AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1996
FILE NO. 33-50718
FILE NO. 811-7102
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 14 /X/
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 16 /X/
THE ARBOR FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
2 OLIVER STREET
BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (800) 342-5734
DAVID G. LEE
C/O SEI CORPORATION
680 E. SWEDESFORD ROAD
WAYNE, PENNSYLVANIA 19087
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
RICHARD W. GRANT, ESQUIRE
Morgan, Lewis & Bockius LLP
2000 ONE LOGAN SQUARE
PHILADELPHIA, PA 19103
It is proposed that this filing become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on [date] pursuant to paragraph (b)
/x/ 60 days after filing pursuant to paragraph (a)
/ / 75 days after filing pursuant to paragraph (a)
/ / on [date] pursuant to paragraph (a) of Rule 485.
Registrant commenced operations on February 1, 1993. Registrant filed its 24f-2
Notice for the fiscal year ended January 31, 1996 on March 25, 1996.
<PAGE>
THE ARBOR FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
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PART A Golden Oak Diversified Growth Portfolio, Golden Oak Growth and Income Portfolio,
Golden Oak Intermediate-Term Income Portfolio, Golden Oak Michigan Tax Free
Bond Portfolio and Golden Oak Prime Obligation Money Market Portfolio
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary; Annual Operating Expenses
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant The Funds and the Trust; Investment
Objective and Policies; General
Information
Item 5. Management of the Fund General Information; The Adviser; The
Sub-Adviser; The Administrator; The
Shareholder Servicing Agent
Item 5A. Management's Discussion of
Fund Performance **
Item 6. Capital Stock and Other Securities General Information; Taxes
Item 7. Purchase of Securities Being Offered Purchase of Shares
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Pending Legal Proceedings *
PART B Golden Oak Diversified Growth Portfolio, Golden Oak Growth and Income Portfolio,
Golden Oak Intermediate-Term Income Portfolio, Golden Oak Michigan Tax Free
Bond Portfolio and Golden Oak Prime Obligation Money Market Portfolio
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History The Funds and The Trust
Item 13. Investment Objectives and Policies Investment Objective and Policies;
Investment Limitations; Non-
Fundamental Policies
Item 14. Management of the Registrant The Funds and the Trust; Trustees and
Officers of the Trust; The Administrator;
The Adviser; The Sub-Adviser
Item 15. Control Persons and Principal Holders
of Securities Trustees and Officers of the Trust; The
Administrator
Item 16. Investment Advisory and Other Services The Adviser; The Sub-Adviser; The
Administrator; The Distributor; Experts
Item 17. Brokerage Allocation Portfolio Transactions; Trading Practices
and Brokerage
Item 18. Capital Stock and Other Securities Description of Shares
i
<PAGE>
Item 19. Purchase, Redemption, and Pricing of
Securities Being Offered Purchase and Redemption of Shares;
Determination of Net Asset Value; Letter
of Intent
Item 20. Tax Status Taxes
Item 21. Underwriters The Distributor
Item 22. Calculation of Yield Quotations Computation of Yield; Calculation of
Total Return
Item 23. Financial Statements Financial Information
PART A California Tax Exempt Portfolio and Institutional Tax Free Portfolio
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary; Shareholder Transaction
Expenses;
Annual Operating Expenses
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant The Portfolios and the Trust; Investment
Objective; Investment Policies; General
Investment Policies and Information;
Investment Limitations
Item 5. Management of the Fund General Information; The Adviser; The
Administrator; The Shareholder
Servicing Agent
Item 5A. Management's Discussion of
Fund Performance **
Item 6. Capital Stock and Other Securities General Information; Taxes
Item 7. Purchase of Securities Being Offered Purchase and Redemption of Shares
Item 8. Redemption or Repurchase Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings *
PART B California Tax Exempt Portfolio and Institutional Tax Free Portfolio
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History The Trust
Item 13. Investment Objectives and Policies Investment Limitations; Non-
Fundamental Policies
Item 14. Management of the Registrant Trustees and Officers of the Trust; The
Administrator; The Adviser; The Trust
Item 15. Control Persons and Principal Holders
of Securities Trustees and Officers of the Trust; The
Administrator
Item 16. Investment Advisory and Other Services The Adviser; The Administrator; The
Distributor
Item 17. Brokerage Allocation Portfolio Transactions; Trading Practices
and Brokerage
Item 18. Capital Stock and Other Securities Description of Shares
Item 19. Purchase, Redemption, and Pricing of
Securities Being Offered Purchase and Redemption of Shares;
Determination of Net Asset Value
ii
<PAGE>
Item 20. Tax Status Taxes
Item 21. Underwriters The Distributor
Item 22. Calculation of Yield Quotations Computation of Yield; Calculation of
Total Return
Item 23. Financial Statements Financial Information
PART A OVB Capital Appreciation Portfolio, OVB Emerging Growth Portfolio, OVB
Government Securities Portfolio, OVB West Virginia Tax-Exempt Income Portfolio
and OVB Prime Obligations Portfolio
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary; Expense Summary
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant The Funds and the Trust; Investment
Objectives; Investment Policies and
Information; General Investment Policies
and Information; Risk Factors;
Investment Limitations and Fundamental
Policies; Description of Permitted
Investments
Item 5. Management of the Fund The Adviser; The Sub-Adviser; The
Administrator; Transfer Agent; General
Information
Item 5A Management's Discussion of Fund
Performance **
Item 6. Capital Stock and Other Securities General Information; Taxes
Item 7. Purchase of Securities Being Offered How to Purchase Shares; How to
Exchange Shares
Item 8. Redemption or Repurchase How to Redeem Shares; How to
Exchange Shares
Item 9. Pending Legal Proceedings *
PART B OVB Prime Obligations Portfolio, OVB Capital Appreciation Portfolio, OVB
Emerging Growth Portfolio, OVB Government Securities Portfolio and OVB West
Virginia Tax-Exempt Income Portfolio
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History The Funds and the Trust
Item 13. Investment Objectives and Policies Additional Description of Permitted
Investments; Investment Limitations;
Non-Fundamental Policies
Item 14. Management of the Fund The Funds and the Trust; Trustees and
Officers of the Trust; The Adviser; The
Sub-Adviser; The Administrator
Item 15. Control Persons and Principal Holders
of Securities Trustees and Officers of the Trust; The
Administrator
Item 16. Investment Advisory and Other Services The Adviser; The Administrator; The
Distributor
Item 17. Brokerage Allocation Fund Transactions; Trading Practices
and Brokerage
iii
<PAGE>
Item 18. Capital Stock and Other Securities Description of Shares; Shareholder
Liability
Item 19. Purchase, Redemption, and Pricing of
Securities Being Offered Purchase and Redemption of Shares;
Determination of Net Asset Value
Item 20. Tax Status Taxes
Item 21. Underwriters The Distributor
Item 22. Calculation of Yield Quotations Computation of Yield; Calculation of
Total Return
Item 23. Financial Statements Financial Information
PART A U.S. Government Securities Money Fund and Prime Obligations Fund
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Summary
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant The Fund and the Trust; Investment
Objective and Policies; Investment
Limitations and Fundamental Policies;
Description of Permitted Investments
and Risk Factors; General Information
Item 5. Management of the Fund The Adviser; The Administrator and
Distributor; The Transfer Agent and
Custodian; General Information
Item 5A. Management's Discussion of Fund
Performance **
Item 6. Capital Stock and Other Securities General Information; Taxes
Item 7. Purchase of Securities Being Offered How to Purchase Shares
Item 8. Redemption or Repurchase How to Redeem Shares
Item 9. Pending Legal Proceedings *
PART B U.S. Government Securities Money Fund and Prime Obligations Fund
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History The Fund and The Trust
Item 13. Investment Objectives and Policies Additional Description of Permitted
Investments; Investment Limitations;
Non-Fundamental Policies
Item 14. Management of the Fund The Fund and the Trust; Trustees and
Officers of the Trust; The Adviser; The
Administrator; The Distributor
Item 15. Control Persons and Principal Holders Trustees and Officers of the
of Securities Trust; The Administrator
Item 16. Investment Advisory and Other Services The Adviser; The Administrator; The
Distributor
Item 17. Brokerage Allocation Fund Transactions; Trading Practices
and Brokerage
Item 18. Capital Stock and Other Securities Description of Shares; Shareholder
Liability
iv
<PAGE>
Item 19. Purchase, Redemption, and Pricing of
Securities Being Offered Purchase and Redemption of Shares;
Determination of Net Asset Value
Item 20. Tax Status Taxes
Item 21. Underwriters The Distributor
Item 22. Calculation of Yield Quotations Computation of Yield
Item 23. Financial Statements *
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
* Not Applicable
** Information required by Item 5A is included in the 1996 Annual Report to
Shareholders
v
<PAGE>
GOLDEN OAK FAMILY OF FUNDS
Investment Adviser:
CITIZENS BANK
o GOLDEN OAK DIVERSIFIED GROWTH PORTFOLIO
o GOLDEN OAK GROWTH AND INCOME PORTFOLIO
o GOLDEN OAK INTERMEDIATE-TERM INCOME PORTFOLIO
o GOLDEN OAK MICHIGAN TAX FREE BOND PORTFOLIO
o GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO
THE GOLDEN OAK FAMILY OF FUNDS is a group of professionally managed mutual funds
that offers a convenient and economical means of investing in one or more
portfolios of securities. This Prospectus offers Class A and Class B shares of
the Golden Oak Diversified Growth Portfolio, Golden Oak Growth and Income
Portfolio, Golden Oak Intermediate-Term Income Portfolio, Golden Oak Michigan
Tax Free Bond Portfolio and Golden Oak Prime Obligation Money Market Portfolio
(the 'Portfolios'), an assortment of equity, fixed income and money market
portfolios.
Each Portfolio offers its Class A shares to institutional investors, including
CITIZENS BANK, its affiliates and correspondents for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
Each Portfolio offers its Class B shares to individuals and institutional
accounts, including accounts for which Citizens Bank, its affiliates and
correspondents, act in an agency or custodial capacity.
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE UNITED
STATES GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE GOLDEN OAK PRIME
OBLIGATION MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
MUTUAL FUND SHARES
o ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY
o ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, INCLUDING CITIZENS BANK, ANY OF
ITS AFFILIATES OR CORRESPONDENTS, OR OTHER FINANCIAL INSTITUTION
o ARE NOT GUARANTEED OR ENDORSED BY ANY BANK, INCLUDING CITIZENS BANK, ANY OF
ITS AFFILIATES OR CORRESPONDENTS, OR OTHER FINANCIAL INSTITUTION
o INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL
This Prospectus sets forth concisely the information about the Portfolios that a
prospective investor should know before investing. Each Portfolio is a separate
series of The Arbor Fund. Investors are advised to read this Prospectus and
retain it for future reference. A Statement of Additional Information dated May
31, 1996 has been filed with the Securities and Exchange Commission and is
available without charge by calling 1-800-545-6331. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MAY 31, 1996
CIT-F-007-01
<PAGE>
2
SUMMARY
THE GOLDEN OAK FAMILY OF FUNDS IS A GROUP OF OPEN-END MANAGEMENT INVESTMENT
COMPANIES PROVIDING A CONVENIENT WAY TO INVEST IN PROFESSIONALLY MANAGED
PORTFOLIOS OF SECURITIES. THE FOLLOWING SUMMARY PROVIDES BASIC INFORMATION ABOUT
THE CLASS A AND CLASS B SHARES OF THE GOLDEN OAK DIVERSIFIED GROWTH PORTFOLIO,
GOLDEN OAK GROWTH AND INCOME PORTFOLIO, GOLDEN OAK INTERMEDIATE-TERM INCOME
PORTFOLIO, GOLDEN OAK MICHIGAN TAX FREE BOND PORTFOLIO AND GOLDEN OAK PRIME
OBLIGATION MONEY MARKET PORTFOLIO (EACH, A 'PORTFOLIO'). THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
What are the Investment Objectives? The GOLDEN OAK DIVERSIFIED GROWTH
PORTFOLIO (the 'Diversified Growth Portfolio') seeks total return. The GOLDEN
OAK GROWTH AND INCOME PORTFOLIO (the 'Growth and Income Portfolio') seeks
long-term growth of capital, current income and growth of income. The GOLDEN OAK
INTERMEDIATE-TERM INCOME PORTFOLIO (the 'Intermediate-Term Income Portfolio')
seeks current income consistent with limited price volatility. The GOLDEN OAK
MICHIGAN TAX FREE BOND PORTFOLIO (the 'Michigan Portfolio') seeks current income
exempt from federal and Michigan income taxes consistent with preservation of
capital. The GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO (the 'Prime
Obligation Portfolio') seeks to preserve principal value and maintain a high
degree of liquidity while providing current income. See 'Investment Objectives
and Policies.'
What are the Permitted Investments? Under normal market conditions, the
DIVERSIFIED GROWTH PORTFOLIO will invest at least 75% of its assets in common
stocks traded in United States markets. The GROWTH AND INCOME PORTFOLIO will
invest primarily in dividend-paying common stocks, preferred stocks and
securities convertible into common stocks of domestic or foreign issuers. Under
normal market conditions, the INTERMEDIATE-TERM INCOME PORTFOLIO will invest at
least 80% of its assets in the following United States dollar denominated
obligations: (i) corporate bonds and debentures; (ii) obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies or instrumentalities; (iii) commercial paper; (iv) short-term bank
obligations; and (v) repurchase agreements involving any of the above
securities. The MICHIGAN PORTFOLIO will invest (i) primarily in obligations
issued by or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, the interest of which, in the opinion of counsel for the
issuer, is exempt from federal income tax (collectively, 'Municipal
Securities'), (ii) under normal circumstances, at least 65% of its assets are in
municipal bonds and (iii) except where acceptable securities are unavailable as
determined by the Adviser, at least 80% of the Portfolio's assets will be
invested in Municipal Securities, the interest of which, in the opinion of
counsel for the issuer, is exempt from Michigan Income Tax ('Michigan Municipal
Securities'). The PRIME OBLIGATION PORTFOLIO intends to invest exclusively in
short-term, U.S. dollar denominated money market instruments that satisfy
certain quality, maturity and diversification criteria, including criteria set
by applicable laws and regulations. The Portfolio may invest in obligations of
U.S. issuers, obligations of foreign issuers sold in the U.S. market,
obligations of U.S. and London branches of foreign banks and obligations of
supranational entities. See 'Investment Objectives and Policies,' 'Risk Factors'
and 'Description of Permitted Investments.'
What are the Risks? Because securities fluctuate in value, the shares of
the Portfolios, like shares of any mutual fund, will fluctuate in value. The
Diversified Growth and Growth and Income Portfolios may invest in equity
securities that are affected by market and economic factors. The Portfolios may
invest in fixed income securities that tend to vary inversely with interest
rates and may be affected by other market and economic factors as well, which
may cause these securities to fluctuate in value. Investing in securities of
foreign issuers involves special risks and considerations not typically
associated with investing in securities of domestic issuers. The Michigan
Portfolio is a non-diversified mutual fund that concentrates in Michigan
Municipal Securities, which subjects the Portfolio to special investment risks.
There is no assurance that the Portfolios will achieve their investment
<PAGE>
3
objectives, or that the Prime Obligation Portfolio will be able to maintain a
net asset value of $1.00 per share on a continuous basis. See 'Investment
Objectives and Policies,' 'Risk Factors,' 'Special Factors Relating to Michigan
Municipal Securities' and 'Description of Permitted Investments.'
Who are the Adviser and Sub-Advisers? Citizens Bank serves as the
investment adviser to the Portfolios. Wellington Management Company serves as
the investment sub-adviser to the Prime Obligation Portfolio. Scudder, Stevens &
Clark, Inc. serves as the investment sub-adviser to the Growth and Income
Portfolio. Nicholas-Applegate Capital Management serves as the investment
sub-adviser to the Diversified Growth Portfolio. See 'Expense Summary,' 'The
Adviser' and 'The Sub-Advisers.'
Who is the Administrator? SEI Financial Management Corporation serves as
the administrator and shareholder servicing agent of the Portfolios. See
'Expense Summary' and 'The Administrator.'
Who is the Transfer Agent? DST Systems, Inc. serves as transfer agent and
dividend disbursing agent for the Portfolios. See 'Expense Summary' and 'The
Transfer Agent.'
Who is the Distributor? SEI Financial Services Company serves as
distributor of the Portfolios' shares. See 'The Distributor.'
How do I Purchase Shares? You may purchase CLASS A SHARES of each Portfolio
through the Transfer Agent on days on which the New York Stock Exchange and the
Federal Reserve wire system are open for business ('Business Days'). The minimum
initial investment in the Class A shares is $1,000,000. Class A shares of each
Portfolio are offered at net asset value per share.
You may purchase CLASS B SHARES of each Portfolio through the Transfer Agent
on Business Days. The minimum initial investment in the Class B shares is
$1,000. Class B shares of each Portfolio are offered at net asset value per
share plus a maximum sales charge of 5.75% for both the Diversified Growth and
Growth and Income Portfolios or a maximum sales charge of 4.50% for both the
Intermediate-Term Income and Michigan Portfolios. There is no sales charge
imposed on Class B shares of the Prime Obligation Portfolio. See 'How To
Purchase Shares.'
