afforded less
protection in the event of bankruptcy or reorganization. Issues rated D are in
default.
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