How Do I Redeem Class A and Class B Shares? You may redeem shares through
the Transfer Agent on Business Days. Redemptions are made at the net asset value
per share determined as of the end of the Business Day that the order is
effective. See 'How To Redeem Shares.'
How are Dividends Paid? Substantially all of the net investment income
(exclusive of capital gains) of the Intermediate-Term Income, Michigan and Prime
Obligation Portfolios is distributed in the form of dividends declared daily and
distributed monthly to shareholders of record. The net investment income
(exclusive of capital gains) of the Diversified Growth and Growth Income
Portfolios is declared monthly and distributed monthly to shareholders of
record. Any realized net capital gain is distributed at least annually.
Distributions are paid in additional shares unless the shareholder elects to
take the payment in cash. See 'General Information -- Dividends.'
<PAGE>
4
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION FEES CLASS A
(as a percentage of offering price)(1)
<TABLE>
<CAPTION>
DIVERSIFIED GROWTH GROWTH AND INTERMEDIATE-TERM MICHIGAN
PORTFOLIO INCOME PORTFOLIO INCOME PORTFOLIO PORTFOLIO
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Maximum Sales Charge
Imposed on
Purchases............ None None None None
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<CAPTION>
PRIME OBLIGATION
PORTFOLIO
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Maximum Sales Charge
Imposed on
Purchases............ None
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<CAPTION>
</TABLE>
(1) There is a $10.00 charge if redemption proceeds are wired except that
certain financial institutions may be exempt from this wire charge.
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<CAPTION>
DIVERSIFIED GROWTH GROWTH AND INTERMEDIATE-TERM MICHIGAN PRIME OBLIGATION
PORTFOLIO INCOME PORTFOLIO INCOME PORTFOLIO PORTFOLIO PORTFOLIO
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<S> <C> <C> <C> <C> <C>
Advisory Fees (after
fee waiver) (2)...... .67% .52% .31% .23% .10%
12b-1 Fees............. None None None None None
Other Expenses(2)(3)... .43% .58% .34% .42% .30%
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Total Operating
Expenses (after
fee waiver) (4)...... 1.10% 1.10% .65% .65% .40%
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<TABLE>
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(2) The Adviser has agreed to waive, on a voluntary basis, a portion of its fee for an indefinite period of time in
an amount that operates to limit total operating expenses (exclusive of distribution expenses) to not more than
1.10%, 1.10%, .65%, .65% and .40% of the average daily net assets of the Class A shares of the Diversified
Growth, Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation Portfolios, respectively.
The advisory fee shown reflects this voluntary waiver. The Administrator has agreed to waive a portion of its
fee on a prorated basis with the Adviser up to a maximum waiver of .045% of the average daily net assets of the
Class A shares of the Prime Obligation Portfolio. The Adviser and the Administrator each reserve the right to
terminate its waiver at any time in its sole discretion. Absent such waivers, the advisory fees for the
Diversified Growth, Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation Portfolios would
be .74%, .74%, .50%, .50% and .30%, respectively.
(3) For the Growth and Income Portfolio, Other Expenses reflects estimated amounts for the current fiscal year and
assumes the minimum annual administration fee of $100,000. Administration fees as a percentage of average daily
net assets will decline to .20% at net asset levels of $50 million and above for this Portfolio. See 'The
Administrator.'
(4) Absent the voluntary fee waivers described above, Total Operating Expenses for the Class A shares of the
Diversified Growth, Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation Portfolios would
be 1.17%, 1.32%, .84%, .92% and .70%, respectively.
</TABLE>
<PAGE>
5
EXAMPLE
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1YR. 3 YRS. 5 YRS.
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An investor would pay the following expenses on a $1,000 investment assuming (1)
imposition of the maximum sales load, (2) 5% annual return and (3) redemption
at the end of each time period:
Diversified Growth Portfolio................................................. $ 11 $ 35 $ 61
Growth and Income Portfolio.................................................. $ 11 $ 35 $ 61
Intermediate-Term Income Portfolio........................................... $ 7 $ 21 $ 36
Michigan Portfolio........................................................... $ 7 $ 21 $ 36
Prime Obligation Portfolio................................................... $ 4 $ 13 $ 22
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10 YRS.
<S> <C>
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An investor would pay the following expenses on a $1,000 investment assuming (1)
imposition of the maximum sales load, (2) 5% annual return and (3) redemption
at the end of each time period:
Diversified Growth Portfolio................................................. $ 134
Growth and Income Portfolio.................................................. $ 134
Intermediate-Term Income Portfolio........................................... $ 81
Michigan Portfolio........................................................... $ 81
Prime Obligation Portfolio................................................... $ 51
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</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
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 each
Portfolio. A person who purchases shares through an account with a financial
institution may be charged separate fees by that financial institution.
Additional information may be found under 'The Adviser,' 'The Sub-Advisers' and
'The Administrator.'
<PAGE>
6
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION FEES CLASS B
(as a percentage of offering price)(1)
<TABLE>
<CAPTION>
DIVERSIFIED GROWTH GROWTH AND INTERMEDIATE-TERM MICHIGAN PRIME OBLIGATION
PORTFOLIO INCOME PORTFOLIO INCOME PORTFOLIO PORTFOLIO PORTFOLIO
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<S> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on
Purchases............ 5.75% 5.75% 4.50% 4.50% None
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</TABLE>
<TABLE>
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(1) There is a $10.00 charge if redemption proceeds are wired except that certain financial institutions may be
exempt from this wire charge.
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<CAPTION>
DIVERSIFIED GROWTH GROWTH AND INTERMEDIATE-TERM MICHIGAN PRIME OBLIGATION
PORTFOLIO INCOME PORTFOLIO INCOME PORTFOLIO PORTFOLIO PORTFOLIO
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<S> <C> <C> <C> <C> <C>
Advisory Fees (after
fee waiver) (2)...... .67% .52% .31% .23% .10%
12b-1 Fees............. .25% .25% .25% .25% .25%
Other Expenses (2)(3).. .43% .58% .34% .42% .30%
- --------------------------------------------------------------------------------------------------------------------------------
Total Operating
Expenses (after
fee waiver) (4)...... 1.35% 1.35% .90% .90% .65%
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</TABLE>
<TABLE>
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(2) The Adviser has agreed to waive, on a voluntary basis, a portion of its fee for an indefinite period of time in
an amount that operates to limit total operating expenses (exclusive of distribution expenses) to not more than
1.35%, 1.35%, .90%, .90% and .65% of the average daily net assets of the Class B shares of the Diversified
Growth, Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation Portfolios, respectively.
The advisory fee shown reflects this voluntary waiver. The Administrator has agreed to waive a portion of its
fee on a prorated basis with the Adviser up to a maximum waiver of .045% of the average daily net assets of the
Class B shares of the Prime Obligation Portfolio. The Adviser and Administrator each reserves the right to
terminate its waiver at any time in its sole discretion. Absent such waivers, the advisory and administration
fees for the Diversified Growth, Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation
Portfolios would be .74%, .74%, .50%, .50% and .30%, respectively.
(3) For the Growth and Income Portfolio, Other Expenses reflects estimated amounts for the current fiscal year and
assumes the minimum annual administration fee of $100,000. Administration fees as a percentage of average daily
net assets will decline to .20% at net asset levels of $50 million and above for this Portfolio. See 'The
Administrator.'
(4) Absent the voluntary fee waivers described above, Total Operating Expenses for the Class B shares of the
Diversified Growth, Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation Portfolios would
be 1.42%, 1.57%, 1.09%, 1.17% and .95%, respectively.
</TABLE>
<PAGE>
7
EXAMPLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1YR. 3 YRS. 5 YRS.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment assuming (1)
imposition of the maximum sales load, (2) 5% annual return and (3) redemption
at the end of each time period:
Diversified Growth Portfolio................................................. $ 70 $ 98 $ 127
Growth and Income Portfolio.................................................. $ 70 $ 98 $ 127
Intermediate-Term Income Portfolio........................................... $ 54 $ 72 $ 93
Michigan Portfolio........................................................... $ 54 $ 72 $ 93
Prime Obligation Portfolio................................................... $ 7 $ 21 $ 36
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
10 YRS.
<S> <C>
- ---------------------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment assuming (1)
imposition of the maximum sales load, (2) 5% annual return and (3) redemption
at the end of each time period:
Diversified Growth Portfolio................................................. $ 211
Growth and Income Portfolio.................................................. $ 211
Intermediate-Term Income Portfolio........................................... $ 151
Michigan Portfolio........................................................... $ 151
Prime Obligation Portfolio................................................... $ 81
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
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 each
Portfolio. A person who purchases shares through an account with a financial
institution may be charged separate fees by that financial institution.
Additional information may be found under 'The Adviser,' 'The Sub-Advisers' and
'The Administrator.'
Long-term Class B shareholders may eventually pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice (the 'Rules') of the National Association of Securities
Dealers, Inc. ('NASD').
<PAGE>
8
FINANCIAL HIGHLIGHTS GOLDEN OAK FAMILY OF FUNDS
The following information has been audited by Price Waterhouse LLP, the
independent accountants for the Arbor Fund (the 'Trust'), as indicated in their
report dated March 8, 1996 on the Trust's financial statements as of January 31,
1996 included in the Trust's Statement of Additional Information under
'Financial Statements.' Additional performance information is in the 1996 Annual
Report to Shareholders and is available upon request without charge by calling
1-800-545-6331. This table should be read in conjunction with the Trust's
financial statements and notes thereto.
For a Share Outstanding Throughout the Period
For the Periods Ended January 31,
<TABLE>
<CAPTION>
NET DISTRIBUTIONS NET NET
ASSET REALIZED ------------------------ ASSET ASSETS
VALUE NET AND UNREALIZED NET NET VALUE END
BEGINNING INVESTMENT GAINS (LOSS) INVESTMENT REALIZED END TOTAL OF PERIOD
OF PERIOD INCOME ON INVESTMENTS INCOME GAIN OF PERIOD RETURN (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prime Obligation Money Market Portfolio Class A
- ---------------------------------------------------------------------------------------------------------------------------
1996........... $ 1.00 0.06 -- (0.06) -- $ 1.00 5.74% $ 107,409
1995........... 1.00 0.04 -- (0.04) -- 1.00 4.21 109,076
1994(1)........ 1.00 0.03 -- (0.03) -- 1.00 2.87 117,188
- ---------------------------------------------------------------------------------------------------------------------------
Prime Obligation Money Market Portfolio Class B+
- ---------------------------------------------------------------------------------------------------------------------------
1996........... $ 1.00 0.05 -- (0.05) -- $ 1.00 5.47% $ 75,292
1995........... 1.00 0.04 -- (0.04) -- 1.00 3.95 21,018
1994(2)........ 1.00 -- -- -- -- 1.00 2.90* 104
- ---------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Income Portfolio Class A
- ---------------------------------------------------------------------------------------------------------------------------
1996........... $ 9.52 0.56 0.63 (0.56) -- $ 10.15 12.83% $ 104,270
1995........... 10.19 0.50 (0.67) (0.50) -- 9.52 (1.61) 80,064
1994(1)........ 10.00 0.46 0.23 (0.46) (0.04) 10.19 6.99 64.329
- ---------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Income Portfolio Class B+
- ---------------------------------------------------------------------------------------------------------------------------
1996........... $ 9.52 0.54 0.63 (0.54) -- $ 10.15 12.54% $ 210
1995........... 10.19 0.48 (0.67) (0.48) -- 9.52 (1.85) 314
1994(3)........ 10.12 0.31 0.11 (0.31) (0.04) 10.19 6.72* 365
- ----------------------------------------------------------------------------------------------------------------------------
Diversified Growth Portfolio Class A
- ----------------------------------------------------------------------------------------------------------------------------
1996........... $ 10.00 0.07 1.74 (0.07) (1.48) $ 10.26 18.81% $ 24,775
1995........... 10.82 0.08 (0.64) (0.08) (0.18) 10.00 (5.24) 32,931
1994(1)........ 10.00 0.08 0.82 (0.08) -- 10.82 9.08 24,955
- ----------------------------------------------------------------------------------------------------------------------------
Diversified Growth Portfolio Class B+
- ----------------------------------------------------------------------------------------------------------------------------
1996........... $ 9.96 0.04 1.72 (0.04) (1.48) $ 10.20 18.43% $ 193
1995........... 10.81 0.05 (0.67) (0.05) (0.18) 9.96 (5.76) 125
1994(3)........ 9.54 0.02 1.27 (0.02) -- 10.81 22.00* 173
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF
RATIO OF NET
EXPENSES INCOME TO
RATIO OF RATIO OF TO AVERAGE TO AVERAGE
EXPENSES NET INCOME NET ASSETS NET ASSETS PORTFOLIO
TO AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATIO
- ---------------------------------------------------------------------------------------
Prime Obligation Money Market Portfolio Class A
- ---------------------------------------------------------------------------------------
1996........... 0.40% 5.60% 0.70% 5.30% N/A
1995........... 0.40 4.20 0.68 3.92 N/A
1994(1)........ 0.40 2.83 0.67 2.56 N/A
- ---------------------------------------------------------------------------------------
Prime Obligation Money Market Portfolio Class B+
- ---------------------------------------------------------------------------------------
1996........... 0.65% 5.31% 0.95% 5.01% N/A
1995........... 0.65 3.95 0.93 3.67 N/A
1994(2)........ 0.65* 2.68* 0.93* 2.40* N/A
- ---------------------------------------------------------------------------------------
Intermediate-Term Income Portfolio Class A
- ---------------------------------------------------------------------------------------
1996........... 0.65% 5.68% 0.84% 5.49% 121.47%
1995........... 0.65 5.21 0.86 5.00 141.1
1994(1)........ 0.65 4.47 0.83 4.29 71.73
- ----------------------------------------------------------------------------------------
Intermediate-Term Income Portfolio Class B+
- ----------------------------------------------------------------------------------------
1996........... 0.90% 5.49% 1.09% 5.30% 121.47%
1995........... 0.90 4.96 1.11 4.75 141.51
1994(3)........ 0.90* 4.27* 1.08* 4.09* 71.73
- -----------------------------------------------------------------------------------------
Diversified Growth Portfolio Class A
- -----------------------------------------------------------------------------------------
1996........... 1.10% 0.62% 1.17% 0.55% 189.48%
1995........... 1.10 0.74 1.24 0.60 84.00
1994(1)........ 1.10 0.77 1.21 0.66 68.91
- -----------------------------------------------------------------------------------------
Diversified Growth Portfolio Class B+
- -----------------------------------------------------------------------------------------
1996........... 1.35% 0.30% 1.42% 0.23% 189.48%
1995........... 1.35 0.49 1.49 0.35 84.00
1994(3)........ 1.35* 0.33* 1.45* 0.23* 68.91
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Total return does not reflect the sales charge.
(1) Commenced operations February 1, 1993.
(2) Commenced operations January 20, 1994.
(3) Commenced operations June 18, 1993.
<PAGE>
9
THE PORTFOLIO AND THE TRUST
The Golden Oak Family of Funds (the 'Golden Oak Family') is a group of open-end
management investment companies (each a 'portfolio') that are offered together
in order to provide investors with a number of investment alternatives. Each of
the portfolios is a separate series of shares of The Arbor Fund (the 'Trust'),
an open-end management investment company. Shareholders may purchase units of
beneficial interest ('shares') in the portfolios through two separate classes,
Class A and Class B, which provide for variations in distribution costs and
dividends. Except for these differences between classes, each share of each
portfolio represents an undivided, proportionate interest in that portfolio.
This Prospectus offers only the Class A and Class B shares of the Golden Oak
Diversified Growth Portfolio (the 'Diversified Growth Portfolio'), Golden Oak
Growth and Income Portfolio (the 'Growth and Income Portfolio'), Golden Oak
Intermediate-Term Income Portfolio (the 'Intermediate-Term Income Portfolio'),
Golden Oak Michigan Tax Free Bond Portfolio (the 'Michigan Portfolio') and
Golden Oak Prime Obligation Money Market Portfolio (the 'Prime Obligation
Portfolio') (each, a 'Portfolio'; collectively, the 'Portfolios'). Each of the
Portfolios is a diversified mutual fund except for the Michigan Portfolio, which
is a non-diversified mutual fund. Information regarding the Trust's other
portfolios is contained in separate prospectuses that may be obtained by calling
1-800-545-6331.
INVESTMENT OBJECTIVES AND POLICIES
THE DIVERSIFIED GROWTH PORTFOLIO -- The investment objective of the Diversified
Growth Portfolio is to provide total return. There is no assurance that the
Portfolio will achieve its investment objective.
Under normal conditions, the Portfolio expects to be fully invested in common
stocks (and will be at least 75% invested in common stocks) listed on registered
exchanges in the United States or actively traded in the over-the-counter market
as further described below. In addition to investing in common stocks, the
Portfolio may invest in warrants and rights to purchase common stocks, United
States dollar denominated securities of foreign issuers traded in the United
States (including sponsored American Depositary Receipts traded on registered
exchanges or listed on NASDAQ), repurchase agreements, covered call options and
money market instruments of the type described below. The Portfolio may invest
up to 10% of its net assets in American Depositary Receipts, including American
Depositary Shares and New York Shares. The Portfolio may also write covered call
options and engage in related closing purchase transactions provided that the
aggregate value of such options does not exceed 10% of the Portfolio's net
assets as of the time such options are entered into by the Portfolio. The
Sub-Adviser will engage in such transactions only as hedging transactions and
not for speculative purposes.
The common stocks and other equity securities purchased by the Portfolio will be
those of companies which, in the Sub-Adviser's opinion, are well managed, have
an above average rate of return on equity, above average projected five year
earnings and dividend growth rates, a consistent record of dividend and earnings
increases and below average financial leverage. However, there is no assurance
that the Sub-Adviser will be able to predict the stages of a business cycle. In
addition, the Portfolio invests primarily in equity securities that fluctuate in
value; therefore, the Portfolio's shares will fluctuate in value.
For temporary defensive purposes during periods when the Sub-Adviser determines
that market conditions warrant, the Portfolio may invest up to 100% of its
assets in money market instruments (consisting of securities issued or
guaranteed as to principal and interest by the United States government, its
agencies or instrumentalities, repurchase agreements collateralized by United
States Government securities and entered into with financial institutions the
Sub-Adviser deems creditworthy, certificates of deposit, time deposits and
bankers' acceptances issued by banks or savings and loan associations having net
assets of at least $1.0 billion as shown on their most recent public financial
statements, and deemed by the Sub-Adviser to present minimal credit risk, and
commercial paper rated in the two highest short-term rating categories), and may
hold a portion of
<PAGE>
10
its assets in cash. To the extent the Portfolio is engaged in temporary
defensive investment, the Portfolio will not be pursuing its investment
objective.
The Portfolio reserves the right to engage in securities lending but has no
present intention to do so.
For the fiscal year ended January 31, 1996, the Portfolio's annual turnover rate
was approximately 189%. Such a turnover rate may result in higher transaction
costs and may result in additional taxes for shareholders.
THE GROWTH AND INCOME PORTFOLIO -- The investment objective of the Growth and
Income Portfolio is to seek long-term growth of capital, current income and
growth of income. There is no assurance that the Portfolio will achieve its
investment objective.
The Portfolio attempts to achieve its investment objective by investing
primarily in dividend-paying common stocks, preferred stocks and securities
convertible into common stocks. The Portfolio will be as fully invested as
practicable in common stocks, preferred stocks and convertible securities that,
in the opinion of Scudder, Stevens & Clark, Inc. ('Scudder' or the
'Sub-Adviser'), offer the prospect for growth of earnings while paying current
dividends. Over time, continued growth of earnings tends to lead to higher
dividends and enhancement of capital value. The Portfolio allocates its
investment among different industries and companies (that are generally
well-established), and changes its portfolio securities for investment
considerations and not for trading purposes.
The Portfolio may also purchase such securities that do not pay current
dividends but which offer prospects for growth of capital and future income.
Convertible securities (which may be current coupon or zero coupon debt
securities) are bonds, notes, debentures, preferred stocks and other securities
which may be converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. The Portfolio may also invest in
nonconvertible preferred stocks consistent with the Portfolio's investment
objective.
The Portfolio may invest in foreign dividend-paying common stocks, preferred
stocks and securities convertible into common stocks. While the Portfolio
generally emphasizes investments in companies domiciled in the United States, it
may invest without limit in listed and unlisted foreign securities in which it
is permitted to invest. The Portfolio may invest in foreign securities when the
anticipated performance of the foreign securities is believed by the Sub-Adviser
to offer more return potential than domestic alternatives in keeping with the
investment objective of the Portfolio. The Portfolio may enter into forward
currency exchange contracts in connection with the purchase and sale of
securities denominated in a foreign currency.
The Portfolio may also invest in repurchase agreements, illiquid securities and
Eurodollar instruments, and may engage in strategic transactions for hedging
purposes and to seek to increase gain. In addition, the Portfolio may invest in
restricted securities, but currently does not intend to invest more than 5% of
its total assets in such securities.
The Portfolio may invest up to 15% of its net assets in illiquid securities,
including restricted securities other than Section 4(2) commercial paper. The
Portfolio may invest in Section 4(2) commercial paper. Restricted securities,
including Rule 144A securities and Section 4(2) commercial paper, that meet the
criteria established by the Board of Trustees of the Trust will be considered
liquid.
For temporary defensive purposes during periods when the Sub-Adviser determines
that market conditions warrant, the Portfolio may invest up to 100% of its
assets in money market instruments (consisting of securities issued or
guaranteed by the United States Government, its agencies or instrumentalities,
repurchase agreements collateralized by United States Government securities and
entered into with financial institutions the Sub-Adviser deems creditworthy,
certificates of deposit, time deposits and bankers' acceptances issued by banks
or savings and loan associations having net assets of at least $1.0 billion as
shown on their most recent financial statements, and commercial paper rated in
one of the two highest short-term rating categories), and may hold a
<PAGE>
11
portion of its assets in cash for liquidity purposes. To the extent the
Portfolio is engaged in temporary defensive investing, the Portfolio will not be
pursuing its investment objective.
THE INTERMEDIATE-TERM INCOME PORTFOLIO -- The investment objective of the
Intermediate-Term Income Portfolio is current income consistent with limited
price volatility. The Portfolio will seek to limit price volatility by
maintaining an average weighted maturity of three to ten years. There is no
assurance that the Portfolio will achieve its investment objective.
Under normal circumstances, at least 80% of the Portfolio's assets will be
invested in the following United States dollar denominated obligations: (i)
corporate bonds and debentures rated A or better by Standard & Poor's
Corporation ('S&P') or A or better by Moody's Investors Service ('Moody's') or
of comparable quality at the time of purchase as determined by the Adviser; (ii)
obligations issued or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities; (iii) commercial paper
rated A-1 or better by Moody's or P-1 or better by S&P or of comparable quality
at the time of purchase as determined by the Adviser; (iv) short-term bank
obligations consisting of certificates of deposit, time deposits, and bankers'
acceptances of U.S. commercial banks or savings and loan institutions with
assets of at least $1.0 billion as shown on their most recent public financial
statements, that the Adviser deems to be comparable in quality to corporate
obligations in which the Portfolio may invest; and (v) repurchase agreements
involving any of the above securities.
The remaining 20% of the Portfolio's assets may be invested in (i) debt
securities issued or guaranteed by the government of Canada or its provincial or
local governments; (ii) debt securities issued or guaranteed by foreign
governments, their political subdivisions, agencies or instrumentalities and
debt securities of supranational entities; (iii) mortgage-backed securities and
asset-backed securities rated AAA by S&P or Aaa by Moody's; (iv) receipts
evidencing separately traded interest and principal component parts of United
States Government obligations; (v) taxable municipal securities; and (vi)
repurchase agreements involving such securities. The Portfolio may invest in
futures and options for hedging purposes, and will limit the outstanding
obligations to purchase securities under futures contracts to not more than 20%
of the Portfolio's total assets.
In the event a security owned by the Portfolio is downgraded below these ratings
categories, the Adviser will review the quality and credit-worthiness of such
security and take action, if any, that it deems appropriate.
The Portfolio expects to maintain an average weighted remaining maturity of
three to ten years and does not expect to purchase any single security with a
maturity of more than twenty years.
For temporary defensive purposes when the Adviser determines that market
conditions warrant, the Portfolio may invest up to 100% of its assets in the
money market instruments listed above, may hold a portion of its assets in cash
for liquidity purposes and may shorten the average maturity substantially. To
the extent the Portfolio is engaged in temporary defensive investing, the
Portfolio will not be pursuing its investment objective.
The Portfolio may enter into forward commitments or purchase securities on a
when-issued basis where such purchases are for investment and not for
speculative purposes. In addition, the Portfolio may engage in securities
lending.
For the fiscal year ended January 31, 1996, the Portfolio's annual turnover rate
was approximately 121%. Such a turnover rate may result in higher transaction
costs and may result in additional taxes for shareholders.
THE MICHIGAN PORTFOLIO -- The investment objective of the Michigan Portfolio is
current income exempt from federal and Michigan income taxes consistent with
preservation of capital. There is no assurance that the Portfolio will achieve
its investment objective.
The Portfolio will invest primarily in obligations issued by or on behalf of the
states, territories or possessions of the United States or the District of
<PAGE>
12
Columbia or their political subdivisions, agencies or instrumentalities, the
interest of which, in the opinion of counsel for the issuer, is exempt from
federal income tax (collectively, 'Municipal Securities'). It is a fundamental
policy of the Portfolio that at least 80% of its net assets will be invested in
municipal securities the interest on which is exempt from federal income tax and
not subject to taxation as a preference item for purposes of the alternative
minimum tax. Under normal circumstances, at least 65% of the Portfolio will be
invested in municipal bonds and, except where acceptable securities are
unavailable as determined by the Adviser, at least 80% of the Portfolio's assets
will be invested in Municipal Securities, the interest of which, in the opinion
of bond counsel to the issuer, is exempt from Michigan income tax ('Michigan
Municipal Securities'). The Adviser expects to be fully invested in Municipal
Securities. The Portfolio will purchase Municipal Securities which are comprised
of (i) municipal bonds rated in one of the three highest rating categories; (ii)
municipal notes rated in one of the two highest rating categories; (iii)
commercial paper rated in one of the two highest short term rating categories;
or (iv) any of the foregoing that are not rated but are determined by the
Adviser to be of comparable quality at the time of investment. The Portfolio may
also invest up to 5% of its net assets in securities of closed-end investment
companies traded on a national securities exchange.
The Portfolio expects to maintain an average weighted remaining maturity of
three to ten years. The maximum maturity for any individual security is thirty
years.
The Portfolio is a non-diversified investment company which means that more than
5% of its assets may be invested in one or more issuers, although the Adviser
does not intend to invest more than 10% of the Portfolio's assets in any one
issuer. Since a relatively high percentage of assets of the Portfolio may be
invested in the obligations of a limited number of issuers, the value of shares
of the Portfolio may be more susceptible to any single economic, political or
regulatory occurrence than the shares of a diversified investment company would
be. The Portfolio intends to satisfy the diversification requirements necessary
to qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended (the 'Code').
For temporary defensive purposes, when the Adviser determines that market
conditions warrant, the Portfolio may invest up to 100% of its assets in taxable
money market instruments (including repurchase agreements) and securities
subject to the alternative minimum tax and it may hold a portion of its assets
in cash for liquidity purposes. To the extent the Portfolio is engaged in
temporary defensive investing, the Portfolio will not be pursuing its investment
objective.
The Portfolio may enter into forward commitments or purchase securities on a
when-issued basis where such purchases are for investment and not for
speculative purposes. In addition, the Portfolio may also engage in securities
lending.
THE PRIME OBLIGATION PORTFOLIO -- The investment objective of the Prime
Obligation Portfolio is to preserve principal value and maintain a high degree
of liquidity while providing current income. It is also a fundamental policy of
the Portfolio to use its best efforts to maintain a constant net asset value of
$1.00 per share. There is no assurance that the Portfolio will achieve its
investment objective or that it will be able to maintain a constant net asset
value of $1.00 per share on a continuous basis.
The Portfolio intends to comply with regulations of the Securities and Exchange
Commission 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 Portfolio investments. Under these
regulations, the Portfolio will invest in only United States 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. For a further discussion
of these rules, see 'Description of Permitted Investments.'
The Portfolio intends to invest exclusively in (i) bills, notes, receipts and
bonds issued by the United States Treasury and separately traded interest and
<PAGE>
13
principal component parts ('STRIPs') of such obligations that are transferable
through the Federal Book-Entry System ('U.S. Treasury Obligations'); (ii)
obligations issued or guaranteed as to principal and interest by the agencies or
instrumentalities of the United States Government; (iii) commercial paper of
United States or foreign issuers rated in the two highest short-term rating
categories at the time of investment or, if not rated, as determined by the
sub-adviser to be of comparable quality; (iv) obligations (certificates of
deposit, bank notes, time deposits, bankers' acceptances, European certificates
of deposit, European time deposits, Canadian time deposits, Eurodollar
obligations and Yankee Bank obligations) of U.S. commercial banks, U.S. savings
and loan institutions and U.S. and London branches of foreign banks that have
total assets of $1 billion or more as shown on their most recently published
financial statements (the Portfolio 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); (v) U.S. dollar denominated obligations of foreign
governments including Canadian and Provincial Government and Crown Agency
obligations; (vi) short-term corporate obligations of United States issuers with
commercial paper of comparable quality and security that meet the above ratings
or, if not rated, determined by the sub-adviser to be of comparable quality;
(vii) repurchase agreements involving any of the foregoing obligations; (viii)
short-term obligations issued by state and local governmental issuers, which are
rated, at the time of investment, by at least two NRSROs in one of the two
highest municipal bond rating categories, and carry yields that are competitive
with those of other types of money market instruments of comparable quality and
security that meet the above ratings or, if not rated, determined by the
sub-adviser to be of comparable quality; (ix) obligations of supranational
entities satisfying the credit standards described above or, if not rated,
determined by the sub-adviser to be of comparable quality; and (x) to the extent
permitted by applicable law, shares of other investment companies. In addition,
under applicable law, the Portfolio may not invest more than 10% of its total
assets in shares of other investment companies, and investment in such shares
may result in layering of expenses.
The Portfolio may invest up to 10% of its net assets in illiquid securities,
including restricted securities other than Section 4(2) commercial paper. The
Portfolio may invest in Section 4(2) commercial paper. Restricted securities,
including Rule 144A securities and Section 4(2) commercial paper, that meet the
criteria established by the Board of Trustees of the Trust will be considered
liquid.
The Portfolio reserves the right to engage in securities lending but has no
present intention to do so. The Portfolio may also engage in forward commitments
or purchase securities on a when-issued basis.
For additional information regarding the permitted investments of the Portfolios
see 'Risk Factors' and 'Description of Permitted Investments' in the Prospectus
and 'Description of Permitted Investments' in the Statement of Additional
Information.
RISK FACTORS
The market value of the Intermediate-Term Income and Michigan Portfolios' fixed
income investments will change in response to interest rate changes and other
factors and the impact of such changes will depend, in part, upon the ratings
and maturities of a Portfolio's investments. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Moreover, while securities with longer maturity
tend to produce higher yields, the price of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest rates.
Bonds rated A by S&P or Moody's possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Such 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.
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal
<PAGE>
14
also affect the value of these investments. Changes in the value of portfolio
securities will not affect cash income derived from these securities but will
affect a Portfolio's net asset value. Zero coupon securities may be more subject
to price volatility than securities that pay coupon interest.
In general, mortgage-backed securities are subject to prepayment of the
underlying mortgages. During periods of a decline in interest rates, prepayment
of mortgages underlying these securities can be expected to accelerate. When the
mortgage-backed securities held by a Portfolio are prepaid, the Portfolio may
reinvest the proceeds in securities, the yield of which reflects prevailing
interest rates. Thus, mortgage-backed securities may not be an effective means
of locking in long-term interest rates for a Portfolio.
Investments in securities of foreign issuers may subject a Portfolio to
different risks than those attendant to investments in securities of United
States issuers, such as differences in accounting, auditing and financial
reporting standards, the possibility of expropriation or confiscatory taxation,
and political instability. There may be less publicly available information with
regard to foreign issuers, than domestic issuers.
The Michigan Portfolio currently contemplates that it will not invest more than
25% of its total assets (at market value at the time of purchase) in Municipal
Securities, the interest of which is paid from venues or projects with similar
characteristics. See also 'Description of Permitted Investments -- Special
Factors Relating to Michigan Municipal Securities' in the Statement of
Additional Information.
INVESTMENT LIMITATIONS AND
FUNDAMENTAL POLICIES
The investment objective and the following investment limitations are
fundamental policies of the Portfolios. Fundamental policies cannot be changed
with respect to a Portfolio without the consent of the holders of a majority of
the Portfolio's outstanding shares.
A Portfolio may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States Government, its agencies or instrumentalities and repurchase
agreements involving such securities) if, as a result, more than 5% of the total
assets of the Portfolio would be invested in the securities of such issuer. This
restriction applies to 75% of a Portfolio's assets. This limitation does not
apply to the Michigan Portfolio. As a money market fund, the Prime Obligation
Portfolio is subject to additional diversification requirements. See
'Description of Permitted Investments -- Restraints on Investments by Money
Market Funds.'
2. Purchase any securities which would cause more than 25% of the total assets
of the Portfolio 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 (a) investments in the obligations issued
or guaranteed by the United States Government, its agencies or instrumentalities
and repurchase agreements involving such securities, (b) investments in
tax-exempt securities issued by governments or political subdivisions of
government or (c) obligations issued by domestic branches of United States banks
or United States branches of foreign banks subject to the same regulations as
United States banks. For purposes of this limitation (i) utility companies will
be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (ii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; (iii) supranational
entities will be considered to be a separate industry; and (iv) loan
participations are considered to be issued by both the issuing bank and the
underlying corporate borrower. This limitation does not apply to the Michigan
Portfolio.
3. Make loans, except that a Portfolio may (i) purchase or hold debt instruments
in accordance with its investment objective and policies; (ii) enter into
repurchase agreements; and (iii) engage in securities lending as described in
this Prospectus and in the Statement of Additional Information.
<PAGE>
15
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations are set forth in the Statement of Additional
Information.
THE ADVISER
Citizens Bank ('Citizens Bank' or the 'Adviser') serves as investment adviser to
the Portfolios pursuant to an investment advisory agreement (the 'Advisory
Agreement') with the Trust. Under the Advisory Agreement, the Adviser is
responsible for the investment decisions for each Portfolio, and continuously
reviews, supervises and administers each Portfolio's investment program. The
Trust and the Adviser have employed Wellington Management Company as the
investment sub-adviser to manage the Prime Obligation Portfolio, Scudder,
Stevens & Clark, Inc. as the investment sub-adviser to the Growth and Income
Portfolio and Nicholas-Applegate Capital Management as the investment
sub-adviser to the Diversified Growth Portfolio, in each case subject to the
supervision of the Adviser and the Trustees, on a day-to-day basis. In
conjunction with the Adviser, each investment sub-adviser makes the investment
decisions for the assets of the Portfolio and continuously reviews, supervises
and administers the Portfolio's investment program. See 'The Sub-Advisers.'
The Adviser is independent of SEI Financial Management Corporation (the
'Administrator') and discharges its responsibilities subject to the supervision
of, and policies established by, the Trustees of the Trust.
The Adviser, 328 S. Saginaw Street, Flint, Michigan 48502, was incorporated in
1871 in the state of Michigan. Citizens Bank is a wholly owned subsidiary of
Citizens Banking Corporation. Citizens Banking Corporation is an interstate bank
holding company with over $3.5 billion in assets and 92 banking offices in
Michigan and Illinois. As of January 31, 1996, the Adviser's total assets under
management were $1.7 million. The Adviser has managed bank common funds, pension
plan assets and personal trust assets since 1927. The Adviser's sole experience
as an investment adviser to investment companies is as investment adviser to the
Trust.
Richard Ranville, Jr., Assistant Vice-President of Citizens Banking Corporation,
has managed the Michigan Portfolio since its inception. He has managed fixed
income portfolios since 1980.
Christopher W. Wheeler, Trust Officer of the Adviser, has managed the
Intermediate-Term Income Portfolio since February, 1996. He has managed the
Adviser's fixed income portfolios and trust accounts since 1993.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate based on the average daily net assets of
each Portfolio as follows: Diversified Growth Portfolio, .74%; Growth and Income
Portfolio, .74%; Intermediate-Term Portfolio, .50%; Michigan Portfolio, .50%;
and Prime Obligation Portfolio, .30%. From this fee, the Adviser pays the fees
of certain of the Sub-Advisers. See 'The Sub-Advisers' below. The Adviser has
voluntarily agreed to waive a portion of its fees in order to limit the total
operating expenses of Class A and Class B shares of the Diversified Growth,
Growth and Income, Intermediate-Term Income, Michigan and Prime Obligation
Portfolios (exclusive of distribution expenses charged to Class B shares) to not
more than 1.10%, 1.10%, .65%, .65% and .40%, respectively, of each Portfolio's
average daily net assets. The Adviser reserves the right, in its sole
discretion, to terminate this voluntary fee waiver at any time. For the fiscal
year ended January 31, 1996, the Diversified Growth, Intermediate-Term Income
and Prime Obligation Portfolios paid the Adviser an advisory fee of .67%, .31%
and .01% respectively, of each Portfolio's average daily net assets. The
Michigan and Growth and Income Portfolios were not in operation during the
fiscal year ended January 31, 1996. The Portfolios may also execute brokerage or
other agency transactions through an affiliate of the Adviser. See 'The
Distributor' below regarding such transactions.
The Glass-Steagall Act restricts the securities activities of banks such as the
Adviser, 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.
<PAGE>
16
THE SUB-ADVISERS
Wellington Management Company (a 'Sub-Adviser' or 'WMC') serves as the
investment sub-adviser for the Prime Obligation Portfolio, Scudder, Stevens &
Clark, Inc. (a 'Sub-Adviser' or 'Scudder') serves as investment sub-adviser for
the Growth and Income Portfolio and Nicholas-Applegate Capital Management (a
'Sub-Adviser' or 'Nicholas-Applegate') serves as investment sub-adviser for the
Diversified Growth Portfolio pursuant to sub-advisory agreements (each, a
'Sub-Advisory Agreement') with the Trust and/or the Adviser. Under each
Sub-Advisory Agreement, the Sub-Adviser manages the investments of the
Portfolio, selects investments, and places all orders for purchases and sales of
the Portfolio's securities, subject to the general supervision of the Trustees
of the Trust and the Adviser.
WMC is a professional investment counseling firm which provides investment
services to investment companies, employee benefit plans, endowments,
foundations, and other institutions and individuals. As of January 31, 1996, WMC
had discretionary management authority with respect to approximately $111.1
billion of assets. WMC and its predecessor organizations have provided
investment advisory services to investment companies since 1933 and to
investment counseling clients since 1960. Wellington Management Company, 75
State Street, Boston, MA 02109, is a Massachusetts general partnership, of which
the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan.
For the services provided and expenses incurred pursuant to the Sub-Advisory
Agreement, WMC is entitled to receive from the Portfolio a fee, computed daily
and paid monthly, at the annual rate of .075% of the average daily net assets of
the Portfolio. For the fiscal year ended January 31, 1996, the Portfolio paid
the Sub-Adviser an advisory fee of .075% of its average daily net assets.
Scudder, Two International Place, Boston, Massachusetts, 02110 is incorporated
in the state of Delaware. As of December 31, 1995, Scudder and its affiliates
had assets under their supervision in excess of $100 billion. Scudder is a
professional investment counseling firm which provides investment services to
individuals and institutions.
The Growth and Income Portfolio is managed by a team of Scudder investment
professionals, each of whom plays an important role in the Portfolio's
management process. Team members work closely together to develop investment
strategies and select securities for the Portfolio's investment portfolio. They
are supported by Scudder's large staff of economists, research analysts, traders
and other investment specialists who work in offices across the United States
and abroad. Scudder believes its team approach benefits Portfolio investors by
bringing together many disciplines and leveraging Scudder's extensive resources.
Lead Portfolio Manager Robert T. Hoffman has had responsibility for setting the
Growth and Income Portfolio's stock investing strategy and overseeing the
Portfolio's day-to-day operations since its inception. Mr. Hoffman, who joined
Scudder in 1990 as a portfolio manager, has 11 years experience in the
investment industry, including several years of pension fund management
experience. Kathleen T. Millard, Portfolio Manager, has been involved in the
investment industry since 1983 and has worked as a portfolio manager since 1986.
Ms. Millard, who joined Scudder in 1991 and has been with the Portfolio since
its inception, focuses on strategy and stock selection. Benjamin W. Thorndike,
Portfolio Manager, is the Portfolio's chief analyst and strategist for
convertible securities. Mr. Thorndike, who has 16 years of investment
experience, joined Scudder in 1983 as a portfolio manager and has been with the
Portfolio since its inception.
For the services provided and expenses incurred pursuant to the Sub-Advisory
Agreement, Scudder is entitled from the Adviser a fee, computed daily and paid
monthly, at an annual rate of .74% of the Portfolio's average daily net assets
up to $5 million; .50% of the Portfolio's average daily net assets over $5
million and up to $25 million; .35% of the Portfolio's average daily net assets
over $25 million and up to $50 million; and .30% of the Portfolio's average
daily net assets over $50 million. Scudder will receive its entire fee even if
the Adviser waives a portion of its fee.
<PAGE>
17
Effective August 31,1995, Nicholas-Applegate began serving as investment
sub-adviser for the Diversified Growth Portfolio. Nicholas-Applegate has
operated as a registered investment adviser providing investment advisory
services for a wide variety of clients including employee benefit plans,
university endowments, foundations, public retirement systems and unions, other
institutional investors and individuals since 1984 and, since April 20, 1987,
investment companies. As of January 31, 1996, Nicholas-Applegate had
discretionary management authority with respect to approximately $29.2 billion
of assets. Nicholas-Applegate, pursuant to a partnership agreement, is
controlled by its general partner Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership controlled by Arthur E.
Nicholas. The principal business address of Nicholas-Applegate is 600 West
Broadway, 29th Floor, San Diego, California 92101.
Lawrence S. Speidell, CFA, has managed the Diversified Growth Portfolio since
August 31, 1995. Mr. Speidell joined Nicholas-Applegate in 1994. Prior to that
time, Mr. Speidell was an institutional portfolio manager with Batterymarch
Financial Management where he was involved in the development of domestic and
international portfolio strategies and portfolio optimization. Mr. Speidell has
been involved in the investment industry for over 25 years.
For the services provided and the expenses incurred pursuant to the Sub-Advisory
Agreement, Nicholas-Applegate is entitled to receive from the Adviser a fee,
calculated daily and paid quarterly, at an annual rate of .40% of the average
daily net assets of the Portfolio.
THE ADMINISTRATOR
SEI Financial Management Corporation, 680 East Swedesford Road, Wayne,
Pennsylvania 19087, a wholly-owned subsidiary of SEI Corporation ('SEI'),
provides the Portfolios with administrative services, other than investment
advisory services, including all regulatory reporting, necessary office space,
equipment, personnel and facilities, pursuant to an administration agreement
(the 'Administration Agreement') with the Trust. The Administrator also serves
as the shareholder servicing agent of the Trust under the terms of the
Administration Agreement.
For its services, the Administrator is entitled to a fee, which is calculated
daily and paid monthly, at an annual rate of .20% of the average daily net
assets of the Diversified Growth, Growth and Income, Intermediate-Term Income,
Michigan and Prime Obligation Portfolios. The Growth and Income Portfolio and
the Michigan Portfolio are also subject to a minimum fee of $100,000. In
addition, the Administrator has agreed to waive a portion of its fee on a
prorated basis with the Adviser up to a maximum waiver of .045% of the average
daily net assets of the shares of the Prime Obligation Portfolio. The
Administrator and the Advisor each reserve the right to terminate its waiver at
any time in its sole discretion.
For the fiscal year ended January 31, 1996, the Portfolios paid the
Administrator the following administration fees (shown as a percentage of
average daily net assets): Diversified Growth, .20%; Intermediate-Term Income,
.20%; and Prime Obligation, .20%. The Growth and Income and Michigan Portfolios
had not commenced operations as of January 31, 1996.
THE TRANSFER AGENT
DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105 (the
'Transfer Agent'), serves as the transfer agent and dividend disbursing agent
for the Portfolios under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Financial Services Company (the 'Distributor'), a wholly-owned subsidiary of
SEI, serves as the Portfolios' distributor pursuant to a distribution agreement
('Distribution Agreement') with the Trust which applies to Class A and Class B
shares of the Portfolio.
The Class B shares of the Portfolio have a distribution plan (the 'Class B
Plan') pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended (the '1940 Act'). As provided in the Distribution Agreement and the
Class B Plan, the Trust will pay an annual fee of .25% of the Class B
Portfolios' average daily net assets to the
<PAGE>
18
Distributor as compensation for its services. From this amount the Distributor
may make payments to financial institutions and intermediaries such as banks
(including Citizens Bank), savings and loan associations, insurance companies,
investment counselors, broker-dealers, and the Distributor's affiliates and
subsidiaries as compensation for services, reimbursement of expenses incurred in
connection with distribution assistance or provision of shareholder services.
The Class B Plan is characterized as a compensation plan since the distribution
fee will be paid to the Distributor without regard to the distribution or
shareholder service expenses incurred by the Distributor or the amount of
payments made to financial institutions and intermediaries. The Trust intends to
operate the Class B Plan in accordance with its terms and with the NASD rules
concerning sales charges. The Portfolio may also execute brokerage or other
agency transactions through an affiliate of the Adviser or through the
Distributor for which the affiliate or the Distributor may receive 'usual and
customary' compensation. The Adviser will use its best efforts to obtain the
best available price and most favorable execution with respect to all
transactions for the Portfolios.
The Class A shares of each Portfolio are offered without distribution fees to
institutional investors, including Citizens Bank, its affiliates and
correspondent banks, for the investment of funds for which they act in a
fiduciary, agency or custodial capacity. It is possible that an institution may
offer different classes of shares to its customers and thus receive different
compensation with respect to different classes of shares. These financial
institutions may also charge separate fees to their customers.
Certain financial institutions offering shares to their customers may be
required to register as dealers pursuant to state laws.
The Distributor may, from time to time and at its own expense, provide
promotional incentives in the form of cash or other compensation to certain
financial institutions and intermediaries whose registered representatives have
sold or are expected to sell significant amounts of the shares of each
Portfolio. Such other compensation may take the form of payments for travel
expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives to places within or outside of the United
States.
HOW TO PURCHASE SHARES
Shares of each Portfolio are sold on a continuous basis and may be purchased
directly from the Transfer Agent, by mail or by wire transfer. Shares may also
be purchased through a broker-dealer which has established a dealer agreement
with the Distributor or through a financial institution.
Shares of each Portfolio are offered only to residents of states in which the
shares are eligible for purchase.
Purchases of shares of a Portfolio may be made on days on which the New York
Stock Exchange and the Federal Reserve wire system are open for business
('Business Days'). However, shares of the Portfolios cannot be purchased by
Federal Reserve wire on federal holidays restricting wire transfers. The minimum
initial investment in the Class A shares is $1,000,000 and the minimum initial
investment in the Class B Shares is $1,000; however, the minimum investment may
be waived at the Distributor's discretion. All subsequent purchases of Class B
shares must be at least $50.
A purchase order for Class A or Class B shares will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent receives an
order and payment for the shares (by wire transfer or check) prior to 4:00 p.m.,
Eastern time, or at the close of business of the New York Stock Exchange, except
that for the Prime Obligation Portfolio an order and payment for the shares must
be received by the Transfer Agent prior to 12:00 noon, Eastern time. However, an
order for Class A shares may be canceled if the Custodian does not receive
federal funds before 4:00 p.m., Eastern time (on the next Business Day), 12:00
noon, Eastern time for the Prime Obligation Portfolio (on the same Business
Day).
The Trust reserves the right to reject a purchase order when the Distributor or
Transfer Agent determines that it is not in the best interest of the Trust
and/or its shareholders to accept such order.
<PAGE>
19
BY MAIL (CLASS B ONLY)
Investors in the Class B shares may purchase shares of a Portfolio by completing
and signing an Account Application form and mailing it, along with a check (or
other negotiable bank instrument or money order) payable to 'The Arbor
Fund-Golden Oak (Name of Portfolio),' to the Transfer Agent. Subsequent
purchases of shares may be made at any time by mailing a check (or other
negotiable bank draft or money order) to the Transfer Agent. An investor in
Class A shares of a Portfolio may not purchase shares by check. If a check
received does not clear, the purchase will be cancelled and the investor could
be liable for any losses or fees incurred.
Account Application forms can be obtained by calling 1-800-545-6331.
BY WIRE TRANSFER
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Portfolio by requesting
their bank to transmit funds by wire to: United Missouri Bank of Kansas,
N.A.; ABA #10-10-00695; for Account Number 98-7052-398-1; Further Credit:
Golden Oak (Name of Portfolio). The Shareholder's name and account
number must be specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-808-4920 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: DST Systems, Inc., P.O. Box 419240, Kansas
City, Missouri 64141-6240.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholders name and
account number. The investor's bank may impose a fee for investments by wire.
SYSTEMATIC INVESTMENT PLAN
('SIP') (CLASS B ONLY)
A Class B Shareholder may also arrange for periodic additional investments in
any Portfolio through automatic deductions by Automated Clearing House ('ACH')
from a checking account by completing the appropriate section of the Account
Application form. The SIP is subject to account minimum initial purchase amounts
and minimum maintained balance requirements. The minimum pre-authorized
investment amount is $50 per month. An Account Application form may be obtained
by calling 1-800-545-6331.
OTHER INFORMATION REGARDING PURCHASES
Class A and Class B Shares may also be purchased through financial institutions,
including Citizens Bank or its affiliates, that provide distribution assistance
or shareholder services to a Portfolio. Shares purchased by persons
('Customers') through financial institutions may be held of record by the
financial institution. Financial institutions may impose an earlier cut-off time
for receipt of purchase orders directed through them to allow for processing and
transmittal of these orders to the Transfer Agent for effectiveness the same
day. Customers should contact their financial institution for information as to
the institution's procedures for transmitting purchase, exchange or redemption
orders to the Trust.
Customers who desire to transfer the registration of shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change. Other shareholders who desire to transfer
the registration of their shares should contact the Transfer Agent to accomplish
such change.
<PAGE>
20
Purchases may be made by direct deposit or ACH transactions.
Depending upon the terms of a particular Customer account, a financial
institution may charge Customer account fees, that is, fees in addition to the
fees described herein. Information concerning these services and any charges
will be provided to the Customer by the financial institution.
A purchase order for shares will be executed at a per share price equal to the
net asset value next determined after the purchase order is effective plus
any applicable sales charge (the 'offering price'). Net asset value per share of
each Portfolio is determined as of the close of business of the New York Stock
Exchange (currently 4:00 p.m., Eastern time) other than the Prime Obligation
Portfolio. The Prime Obligation Portfolio determines its net asset value as of
12:00 noon, Eastern time. No certificates representing shares will be issued.
For each Portfolio except the Prime Obligation Portfolio, the net asset value
per share is determined by dividing the total market value of the Portfolio's
investments and other assets, less any liabilities, by the total number of
outstanding shares of the Portfolio. For the Prime Obligation Portfolio the net
asset value per share is determined using amortized cost method described in the
Statement of Additional Information. Pursuant to guidelines adopted and
monitored by the Trustees, a Portfolio may use a pricing service to provide
market quotations or fair market valuations. A pricing service may derive such
valuations through the use of a matrix system to value fixed income securities
which considers factors such as securities prices, yield features, ratings, and
developments related to a specific security. Purchases will be made in full and
fractional shares of a Portfolio calculated to three decimal places. Although
the methodology and procedures are identical, the net asset value per share of
classes within a Portfolio may differ because of the distribution expenses paid
by Class B shares.
The following table shows the regular sales charge on Class B shares of the
Diversified Growth and Growth and Income Portfolios to a 'single purchaser'
(defined below) together with the sales load reallowed to certain financial
institutions (the 'commission'):
<TABLE>
<CAPTION>
DEALER
AND
SALES BROKERAGE
SALES CHARGE COMMISSION
CHARGE AS A AS A
AS A PERCENTAGE PERCENTAGE
PERCENTAGE OF NET OF
AMOUNT OF OF OFFERING AMOUNT OFFERING
PURCHASE PRICE INVESTED PRICE
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Less than $50,000... 5.75% 6.10% 5.15%
$50,000-$99,999..... 4.50% 4.71% 4.00%
$100,000-$249,999... 3.50% 3.63% 3.10%
$250,000-$499,999... 2.60% 2.67% 2.30%
$500,000-$999,999... 2.00% 2.04% 1.80%
$1,000,000 and
above............... NAV 0 0
</TABLE>
The following table shows the regular sales charge on Class B shares of the
Intermediate-Term Income and Michigan Portfolios to a 'single purchaser'
together with the commission:
<TABLE>
<CAPTION>
DEALER
AND
SALES BROKERAGE
SALES CHARGE COMMISSION
CHARGE AS A AS A
AS A PERCENTAGE PERCENTAGE
PERCENTAGE OF NET OF
AMOUNT OF OF OFFERING AMOUNT OFFERING
PURCHASE PRICE INVESTED PRICE
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Less than
$100,000............ 4.50% 4.71% 4.00%
$100,000-$249,999... 3.50% 3.63% 3.10%
$250,000-$499,999... 2.60% 2.67% 2.30%
$500,000-$999,999... 2.00% 2.04% 1.80%
$1,000,000 and
above............... NAV 0 0
</TABLE>
There is no sales charge imposed on Class B shares of the Prime Obligation
Portfolio.
The commissions shown in the tables apply to sales made through financial
institutions. Under certain circumstances, commissions up to the amount of the
entire sales charge may be reallowed to certain financial institutions, who
might then be deemed to be 'underwriters' under the Securities Act of 1933.
<PAGE>
21
RIGHT OF ACCUMULATION
In calculating the sales charge rates applicable to current purchases of Class B
shares of the Portfolio, a 'single purchaser' is entitled to cumulate current
purchases with the current market value of previously purchased Class B shares
of (i) the Diversified Growth and Growth and Income Portfolios, and (ii) the
Intermediate-Term Income and Michigan Portfolios (the 'Eligible Portfolios')
which were purchased subject to a comparable sales charge.
The term 'single purchaser' refers to (i) an individual, (ii) an individual and
spouse purchasing shares of a Portfolio for their own account or for trust or
custodial accounts for their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account, including employee benefit plans
created under Sections 401 or 457 of the Internal Revenue Code of 1986, as
amended (the 'Code'), including related plans of the same employer. To be
entitled to a reduced sales charge based upon shares already owned, the investor
must ask the Transfer Agent for such reduction at the time of purchase and
provide the account number(s) of the investor, the investor and spouse, and
their minor children. A Portfolio may amend or terminate this right of
accumulation at any time as to subsequent purchases.
LETTER OF INTENT
By submitting a Letter of Intent (the 'Letter') to the Transfer Agent, a single
purchaser may purchase shares of a Portfolio and the other Eligible Portfolios
during a 13-month period at the reduced sales charge rates applying to the
aggregate amount of the intended purchases stated in the Letter. The Letter may
apply retroactively to purchases made up to 90 days before the date of the
Letter. It is the responsibility of the shareholder to notify the Transfer Agent
at the time the Letter is submitted that there are prior purchases that may
apply.
OTHER CIRCUMSTANCES
No sales charge is imposed on shares of a Portfolio: (i) issued in plans of
reorganization, such as mergers, asset acquisitions and exchange offers, to
which the Trust is a party; (ii) sold to dealers or brokers that have a sales
agreement with the Distributor, for their own account or for retirement plans
for their employees or sold to employees (and their spouses) of dealers or
brokers that certify to the Distributor at the time of purchase that such
purchase is for their own account (or for the benefit of such employees' minor
children); (iii) purchased in aggregate amounts of $1 million or more by tax
exempt organizations enumerated in Section 501(c) of the Code or employee
benefit plans created under Sections 401 or 457 of the Code; (iv) sold to
Trustees and officers of the Trust and employees of the Adviser and its
affiliates; or (v) sold to agency, custody and fiduciary accounts of the Adviser
and its affiliates.
A description of the above and other plans and privileges by which a sales
charge may be reduced is set forth in the 'Purchase and Redemption of Shares'
section of the Statement of Additional Information.
HOW TO EXCHANGE SHARES
Some or all of the shares of a Portfolio for which payment has been received
(i.e., an established account) may be exchanged for shares, at their net asset
value, of other Eligible Portfolios with similar or lower sales loads or for
shares of the Prime Obligation Portfolio which does not have a sales load.
Exchanges will be made only after instructions in writing or by telephone (an
'Exchange Request') are received for an established account by the Transfer
Agent.
In the case of shares held of record by Citizens Bank or another financial
institution but beneficially owned by a Customer, to exchange such shares the
Customer should contact Citizens Bank or the financial institution who will
contact the Transfer Agent and effect the exchange on behalf of the Customer. If
an exchange request in good order is received by the Transfer Agent by 4:00
p.m., Eastern time, on any Business Day, the exchange usually will occur on that
day. Any shareholder or Customer who wishes to make an exchange must have
received a current prospectus of the Portfolio in which he or she wishes to
invest before the exchange will be effected.
<PAGE>
22
An exchange from the Class A shares to the Class B shares of a Portfolio will
occur automatically when a Class A shareholder's account falls below the
$1,000,000 minimum balance. The Trust will provide thirty days' notice of any
such exchange. The exchange will take place at net asset value, without the
imposition of a sales load, fee or other charge. After the exchange, the
exchanged shares will be subject to all fees applicable to Class B shares. In
the event that a shareholder declines to accept an automatic exchange, and if
the shareholder does not meet the requirements for investing in Class A shares,
the Trust reserves the right to redeem the shares upon expiration of the
thirty-day period. Each Portfolio reserves the right to require shareholders to
complete an application or other documentation in connection with the exchange.
HOW TO REDEEM SHARES
Shareholders may redeem their shares without charge on any Business Day and
shares may ordinarily be redeemed by mail, by telephone or by wire transfer. A
wire redemption fee of $10.00 is charged for wire redemptions except that
certain financial institutions may be exempt from this wire charge.
BY MAIL
A written request for redemption must be received by the Transfer Agent in good
form in order to constitute a valid request for redemption. Valid written
redemption requests will be effective on receipt. All shareholders of record
must sign the redemption request. The Transfer Agent may require that the
signature on the written request be guaranteed. The signature guarantee
requirement will be waived if all of the following conditions apply: (1) the
redemption is for $5,000 worth of shares or less, (2) the redemption check is
payable to the shareholder(s) of record, and (3) the redemption check is mailed
to the shareholder(s) at the address of record. The Trust and the Transfer Agent
reserve the right to amend these requirements without notice.
For information about the proper form of redemption requests, call
1-800-808-4920. The shareholder may also have the proceeds mailed to a
commercial bank account previously designated on the Account Application or by
written instruction to the Transfer Agent. There is no charge for having
redemption requests mailed to a designated bank account.
BY TELEPHONE
Shares may be redeemed by telephone if the shareholder elects that option on the
Account Application. Telephone redemption orders may be made by the shareholder
by calling the Transfer Agent at 1-800-808-4920. Wire redemption requests may be
made to the Transfer Agent, who will add a wire redemption charge (presently
$10.00, except that certain financial institutions may be exempt from this wire
charge) to the amount of the redemption. Telephone redemption orders must be
placed with the Transfer Agent prior to 4:00 p.m., Eastern time for each
Portfolio except the Prime Obligation Portfolio and as of 12:00 noon, Eastern
time for the Prime Obligation Portfolio on any Business Day in order to be
effective on such day. The shareholder may have the proceeds mailed to his or
her address or mailed or wired to a commercial bank account previously
designated on the Account Application. Under most circumstances, payments will
be transmitted on the next Business Day following receipt of a valid request for
redemption. Shareholders may not close their accounts by telephone.
Neither the Trust nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
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, including requiring a form
of personal identification prior to acting upon instructions received by
telephone and recording telephone instructions. If market conditions are
extraordinarily active, or other extraordinary circumstances exist, and a
shareholder experiences difficulties placing redemption orders by telephone, the
shareholder may wish to consider placing the order by other means, such as mail
or overnight delivery.
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23
CHECK WRITING SERVICE
Class B shareholders of the Prime Obligation Portfolio may redeem shares by
writing checks on his or her account for $500 or more. Once a shareholder has
signed and returned a signature card, he or she will receive a supply of checks.
The check may be made payable to any person, and the shareholder's account will
continue to earn dividends until the check clears.
Because of the difficulty of determining in advance the exact value of a
Portfolio account, a shareholder may not use a check to close his or her
account. These checks are free, but the shareholder's account will be charged a
fee for stopping payment of a check upon the shareholder's request, or if the
check cannot be honored because of insufficient funds or other valid reasons.
OTHER INFORMATION REGARDING REDEMPTIONS
The redemption price for the Class A and Class B shares is the net asset value
per share next determined after the request for redemption is effective. Payment
to shareholders for shares redeemed will be made within seven days after receipt
by the Transfer Agent of the redemption request in good order.
At various times, a Portfolio may be requested to redeem shares for which it has
not yet received good payment. In such circumstances, proceeds will be forwarded
as soon as payment has been collected for the purchase of such shares, which
could take 10 days or more. A Portfolio intends to pay cash for all shares
redeemed, but under abnormal conditions that make payment in cash unwise,
payment may be made wholly or partly 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.
Due to the relatively high costs of handling small investments, a Portfolio
reserves the right to redeem, at net asset value, the shares of any shareholder
if, because of redemptions of shares by or on behalf of the shareholder, the
account of such shareholder decreases in value below the minimum initial
purchase amount for the applicable class of shares. Accordingly, an investor
purchasing shares of a Portfolio in only the minimum investment amount may be
subject to such involuntary redemption if he or she thereafter redeems any of
these shares. Before the Portfolio exercises its right to redeem such shares and
to send the proceeds to the shareholder, the shareholder will be given notice
that the value of the shares in his or her account is less than the minimum
amount and will be allowed 60 days to make an additional investment in the
Portfolio in an amount that will increase the value of the account to at least
the minimum initial purchase amount.
See 'Purchase and Redemption of Shares' in the Statement of Additional
Information for examples of when the right of redemption may be suspended.
SYSTEMATIC WITHDRAWAL PLAN
(SWP) (CLASS B SHARES ONLY)
The Portfolios offer a Systematic Withdrawal Plan which may be utilized by Class
B shareholders who wish to receive regular distributions from their account.
Upon commencement of the SWP, the account must have a current value of $10,000
or more. Class B shareholders may elect to receive automatic payments via check
or ACH of $50 or more on a monthly, quarterly, semi-annual or annual basis. An
Account Application Form may be obtained by calling 1-800-545-6331.
Shareholders should realize that if withdrawals exceed income dividends, their
invested principal in the account will be depleted. Thus, depending on the
frequency and amounts of the withdrawal payments and/or any fluctuations in the
net asset value per share, their original investment could be exhausted
entirely. To participate in the SWP, Shareholders must have their dividends
automatically reinvested. Shareholders may change or cancel the SWP at any time,
upon written notice to the Transfer Agent. It is generally not in the best
interest of shareholders in the SWP to acquire additional shares if they would
have to pay a sales load in connection with such purchases.
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24
PERFORMANCE
From time to time the Prime Obligation Portfolio may advertise its 'current
yield' and 'effective compound yield'. Both yield figures are based on
historical earnings and are not intended to indicate future performance. No
representation can be made concerning actual future yields. The 'current yield'
of the Portfolio refers to the income generated by an investment in a Portfolio
over a stated 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' (also called 'effective compound yield') is calculated
similarly but, when annualized, the income earned by an investment in a
Portfolio 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.
From time to time, the Diversified Growth, Intermediate-Term Income, Michigan
and Growth and Income Portfolios may also advertise yield and total return.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made concerning actual
future yields or returns. The yield of a Portfolio refers to the income
generated by a hypothetical investment, net of any sales charge in the case of
some of the Class B shares, in a Portfolio over a specified thirty day period.
This income is then 'annualized', i.e., the income over thirty days is assumed
to be generated over one year and is shown as a percentage of the investment.
The total return of a Portfolio refers to the average compounded rate of return
on a hypothetical investment, net of any sales charge, for designated time
periods, assuming that the entire investment is redeemed at the end of each
period and assuming the reinvestment of all dividend and capital gain
distributions.
The performance on Class A shares will normally be higher than that on Class B
shares because of the distribution expenses charged to the Class B shares.
A Portfolio may periodically compare its performance to other mutual funds
tracked by mutual fund rating services (such as Lipper Analytical) 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 other
investment alternatives. A Portfolio may quote Morningstar, Inc., a service that
ranks mutual funds on the basis of risk-adjusted performance. A Portfolio may
quote Ibbotson Associates of Chicago, Illinois, which provides historical
returns of the capital markets in the U.S. A Portfolio 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. A Portfolio may also quote financial and business
publications and periodicals as they relate to portfolio management, investment
philosophy and investment techniques.
A Portfolio 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.
TAXES
The following summary of 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 a Portfolio
or its shareholders. Accordingly, shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state and local income
taxes.
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25
TAX STATUS OF THE PORTFOLIO
Each Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Trust's other Portfolios. Each Portfolio intends to
qualify for the special tax treatment afforded regulated investment companies as
defined under Subchapter M of 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) that it
distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS
Each Portfolio will distribute 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. Any net capital gain will be
distributed at least annually and will be taxed to shareholders as long-term
capital gain, regardless of how long the shareholders have held their shares.
Corporate shareholders should note that distributions of the Intermediate-Term,
Michigan Tax Free and Prime Obligation Portfolios are not expected to qualify
for the dividends-received deduction that is generally available to corporate
taxpayers. Dividends paid by the Diversified Growth and Growth and Income
Portfolios to corporate shareholders are expected to qualify for this deduction
to the extent these Portfolios' dividends derive from dividends the Portfolios
received from domestic corporations. The full amount of these dividends,
however, may be subject to the federal alternative minimum tax. Distributions of
net capital gain will not qualify for this deduction. Each Portfolio will make
annual reports to shareholders of the federal income tax status of all
distributions.
Interest received on U.S. Treasury obligations is exempt from income tax at the
state level when received directly and may be exempt, depending on the state,
when received by a shareholder from a Portfolio provided certain conditions are
satisfied. Interest received on repurchase agreements collateralized by U.S.
Treasury obligations normally is not exempt from state taxation. Each Portfolio
will inform shareholders annually of the percentage of income and distributions
derived from U.S. Treasury obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
a Portfolio is considered tax exempt in their particular states.
Certain securities each Portfolio may purchase (such as STRIPS, TRs, TIGRs and
CATs, defined under 'Description of Permitted Investments') are sold with
original issue discount and do not make periodic cash interest payments. A
Portfolio will be required to include as part of its current income the accrued
discount on such obligations even though the Portfolio has not received any
interest payments on such obligation during that period. Because each Portfolio
distributes all of its net investment income to its shareholders, a Portfolio
may have to sell portfolio securities to distribute such accrued income, which
may occur at a time when the Adviser would not have chosen to sell such
securities and which may result in a taxable gain or loss.
Dividends declared by a Portfolio in October, November or December of any year
and payable to shareholders of record on a date in that month will be deemed to
have been paid by the Portfolio and received by the shareholders on December 31
of that year, if paid by the Portfolio at any time during the following January.
Each Portfolio intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax.
A sale, exchange or redemption of Portfolio shares is a taxable event to the
shareholder.
Income derived by a Portfolio from obligations of foreign issuers may be subject
to foreign withholding taxes. No Portfolio will be able to elect to treat
shareholders as having paid their proportionate share of such foreign taxes.
ADDITIONAL CONSIDERATIONS FOR THE MICHIGAN
TAX FREE BOND PORTFOLIO
The Michigan Tax-Free Bond Portfolio will distribute all of its net investment
income (including net short-term capital gain) to its shareholders. If, at the
close of each quarter of its taxable year, at least 50% of the value of the
Portfolio's assets consist of
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26
obligations the interest on which is excludable from gross income, the Portfolio
may pay 'exempt-interest dividends' to its shareholders. Those dividends
constitute the portion of the aggregate dividends as designated by the
Portfolio, equal to the excess of the excludable interest over certain amounts
disallowed as deductions. Exempt-interest dividends are excludable from a
shareholder's gross income for federal income tax purposes, but may have
alternative minimum tax and other collateral consequences. See the Statement of
Additional Information.
Current Federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolio to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of 'exempt-interest
dividends.'
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the Michigan Tax-Free Bond Portfolio is not
deductible for federal income tax purposes. Furthermore, the Portfolio may not
be an appropriate investment for persons (including corporations and other
business entities) who are 'substantial users' (or persons related to
'substantial users') of facilities financed by industrial development private
activity bonds. Such persons should consult their tax advisers before purchasing
shares. A 'substantial user' is defined generally to include 'certain persons'
who regularly use in their trade or business a part of a facility financed from
the proceeds of such bonds.
MICHIGAN TAX CONSIDERATIONS
Under the laws of the State of Michigan, dividends paid by the Michigan
Portfolio representing interest payments on municipal obligations issued by the
State of Michigan or a political subdivision thereof (or interest on obligations
of United States territories or possessions to the extent exempt from taxation
by the states pursuant to federal law) will be exempt from Michigan income tax
(as will be the case with respect to such dividends from the Portfolio). Also,
that portion of a shareholder's shares in the Portfolio representing Municipal
Obligations issued by the State of Michigan or a political subdivision thereof
(or obligations of the United States territories or possessions to the extent
exempt from taxation by the states pursuant to federal law) and dividends paid
by the Portfolio representing interest payments on such obligations will be
exempt from Michigan intangibles tax. Accordingly, shareholders of the Portfolio
who are residents of the State of Michigan will not be subject to Michigan
income tax or intangibles tax on dividends paid by the Portfolio to the extent
such dividends are derived from interest on municipal obligations which would be
tax-exempt if directly received by such shareholder, whether such dividends are
taken in cash or reinvested in additional shares of the Portfolio. Also,
shareholders of the Portfolio who are residents of the State of Michigan will
not be subject to Michigan intangibles tax on that portion of their shares in
the Portfolio attributable to municipal obligations which would be tax-exempt if
directly owned by such shareholder. The Intangible Tax is being phased out, with
reductions of twenty-five percent (25%) in 1994 and 1995, fifty percent (50%) in
1996, and seventy-five percent (75%) in 1997, with total repeal effective
January 1, 1998. Under the laws of the State of Michigan, corporations,
partnerships and other entities doing business in Michigan pay the Single
Business Tax. All dividend and interest income, other than interest from
municipal obligations issued other than by the State of Michigan or its
political subdivisions, is excluded from the Single Business Tax base. Thus,
dividends from the Portfolio derived from interest on municipal obligations
issued by the State of Michigan or a political subdivision thereof (or
obligations of the United States territories or possessions to the extent exempt
from taxation by the states pursuant to federal law) will be exempt from the
Michigan Single Business Tax.
Certain municipalities in Michigan also impose an income tax on individuals and
corporations. However, to the extent that the dividends from the Portfolio are
exempt from federal income taxes or relate to certain U.S. obligations, such
dividends also will be exempt from Michigan municipal income taxes.
OTHER STATE AND LOCAL TAXES
Income from the Michigan Portfolio is not necessarily free from state income
taxes in states
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27
other than Michigan or from personal property taxes. State laws differ on this
issue, and shareholders are urged to consult their own tax advisers regarding
the status of their accounts under state and local tax laws.
Additional information concerning taxes is set forth in the Statement of
Additional Information.
GENERAL INFORMATION
THE TRUST
The Trust is an open-end management investment company that has diversified and
non-diversified portfolios. The Trust is organized as a Massachusetts business
trust under a Declaration of Trust dated July 24, 1992. The Declaration of Trust
permits the Trust to offer separate portfolios of shares and different classes
of shares within each portfolio.
All consideration received by the Trust for shares of a Portfolio and all assets
of such Portfolio belong to the Portfolio and are subject to liabilities related
thereto.
The Trust 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 and registering the
shares under federal and state securities laws, pricing, insurance expenses,
litigation and other extraordinary expenses, brokerage costs, interest charges,
taxes and organization expenses.
Please refer to 'Financial Highlights' in this Prospectus for more information
regarding the Trust's expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of 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 the shareholder of record to one vote. 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.
REPORTING
The Trust issues unaudited financial information semiannually 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 Golden Oak Family of Funds, P.O.
Box 419240, Kansas City, Missouri 64141-6240 or by calling 1-800-545-6331.
Purchase, redemption and exchange transactions should be made through the
Transfer Agent by calling 1-800-808-4920.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
the Intermediate-Term Income, Michigan and Prime Obligation Portfolios is
declared daily and distributed monthly to shareholders in the form of periodic
dividends on the first Business Day of each month to shareholders of record for
such dividend. The net investment income (exclusive of capital gains) of the
Diversified Growth and Growth and Income Portfolios is declared monthly and
distributed monthly to shareholders in the form of dividends on the first
Business Day of each month to shareholders of record for such dividend.
Currently, capital gains of a Portfolio, if any, will be distributed
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28
at least annually. Shareholders are eligible to begin earning dividends that are
declared on the day after the purchase order is effective and continue to be
eligible for dividends through and including the day before the redemption order
is effective.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to the Transfer Agent at least 15 days prior to the distribution.
Dividends and distributions of the Diversified Growth, Intermediate-Term Income,
Michigan and Growth and Income Portfolios are paid on a per-share basis. The
value of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or the distribution of
capital gains, a shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution. The amount
of dividends payable on Class A shares will be more than the dividends payable
on the Class B shares because of the distribution expenses charged to Class B
shares.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Miller, Canfield,
Paddock and Stone, P.L.C. serves as counsel to the Trust with respect to
Michigan state issues. Price Waterhouse LLP serves as the independent
accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 (the 'Custodian'), acts as custodian of the Trust. The
Custodian holds cash, securities and other assets of the Trust as required by
the 1940 Act.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of certain of the permitted investments for the
Portfolios:
AMERICAN DEPOSITARY RECEIPTS ('ADRs') -- ADRs are securities, typically issued
by a U.S. financial institution (a 'depositary'), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs may be available through 'sponsored' or
'unsponsored' facilities. A sponsored facility is established jointly by the
issuer of the security underlying the receipt and a depositary, whereas an
unsponsored facility may be established by a depositary without participation by
the issuer of the underlying security. Holders of unsponsored depositary
receipts generally bear all the costs of the unsponsored facility. The
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through, to the holders of the receipts, voting rights with
respect to the deposited securities.
ASSET-BACKED SECURITIES -- Asset-backed securities are secured by non-mortgage
assets such as company receivables, truck and auto loans, leases and credit card
receivables. Such securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in the underlying pools
of assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain 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. The purchase of asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. For example, 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. There also is the possibility that recoveries on repossessed
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29
collateral may not, in some cases, be available to support payments on those
securities. 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. In addition, credit card receivables
are unsecured obligations of the card holder.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time
drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used
by corporations to finance the shipment and storage of goods. 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 a term used to describe unsecured
short-term promissory notes issued by banks, municipalities, corporations and
other entities. Maturities on these issues vary from a few to 270 days.
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar to both fixed
income and equity securities. Because of the conversion feature, the market
value of a convertible security tends to move with the market value of the
underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
EQUITY SECURITIES -- Investments in common stocks are subject to market risks
which may cause their prices to fluctuate over time. Changes in the value of
portfolio securities will not necessarily affect cash income derived from these
securities but will affect a Portfolio's net asset value.
EURODOLLAR INSTRUMENTS -- Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ('LIBOR'), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income securities are linked.
FIXED INCOME SECURITIES -- Fixed income securities are debt obligations issued
by corporations, municipalities and other borrowers. The market value of fixed
income investments will change in response to interest rate changes and other
factors. During periods of falling interest rates, the values of outstanding
fixed income securities generally rise. Conversely, during periods of rising
interest rates, the values of such securities generally decline. Moreover, while
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are also subject to greater market fluctuations as a
result of changes in interest rates. Changes by recognized agencies in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal will also affect the value of these
investments. Changes in the value of portfolio securities will not affect cash
income derived from these securities but will affect a Portfolio's net asset
value.
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward contract involves an obligation
to purchase or sell a specific currency amount at a future date, agreed upon by
the parties, at a price set at the time of the contract. A Portfolio may also
enter into a contract to sell, for a fixed amount of U.S. dollars or other
appropriate currency, the amount of foreign currency approximating the value of
some or all of a Portfolio's securities denominated in such foreign currency.
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30
At the maturity of a forward contract, a Portfolio may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an 'offsetting' contract with the same currency trader,
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. A Portfolio may realize a gain or loss from currency
transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. A Portfolio may use
futures contracts and related options for bona fide hedging purposes, to offset
unfavorable changes in the value of securities held or expected to be acquired
or be disposed of, to minimize fluctuations in foreign currencies, or to gain
exposure to a particular market or instrument. A Portfolio will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges.
Stock index futures are futures contracts for various stock indices that are
traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates, (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by a Portfolio and the prices of
futures and options on futures, (3) there may not be a liquid secondary market
for a futures contract or option, (4) trading restrictions or limitations may be
imposed by an exchange, and (5) government regulations may restrict trading in
futures contracts and futures options.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the value at which they
are being carried on a Portfolio's books. An illiquid security includes a demand
instrument with a demand notice period exceeding seven days, where there is no
secondary market for such security, and repurchase agreements with durations
over seven days in length.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional thirty-year fixed-rate mortgages, graduated payment
mortgages, and adjustable rate mortgages. During periods of declining interest
rates, prepayment of mortgages underlying mortgage-backed securities can be
expected to accelerate. Prepayment of mortgages which underlie securities
purchased at a premium often results in capital losses, while prepayment of
mortgages purchased at a discount often results in capital gains. Because of
these unpredictable prepayment characteristics, it is often not possible to
predict accurately the average life or realized yield of a particular issue.
Government Pass-Through Securities: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are GNMA, FNMA and FHLMC. FNMA and FHLMC obligations are not backed
by the full faith and credit of the U.S. Government as GNMA certificates are,
but FNMA and FHLMC securities are supported by the instrumentalities' right to
borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely
distributions of interest to certificate holders. GNMA and FNMA also each
guarantees timely distributions of scheduled principal. FHLMC has in the past
guaranteed only the ultimate collection of principal of the underlying
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31
mortgage loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold
PCs) which also guarantee timely payment of monthly principal reductions.
Government and private guarantees do not extend to the securities' value, which
is likely to vary inversely with fluctuations in interest rates.
Private Pass-Through Securities: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. These securities include
collateralized mortgage obligations ('CMOs') and real estate mortgage investment
conduits ('REMICs') that are rated in one of the top two rating categories.
While they are generally structured with one or more types of credit
enhancement, private pass-through securities typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality.
Collateralized Mortgage Obligations ('CMOs'): CMOs are debt obligations or
multiclass pass-through certificates issued by agencies or instrumentalities of
the U.S. Government or by private originators or investors in mortgage loans. In
a CMO, series of bonds or certificates are usually issued in multiple classes.
Principal and interest paid on the underlying mortgage assets may be allocated
among the several classes of a series of a CMO in a variety of ways. Each class
of a CMO, often referred to as a 'tranche,' is issued with a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal payments on the underlying mortgage assets may cause CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates, resulting in a loss of all or part of any premium paid.
REMICs: A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial interests in
REMICs, which are known as 'regular' interests, or 'residual' interests.
Guaranteed REMIC pass-through certificates ('REMIC Certificates') issued by FNMA
or FHLMC represent beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage
pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the
timely payment of interest, and also guarantees the payment of principal as
payments are required to be made on the underlying mortgage participation
certificates. FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA.
Parallel Pay Securities; PAC Bonds: Parallel pay CMOs and REMICS are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which must be retired by
its stated maturity date or final distribution date, but may be retired earlier.
Planned Amortization Class CMOs ('PAC Bonds') generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
REITs: REITs are trusts that invest primarily in commercial real estate or real
estate-related loans. The value of interests in REITs may be affected by the
value of the property owned or the quality of the mortgages held by the trust.
Stripped Mortgage-Backed Securities ('SMBs'): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments and is thus termed an interest-only class ('IO'), while
the other class may receive all of the principal payments and is thus termed the
principal-only class ('PO'). The value of IOs tends to increase as rates rise
and decrease as rates fall; the opposite is true of POs. SMBs are extremely
sensitive to changes in interest rates because of the impact thereon of
prepayment of principal on the underlying mortgage securities. The market for
SMBs is not as fully developed as other markets; SMBs therefore may be illiquid.
Risk Factors: Due to the possibility of prepayments of the underlying mortgage
instruments, mortgage-backed securities generally do not have a known
<PAGE>
32
maturity. In the absence of a known maturity, market participants generally
refer to an estimated average life. An average life estimate is a function of an
assumption regarding anticipated prepayment patterns, 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 can produce different average life estimates with regard to the
same security. There can be no assurance that estimated average life will be a
security's actual average life.
MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) certain private activity and industrial development bonds
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
(tolls from a bridge, for example). Certificates of participation represent an
interest in an underlying obligation or commitment, such as an obligation issued
in connection with a leasing arrangement. The payment of principal and interest
on private activity and industrial development bonds generally is dependent
solely on the ability of a facility's user to meet its financial obligations and
the pledge, if any, of real and personal property as security for such payment.
Municipal securities include both municipal notes and municipal bonds. Municipal
notes include general obligation notes, tax anticipation notes, revenue
anticipation notes, bond anticipation notes, certificates of indebtedness,
demand notes and construction loan notes and participation interests in
municipal notes. Municipal bonds include general obligation bonds, revenue or
special obligation bonds, private activity and industrial development bonds and
participation interests in municipal bonds.
OPTIONS -- A put option gives the purchaser of the option the right to sell, and
the writer of the option the obligation to buy, the underlying security at any
time during the option period. A call option gives the purchaser of the option
the right to buy, and the writer of the option the obligation to sell, the
underlying security at any time during the option period. The premium paid to
the writer is the consideration for undertaking the obligations under the option
contract. The initial purchase (sale) of an option contract is an 'opening
transaction.' In order to close out an option position, a Portfolio may enter
into a 'closing transaction,' which is simply the sale (purchase) of an option
contract on the same security with the same exercise price and expiration date
as the option contract originally opened.
A Portfolio may purchase put and call options to protect against a decline in
the market value of the securities in its portfolio or to protect against an
anticipated increase in the cost of securities that a Portfolio may seek to
purchase in the future. A Portfolio purchasing put and call options pays a
premium therefor. If price movements in the underlying securities are such that
exercise of the options would not be profitable for a Portfolio, loss of the
premium paid may be offset by an increase in the value of a Portfolio's
securities or by a decrease in the cost of acquisition of securities by a
Portfolio.
A Portfolio may write covered call options as a means of increasing the yield on
its portfolio and as a means of providing limited protection against decreases
in its market value. When a Portfolio sells an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and a Portfolio will realize as profit the
premium received for such option. When a call option of which a Portfolio is the
writer is exercised, a Portfolio will be required to sell the underlying
securities to the option holder at the strike price, and will not participate in
any increase in the price of such securities above the strike price. When a put
option of which a Portfolio is the writer is exercised, a Portfolio will be
required to purchase the underlying securities at the strike price, which
<PAGE>
33
may be in excess of the market value of such securities.
A Portfolio may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ('OTC options') differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the Securities and Exchange Commission that OTC options are
illiquid.
A Portfolio may purchase and write put and call options on foreign currencies
(traded on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by a
Portfolio will be 'covered,' which means that a Portfolio will own an equal
amount of the underlying foreign currency. With respect to put options on
foreign currency written by a Portfolio, a Portfolio will establish a segregated
account with its custodian bank consisting of cash or liquid, high grade debt
securities in an amount equal to the amount a Portfolio would be required to pay
upon exercise of the put.
A Portfolio may purchase and write put and call options on indices and enter
into related closing transactions. Put and call options on indices are similar
to options on securities except that options on an index give the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the underlying index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
options on individual securities, all settlements are in cash, and gain or loss
depends on price movements in the particular market represented by the index
generally, rather than the price movements in individual securities. A Portfolio
may choose to terminate an option position by entering into a closing
transaction. The ability of a Portfolio to enter into closing transactions
depends upon the existence of a liquid secondary market for such transactions.
All options written on indices must be covered. When a Portfolio writes an
option on an index, it will establish a segregated account containing cash or
liquid high grade debt securities with its custodian in an amount at least equal
to the market value of the option and will maintain the account while the option
is open or will otherwise cover the transaction.
Risk Factors. Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while a Portfolio will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
RECEIPTS -- Receipts are sold as zero coupon securities which means that they
are sold at a substantial discount and redeemed at face value at their maturity
date without interim cash payments of interest or principal. This discount is
accreted over the life of the security, and such accretion will constitute the
income earned on the security for both accounting and tax purposes. Because of
these features, such securities may be subject to greater interest rate
volatility than interest paying investments.
REPURCHASE AGREEMENTS -- Repurchase agreements are arrangements by which a
Portfolio 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 Portfolio will have actual or constructive
possession of the security as collateral for the repurchase agreement.
Collateral must be maintained at a value at least equal to 102% of the purchase
price. A Portfolio bears a risk of loss in the event the other
<PAGE>
34
party defaults on its obligations and a Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities or if a Portfolio
realizes a loss on the sale of the collateral. A Portfolio will enter into
repurchase agreements on behalf of a Portfolio 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 nationally
recognized security rating organizations (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 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. In the case of taxable money market funds, investments in
second tier securities are subject to the further constraints in that (i) no
more than 5% of a Portfolio's assets may be invested in second tier securities
and (ii) any investment in securities of any one such issuer is limited to the
greater of 1% of the Portfolio's total assets or $1 million. A taxable money
market portfolio may also hold more than 5% of its assets in first tier
securities of a single issuer for three Business Days.
RESTRICTED SECURITIES -- Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933,
as amended, or an exemption from registration.
SECURITIES LENDING -- In order to generate additional income, a Portfolio 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. A Portfolio 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.
SECURITIES OF FOREIGN ISSUERS -- There are certain risks connected with
investing in foreign securities. These include risks of adverse political and
economic developments (including possible governmental seizure or
nationalization of assets), the possible imposition of exchange controls or
other governmental restrictions, less uniformity in accounting and reporting
requirements, the possibility that there will be less information on such
securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgments abroad, restrictions on foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad, and difficulties in transaction settlements and the
effect of delay on shareholder equity. Foreign securities may be subject to
foreign taxes, and may be less marketable than comparable U.S. securities. The
value of a Portfolio's investments denominated in foreign currencies will depend
on the relative strengths of those currencies and the U.S. dollars, and a
Portfolio may be affected favorably or unfavorably by changes in the exchange
rates or exchange control regulations between foreign currencies and the U.S.
dollar. Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains if any, to be distributed to
shareholders by a Portfolio.
STRATEGIC TRANSACTIONS-- A Portfolio may, but is not required to, utilize
various other investment strategies as described below to hedge various market
risks (such as interest rates, currency exchange rates and broad or specific
equity or fixed income market movements), to manage the effective maturity or
duration of fixed-income
<PAGE>
35
securities in a Portfolio's investment portfolio or to enhance potential gain.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Portfolio may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called 'Strategic Transactions').
Strategic Transactions may be used to attempt (i) to protect against possible
changes in the market value of securities held in or to be purchased for a
Portfolio's investment portfolio resulting from securities markets or currency
exchange rate fluctuations, (ii) to protect a Portfolio's unrealized gains in
the value of its portfolio securities, (iii) to facilitate the sale of such
securities for investment purposes, (iv) to manage the effective maturity or
duration of fixed-income securities in a Portfolio's investment portfolio, or
(v) to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a Portfolio's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Portfolio to utilize
these Strategic Transactions successfully will depend on the Sub-Adviser's
ability to predict pertinent market movements, which cannot be assured. A
Portfolio will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
primarily for bona fide hedging, risk management or portfolio management
purposes and not for speculative purposes.
Risk Factors: Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the Sub-Adviser's view as to certain market movements is incorrect, the
risk that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options my result in losses
to a Portfolio, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the amount
of appreciation a Portfolio can realize on its investments or cause a Portfolio
to hold a security it might otherwise sell.
The use of currency transactions can result in a Portfolio incurring losses as a
result of a number of factors including the imposition of exchange controls,
suspension of settlements or the inability to deliver or receive a specified
currency.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Portfolio's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position.
Finally, the daily variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of
<PAGE>
36
Strategic Transactions would reduce net asset value, and possible income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. The Strategic Transactions that a Portfolio may use and some of their
risks are described more fully in the Statement of Additional Information.
SWAPS, CAPS, FLOORS AND COLLARS -- Interest rate swaps, mortgage swaps, currency
swaps and other types of swap agreements such as caps, floors and collars are
designed to permit the purchaser to preserve a return or spread on a particular
investment or portion of its portfolio, and to protect against any increase in
the price of securities a Portfolio anticipates purchasing at a later date. In a
typical interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a 'notional principal amount,' in return for
payments equal to a fixed rate times the same amount, for a specific period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specific interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risk assumed. As a result,
swaps can be highly volatile and have a considerable impact on a Portfolio's
performance. Swap agreements are subject to risks related to the counterparty's
ability to perform, and may decline in value if the counterparty's
creditworthiness deteriorates. A Portfolio may also suffer losses if it is
unable to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. Any obligation a Portfolio may have under these types
of arrangements will be covered by setting aside liquid high grade securities in
a segregated account. A Portfolio will enter into swaps only with counterparties
believed to be creditworthy.
TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, they earn a
specified rate of interest over a definite period of time; however, they cannot
be traded in the secondary market. Time deposits 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 Portfolio'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 Principal Securities ('STRIPS'). The Prime Obligation
Portfolio may not actively trade STRIPs
<PAGE>
37
and may not invest more than 20% of its assets in 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.
WARRANTS -- Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
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.
A Portfolio will maintain with the Custodian a separate account with liquid high
grade debt securities or cash in an amount at least equal to these commitments.
The interest rate realized on these securities is fixed as of the purchase date
and no interest accrues to a Portfolio before settlement. These securities are
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 a Portfolio generally purchases securities on a when-issued or
forward commitment basis with the intention of actually acquiring securities for
its portfolio, a Portfolio may dispose of a when-issued security or forward
commitment prior to settlement if it deems appropriate.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES -- Zero coupon
securities are securities that are sold at a discount to par value and
securities on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received 'phantom income' annually. Because a
Portfolio will distribute its 'phantom income' to shareholders, to the extent
that shareholders elect to receive dividends in cash rather than reinvesting
such dividends in additional shares, a Portfolio will have fewer assets with
which to purchase income producing securities. Alternatively, shareholders may
have to redeem shares to pay tax on this 'phantom income.' In either case, a
Portfolio may have to dispose of its fund securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing cash
to satisfy distribution requirements. A Portfolio accrues income with respect to
the securities prior to the receipt of cash payments. Pay-in-kind securities are
securities that have interest payable by delivery of additional securities. Upon
maturity, the holder is entitled to receive the aggregate par value of the
securities. Deferred payment securities are securities that remain zero coupon
securities until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals. Zero
coupon, pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
<PAGE>
38
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
SUMMARY............................................. 2 THE TRANSFER AGENT.................................. 17
EXPENSE SUMMARY..................................... 4 THE DISTRIBUTOR..................................... 17
FINANCIAL HIGHLIGHTS................................ 8 HOW TO PURCHASE SHARES.............................. 18
THE PORTFOLIO AND THE TRUST......................... 9 HOW TO EXCHANGE SHARES.............................. 21
INVESTMENT OBJECTIVES AND POLICIES.................. 9 HOW TO REDEEM SHARES................................ 22
INVESTMNET LIMITATIONS AND FUNDAMENTAL PERFORMANCE......................................... 24
POLICIES.......................................... 14 TAXES............................................... 24
THE ADVISER......................................... 15 GENERAL INFORMATION................................. 27
THE SUB-ADVISERS.................................... 16 DESCRIPTION OF PERMITTED
THE ADMINISTRATOR................................... 17 INVESTMENTS....................................... 28
</TABLE>
<PAGE>
THE GOLDEN OAK FAMILY OF FUNDS
Trust:
THE ARBOR FUND
Portfolios:
GOLDEN OAK DIVERSIFIED GROWTH PORTFOLIO
GOLDEN OAK GROWTH AND INCOME PORTFOLIO
GOLDEN OAK INTERMEDIATE-TERM INCOME PORTFOLIO
GOLDEN OAK MICHIGAN TAX FREE BOND PORTFOLIO
GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO
Investment Adviser:
CITIZENS BANK
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of the
following Portfolios of the Trust: Golden Oak Diversified Growth, Golden Oak
Growth and Income, Golden Oak Intermediate-Term Income, Golden Oak Michigan Tax
Free Bond and Golden Oak Prime Obligation Money Market Portfolios. This
Statement of Additional Information should be read in conjunction with the
Prospectus dated May 31, 1996. A Prospectus may be obtained by calling
1-800-545-6331.
TABLE OF CONTENTS
THE PORTFOLIOS AND THE TRUST................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS........................................S-2
DESCRIPTION OF RATINGS.....................................................S-15
INVESTMENT LIMITATIONS.....................................................S-20
NON-FUNDAMENTAL POLICIES...................................................S-22
THE ADVISER................................................................S-23
THE SUB-ADVISERS...........................................................S-23
THE ADMINISTRATOR..........................................................S-24
THE DISTRIBUTOR............................................................S-26
TRUSTEES AND OFFICERS OF THE TRUST.........................................S-27
COMPUTATION OF YIELD.......................................................S-29
CALCULATION OF TOTAL RETURN................................................S-30
PURCHASE AND REDEMPTION OF SHARES..........................................S-32
LETTER OF INTENT...........................................................S-32
DETERMINATION OF NET ASSET VALUE...........................................S-32
TAXES......................................................................S-33
PORTFOLIO TRANSACTIONS.....................................................S-37
TRADING PRACTICES AND BROKERAGE............................................S-37
DESCRIPTION OF SHARES......................................................S-40
SHAREHOLDER LIABILITY......................................................S-40
LIMITATION OF TRUSTEES' LIABILITY..........................................S-40
5% SHAREHOLDERS............................................................S-40
EXPERTS....................................................................S-41
FINANCIAL STATEMENTS.......................................................S-41
May 31, 1996
CIT-F-005-03
<PAGE>
THE PORTFOLIOS AND THE TRUST
The "Golden Oak Family of Funds" is a name under which a number of mutual fund
investment portfolios with differing objectives and policies are offered to
investors. Five of these portfolios were established by The Arbor Fund, an
open-end management investment company established under Massachusetts law as a
Massachusetts business trust under a Declaration of Trust dated July 24, 1992.
The Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interest ("shares") and different classes of shares of each
portfolio. Shareholders may purchase shares through two separate classes (Class
A and Class B) which provide for variations in distribution costs, voting rights
and dividends. Except for differences between Class A and Class B shares
pertaining to distribution fees, each share of each portfolio represents an
equal proportionate interest in that portfolio. See "Description of Shares."
This Statement of Additional Information relates to the Class A and Class B
shares of the Golden Oak Diversified Growth, Golden Oak Growth and Income,
Golden Oak Intermediate-Term Income, Golden Oak Michigan Tax Free Bond and
Golden Oak Prime Obligation Money Market Portfolios (collectively, the
"Portfolios") of the Trust.
DESCRIPTION OF PERMITTED INVESTMENTS
Convertible Securities
While convertible securities generally offer lower yields than
nonconvertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
Currency Transactions
The Golden Oak Growth and Income Portfolio may engage in currency transactions
with counterparties in order to hedge the value of portfolio holdings
denominated in particular currencies against fluctuations in relative value.
Currency transactions would include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Portfolio may enter into currency
transactions with counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by Standard &
Poor's ("S&P") or Moody's Investors Service, Inc. ("Moody's"), respectively, or
that have an equivalent rating from a Nationally Recognized Statistical Rating
Organization ("NRSRO") or are determined to be of equivalent credit quality by
the Adviser or Sub-Adviser.
The Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate
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market value (at the time of entering into the transaction) of the securities
held in its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging or
cross hedging as described below.
The Portfolio may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which it expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings or portfolio securities, the Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed to is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a commitment or option to sell a currency
whose changes in value are generally considered to be correlated to a currency
or currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Portfolio's securities
denominated in correlated currencies.
Foreign Securities
The Golden Oak Diversified Growth, Golden Oak Growth and Income, Golden Oak
Intermediate-Term Income and Golden Oak Prime Obligation Money Market Portfolios
may invest in U.S. dollar denominated obligations or securities of foreign
issuers. Permissible investments may consist of obligations of foreign branches
of U.S. banks and of foreign banks, including European Certificates of Deposit,
European Time Deposits, Canadian Time Deposits and Yankee Certificates of
Deposits, and investments in Canadian Commercial Paper, foreign securities and
Europaper. In addition, the Golden Oak Diversified Growth, Golden Oak
Intermediate-Term Income and Golden Oak Growth and Income Portfolios may invest
in American Depositary Receipts. These instruments may subject the Portfolio 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 exchange rates, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
obligations. 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.
Investments in foreign securities usually will involve currencies of foreign
countries. Moreover, a Portfolio may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs and the value of
these assets for the Portfolio as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations and the Portfolio may incur costs in connection
with conversions between various currencies. Although a Portfolio values its
assets daily in terms of U.S. dollars, it does not intend to convert its
holdings of foreign currencies, if any, into U.S. dollars on a daily basis. It
may do so from time to time and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Portfolio at one rate
while offering a lesser rate of exchange should the Portfolio desire to resell
that currency to the dealer. Each Portfolio will conduct its foreign currency
exchange transactions, if any, either on a spot (i.e., cash) basis at the spot
rate
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prevailing in the foreign currency exchange market or through forward foreign
currency exchange contracts.
Futures Contracts and Options
The Golden Oak Intermediate-Term Income, Golden Oak Michigan Tax-Free Bond and
Golden Oak Growth and Income Portfolios may invest in futures contracts and
options. Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases, the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with or for the account of a broker or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Deposit requirements on futures contracts
customarily range upward from less than 5% of the value of the contract being
traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy the required margin, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Portfolios expect to earn
interest income on their margin deposits.
Traders in futures contracts and related options may be broadly classified as
either "hedgers" or "speculators." Hedgers use the futures markets primarily to
offset unfavorable changes in the value of securities otherwise held or expected
to be acquired for investment purposes. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Portfolios intend to use futures contracts
and related options only for bona fide hedging purposes.
A Portfolio may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), so long as, to the extent that such transactions are not for "bona
fide hedging purposes," the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do not
exceed 5% of a Portfolio's net assets. The Portfolios will only sell futures
contracts to protect securities it owns against price declines or purchase
contracts to protect against an increase in the price of securities it intends
to purchase. As evidence of this hedging interest, the Portfolios expect that
approximately 75% of their futures contract purchases will be "completed," that
is, equivalent amounts of related securities will have been purchased or are
being purchased by the Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts and
options on futures contracts could be used to control the Portfolios' exposure
to market fluctuations, the use of futures contracts may be a more effective
means of hedging this exposure. While the Portfolios will incur commission
expenses in both opening and closing out futures positions, these costs are
lower than
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transaction costs incurred in the purchase and sale of the underlying
securities. A Portfolio's obligations under any futures contract or related
option will be "covered" by high quality, liquid securities or cash held in a
segregated account or by holding, or having the right to acquire without
additional cost, the underlying asset.
Risk Factors in Futures Transactions
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the Portfolios would continue to be
required to make daily cash payments to maintain the required margin. In such
situations, if the Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Portfolio may be required to make
delivery of the instruments underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
ability to effectively hedge it.
The Portfolios will minimize the risk that they will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to a Portfolio. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the
Adviser or Sub-Adviser does not believe that the Portfolios would be subject to
the risks of loss frequently associated with futures transactions. The
Portfolios presumably would have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying financial instrument and
sold it after the decline. The risk of loss from the purchase of options is less
as compared with the purchase or sale of futures contracts because the maximum
amount at risk is the premium paid for the option.
Utilization of futures transactions by the Portfolios does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the securities being hedged. It is also possible
that a Portfolio could both lose money on futures contracts and experience a
decline in value of its securities. There is also the risk of loss by the
Portfolio of margin deposits in the event of the bankruptcy of a broker with
whom the Portfolio has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several
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consecutive trading days with little or no trading, thereby preventing prompt
liquidation of future positions and subjecting some futures traders to
substantial losses.
Investment Companies
The Portfolios may invest in securities of other investment companies as
permitted by the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations thereunder. As discussed in the Prospectus, the
Golden Oak Michigan Tax Free Bond Portfolio may invest up to 5% of its net
assets in securities of closed-end investment companies traded on national
securities exchanges. These investment companies typically incur fees that are
separate from those fees incurred directly by the Portfolios. A Portfolio's
purchase of such investment company securities results in the layering of
expenses, such that shareholders would indirectly bear a proportionate share of
the operating expenses of such investment companies, including advisory fees.
Mortgage-Backed Securities
The Golden Oak Prime Obligation Money Market, Golden Oak Intermediate-Term
Income and Golden Oak Growth and Income Portfolios may invest in securities
issued by U.S. Government agencies or instrumentalities such as the Government
National Mortgage Association ("GNMA"), a wholly-owned U.S. Government
corporation which guarantees the timely payment of principal and interest. Other
governmental issuers of mortgage-backed securities include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). Obligations of FNMA and FHLMC are not backed by the full faith and
credit of the United States Government. The market value and interest yield of
these instruments 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. Mortgage-backed certificates consist
of underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, mortgage-backed certificates 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 accurately predict 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. 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 mortgage-backed certificates may offer
yields higher than those available from other types of U.S. Government
securities, mortgage-backed certificates 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
a mortgage-backed certificate 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 certificate originally purchased at a
premium to decline in price to its par value, which may result in a loss.
The Golden Oak Intermediate-Term Income Portfolio may invest in mortgage-backed
securities and asset-backed securities. The principal types of mortgage-backed
securities are collateralized mortgage obligations ("CMOs"), real estate
mortgage investment conduits ("REMICs"), and interest only and principal only
stripped securities ("IOs" and "POs") which are rated in one of the two top
categories by S&P or Moody's. The mortgages backing these securities include
conventional thirty-year fixed rate mortgages, graduated payment mortgages and
adjustable rate mortgages. These mortgages may be supported by various types of
insurance, may be backed by GNMA certificates or other mortgage pass-throughs
issued or guaranteed by the United States Government, its agencies or
instrumentalities.
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However, the guarantees do not extend to the mortgage-backed securities' yield
or value, which are likely to vary inversely with fluctuations in interest
rates. These certificates are in most cases "pass through" instruments, through
which, except for IOs and POs, the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate; in the case of
IOs, the holder receives a share only of interest payments, and for POs, a share
only of principal payments. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the average
life or realized yield of a particular issue of pass-through certificates. When
the mortgage obligations are prepaid, the Portfolio reinvests the prepaid
amounts in securities, the yield of which reflect interest rates prevailing at
the time. Moreover, prepayments that underlie securities purchased at a premium
could result in capital losses. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. Such acceleration can be expected to reduce the final yield realized
by holders of IO securities, perhaps to a negative value. Deceleration of
prepayments will reduce somewhat the final yield realized by holders of PO
securities.
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 the U.S. Government, its
agencies or instrumentalities, the CMOs themselves are not generally guaranteed.
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.
In addition to mortgage-backed securities, the Golden Oak Intermediate-Term
Income Portfolio may invest in securities secured by asset backed securities
including company receivables, truck and auto loans, leases, and credit card
receivables. These issues may be traded over-the-counter and typically have a
short-intermediate maturity structure depending on the paydown characteristics
of the underlying financial assets which are passed through to the security
holder.
Municipal Securities
Municipal notes in which the Golden Oak Michigan Tax Free Bond Portfolio may
invest, include, but are not limited to, 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.
The Adviser may purchase industrial development and pollution control bonds if
the interest paid is exempt from federal income tax. These bonds are issued by
or on behalf of public authorities to raise money to finance various
privately-operated facilities for business and manufacturing, housing, sports,
and pollution control. These bonds are also used to finance public facilities
such as airports, mass transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
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Tax-exempt commercial paper in which the Golden Oak Michigan Tax Free Bond
Portfolio may invest will be limited to investments in obligations which are
rated at least A-2 by S&P or Prime-2 by Moody's at the time of investment or
which are of equivalent quality as determined by the Adviser.
Other types of tax-exempt instruments which are permissible investments for the
Golden Oak Michigan Tax Free Bond Portfolio include floating rate 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 Portfolio 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. The Portfolio may use the longer of the
period required before the Portfolio is entitled to prepayment under such
obligations or the period remaining until the next interest rate adjustment date
for purposes of determining the maturity. Such obligations are frequently
secured by letters of credit or other credit support arrangements provided by
banks. The quality of the underlying credit or of the bank, as the case may be,
must in the Adviser's opinion be equivalent to the long-term bond or commercial
paper ratings stated above. The Adviser 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
Adviser may purchase other types of tax-exempt instruments as long as they are
of a quality equivalent to the bond or commercial paper ratings stated above.
The Adviser has the authority to 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 puts is to maintain flexibility and
liquidity to permit the Golden Oak Michigan Tax Free Bond Portfolio to meet
redemptions and remain as fully invested as possible in municipal securities.
The Portfolio reserves the right to engage in put transactions. 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 Portfolio would limit their put transactions to
institutions which the Adviser believes present minimum credit risks, and the
Adviser would 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
Portfolio would be general creditor (i.e., on a parity with all other unsecured
creditors) of the writer. Furthermore, particular provisions of the contract
between the Portfolio and the writer may excuse the writer from repurchasing the
securities; for example, a change in the published rating of the underlying
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 Portfolio 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.
The 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 Portfolio. 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 Portfolio could seek to negotiate terms for
the extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Portfolio, the Portfolio 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
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to the percentage of portfolio securities that the Portfolio may purchase
subject to a put but the amount paid directly or indirectly for puts which are
not integral parts of the security as originally issued held in the Portfolio
will not exceed 1/2 of 1% of the value of the total assets of such Portfolio
calculated immediately after any such put is acquired. For the purpose of
determining the "maturity" of securities purchased subject to an option to put,
and for the purpose of determining the dollar-weighted average maturity of the
Portfolio including such securities the Trust will consider "maturity" to be the
first date on which it has the right to demand payment from the writer of the
put although the final maturity of the security is later than such date.
Special Factors Relating to Michigan Municipal Securities - Because the Michigan
Portfolio invests primarily in Michigan Municipal Securities, the Portfolio is
more susceptible to factors adversely affecting issuers of Michigan Municipal
Securities than a mutual fund that does not invest as heavily in such
securities. Investors should consider carefully the special risks inherent in
the Portfolio's investment in Michigan Municipal Securities.
Investors should be aware that the economy of the State of Michigan has, in the
past, proven to be cyclical, due primarily to the fact that the leading sector
of the State's economy is the manufacturing of durable goods. While the State's
efforts to diversify its economy have proven successful, as reflected by the
fact that the share of employment in the State in the durable goods sector has
fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable goods
manufacturing still represents a sizable portion of the State's economy. As a
result, any substantial national economic downturn is likely to have an adverse
effect on the economy of the State and on the revenues of the State and some of
its local governmental units.
In July 1995, Moody's raised the State's general obligation bond rating to "Aa."
In October 1989, S&P's raised its rating on the State's general obligation bonds
to "AA." Fitch Investor Services, Inc.
("Fitch") rates the State's general obligation Bonds "AA."
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe.
In recent years, the State has reported its financial results in accordance with
generally accepted accounting principles. For the fiscal years ended September
30, 1990 and 1991, the State reported negative year-end balances in the General
Fund/School Aid Fund of $310.4 million and $169.4 million, respectively. The
State ended each of the 1992, 1993 and 1994 fiscal years with its General
Fund/School Aid Fund in balance, after having made substantial transfers to the
Budget Stabilization Fund in 1993 and 1994. A positive cash balance in the
combined General Fund/School Aid Fund was recorded at September 30, 1990. In the
1991 through 1993 fiscal years, the State experienced deteriorating cash
balances which necessitated short-term borrowing and the deferral of certain
scheduled cash payments. The State did not borrow for cash flow purposes in
1994, but borrowed $500 million in 1995 and has borrowed $900 million in 1996.
The State anticipates borrowing for cash flow purposes in the current fiscal
year. The State's Budget Stabilization Fund received year-end transfers from the
General Fund of $283 million in 1993 and $464 million in 1994, bringing the
balance in the Budget Stabilization Fund to $779 million at September 30, 1994.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the prior calendar
year. In the event that the State's total revenues exceed the limit by 1 percent
or more, the Michigan Constitution of 1963 requires that the excess be refunded
to taxpayers.
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On March 15, 1994, Michigan voters approved a school finance reform amendment to
the State's Constitution which, among other things, increased the State sales
tax rate from 4% to 6% and placed a cap on property assessment increases for all
property taxes. Concurrent legislation cut the State's income tax rate from 4.6%
to 4.4%, reduced some property taxes and altered local school funding sources to
a combination of property taxes and state revenues, some of which is provided
from other new or increased State taxes. The legislation also contained other
provisions that alter (and, in some cases, may reduce) the revenues of local
units of government, and tax increment bonds could be particularly affected.
While the ultimate impact of the constitutional amendment and related
legislation cannot yet be accurately predicted, investors should be alert to the
potential effect of such measures upon the operations and revenues of Michigan
local units of government.
In addition, the State Legislature recently adopted a package of state tax cuts,
including a phase out of the intangibles tax, an increase in exemption amounts
for personal income tax, and reductions in single business tax.
There can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of the
Michigan Municipal Securities in the Portfolio or the ability of the respective
obligors to pay interest on or principal of the Michigan Municipal Securities in
the Portfolio, particularly in view of the dependency of local governments and
other authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet debt
service requirements upon such bonds. In the 1991 fiscal year, the State
deferred certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year, $34.4 million in the
1992 fiscal year, $45.5 million in the 1993 fiscal year, $54.5 million in the
1994 fiscal year, and $67.0 million (budgeted) in the 1995 fiscal year.
The Michigan Portfolio may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978, or
issued after December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation as to rate or
amount. With respect to bonds issued after December 22, 1978, and which were not
approved by the electors of the local unit, the tax levy of the local unit of
debt service purposes is subject to constitutional, statutory and charter tax
rate limitations. In addition, several major industrial corporations have
instituted challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges could have
an adverse impact on the ad valorem tax bases of such units which could
adversely affect their ability to raise funds for operation and debt service
requirements.
Short-Term Obligations of State and Local Governmental Issuers
The Prime Obligation Money Market Portfolio may, when deemed appropriate by its
investment adviser in light of the Portfolio's investment objective, invest in
high quality, short-term obligations issued by state and local governmental
issuers which, as a result of the Tax Reform Act of 1986, carry yields that are
competitive with those of other types of money market instruments of comparable
quality.
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Options
The Golden Oak Diversified Growth, Golden Oak Michigan Tax Free Bond and Golden
Oak Intermediate- Term Income Portfolios may write call options on a covered
basis only. The Golden Oak Michigan Tax Free Bond and the Golden Oak
Intermediate-Term Income Portfolios may also enter into bond futures contracts
and options on such contracts. Neither Portfolio will engage in option writing
strategies for speculative purposes. The Golden Oak Growth and Income Portfolio
may write and sell both call options and put options, provided that the
aggregate value of such options does not exceed 15% of the Portfolio's net
assets as of the time such options are entered into by the Portfolio.
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, a Portfolio's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Portfolio the right to sell such instrument at the option exercise price. A
call option, upon payment of a premium, gives the purchaser of the option the
right to buy, and the seller the obligation to sell, the underlying instrument
at the exercise price. A Portfolio's purchase of a call option on a security,
financial future, index, currency or other instrument might be intended to
protect the Portfolio against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. A Portfolio is authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to such
options. The discussion below uses the OCC as an example, but is also applicable
to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Portfolio's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. Each Portfolio expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, a Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied.
Covered Call Writing. The Golden Oak Diversified Growth Portfolio may write
covered call options on its securities provided the aggregate value of such
options does not exceed 10% of the Portfolio's net assets as of the time such
options are entered into by the Portfolio. The advantage to the Portfolio of
writing covered calls is that the Portfolio receives a premium which is
additional income. However, if the security rises in value, the Portfolio may
not fully participate in the market appreciation.
In covered call options written by a Portfolio, the Portfolio will own the
underlying security subject to a call option at all times during the option
period. Unless a closing purchase transaction is effected the Portfolio would be
required to continue to hold a security which it might otherwise wish to sell,
or deliver a security it would want to hold. Options written by the Portfolio
will normally have expiration dates between one and nine months from the date
written. The exercise price of a call option may be below, equal to or above the
current market value of the underlying security at the time the option is
written.
Repurchase Agreements
The Portfolios may invest in repurchase agreements which 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 established
guidelines) 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 the Portfolio for purposes
of its investment limitations. The repurchase agreements entered into by the
Portfolios 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
Adviser monitors compliance with this requirement). Under all repurchase
agreements entered into by the Portfolios, the portfolio must take actual or
constructive possession of the underlying collateral. However, if the seller
defaults, the Portfolios 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
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the resale price provided in the agreement including interest. In addition, even
though the Bankruptcy Code provides protection for most repurchase agreements,
if the seller should be involved in bankruptcy or insolvency proceedings, the
Portfolios may incur delay and costs in selling the underlying security or may
suffer a loss of principal and interest if the Portfolios are treated as an
unsecured creditor and required to return the underlying security to the
seller's estate.
Restricted Securities
The Prime Obligation Money Market Portfolio and the Golden Oak Growth and Income
Portfolio may invest in restricted securities that are securities in which the
Trust may otherwise invest as provided in the Prospectus and this Statement of
Additional Information. Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933,
as amended (the "Act"), or an exemption from registration. The Prime Obligation
Money Market Portfolio and the Golden Oak Growth and Income Portfolio may invest
up to 10% and 15%, respectively, of their net assets in illiquid securities,
including restricted securities other than Section 4(2) commercial paper. Each
Portfolio may invest in Section 4(2) commercial paper. Section 4(2) commercial
paper is issued in reliance on an exemption from registration under Section 4(2)
of the Act and is generally sold to institutional investors who purchase for
investment. Any resale of such commercial paper must be in an exempt
transaction, usually to an institutional investor through the issuer or
investment dealers who make a market in such commercial paper. The Trust
believes that Section 4(2) commercial paper is liquid to the extent it meets the
criteria established by the Board of Trustees of the Trust. The Trust intends to
treat such commercial paper as liquid and not subject to the investment
limitations applicable to illiquid securities or restricted securities.
The purchase of unrated securities by the Adviser or Sub-Adviser is subject to
the approval of or ratification by the Trustees.
Securities Lending
The Golden Oak Prime Obligation Money Market, Golden Oak Diversified Growth,
Golden Oak Intermediate-Term Income, Golden Oak Michigan Tax Free Bond and
Golden Oak Growth and Income Portfolios may lend securities pursuant to
agreements requiring that the loans be continuously secured by cash, securities
of the United States Government or its agencies, or any combination of cash and
such securities, as collateral equal to 102% of the market value at all times of
the securities lent. Such loans will not be made if, as a result, the aggregate
amount of all outstanding securities loans for the Portfolio exceed one-third of
the value of a Portfolio's total assets taken at fair market value. A Portfolio
will continue to receive interest on the securities lent while simultaneously
earning interest on the investment of the cash collateral in U.S. government
securities. However, a Portfolio 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 or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser or Sub-Adviser to be of
good standing and when, in the judgment of the Adviser or Sub-Adviser, 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 Portfolios may use the Distributor or a
broker/dealer affiliate of the Adviser or Sub-Adviser as a broker in these
transactions.
The Trust is not prohibited from investing in obligations of banks which are
clients of SEI Corporation ("SEI"). However, the purchase of shares of the Trust
by them or by their customers will not be a consideration in determining which
bank obligations the Trust will purchase. The Trust will not purchase
obligations of the Adviser or Sub-Adviser.
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Strategic Transactions
The Golden Oak Growth and Income Portfolio may, but is not required to, utilize
various investment strategies to hedge various market risks, to manage the
effective maturity or duration of fixed-income securities, or to seek
potentially higher returns. Utilizing these investment strategies, the Portfolio
may purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio's investment portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect the Portfolio's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to seek potentially higher returns,
although no more than 5% of the Portfolio's assets will be used as the initial
margin or purchase price of options for Strategic Transactions entered into for
purposes other than "bona fide hedging" positions as defined in the regulations
adopted by the Commodity Futures Trading Commission. Any or all of these
investment techniques may be used at any time, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Portfolio to utilize these Strategic Transactions successfully
will depend on the Sub-Adviser's ability to predict, which cannot be assured,
pertinent market movements. The Portfolio will comply with the applicable
regulatory requirements when utilizing Strategic Transactions. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes.
Strategic Transactions have associated risks including possible default by the
other party to the transaction, illiquidity and, to the extent the Sub-Adviser's
view as to certain market movements is incorrect, losses greater than if they
had not been used. Use of put and call options, currency transactions or options
and futures transactions entails certain risks as described herein and in the
Prospectus in sections relating to such investment or instruments. Losses
resulting from the use of Strategic Transactions would reduce net asset value,
and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
A Portfolio may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single strategy when, in the opinion of the Sub-Advisor, it is in the best
interest of the Portfolio to do so. A combined transaction may contain elements
of risk that are present in each of its component transactions.
The use of Strategic Transactions for portfolio management purposes involves
special considerations and risks. Additional risks pertaining to particular
strategies that make up Strategic Transactions are described in other sections
to this SAI. Successful use of most Strategic Transactions depends upon the
Sub-Adviser's ability to predict movements of the overall securities and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed. There may be imperfect correlation, or
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even no correlation, between price movements of Strategic Transactions and price
movements of the related portfolio or currency positions. Such a lack of
correlation might occur due to factors unrelated to the value of the related
portfolio or currency positions, such as speculative or other pressures on the
markets in which Strategic Transactions are traded. Strategic Transactions, if
successful, can reduce risk of loss or enhance income, by wholly or partially
offsetting the negative effect of, or accurately predicting, unfavorable price
movements or currency fluctuations in the related portfolio or currency
position. However, Strategic Transactions can also reduce the opportunity for
gain by offsetting the positive effect of favorable price movements in the
positions. In addition, the portfolio might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Strategic Transactions involving obligations to third parties
(i.e., Strategic Transactions other than purchased options). These requirements
might impair the Portfolio's ability to sell a portfolio security or currency
position or make an investment at a time when it would otherwise be favorable to
do so, or require that the Portfolio sell a portfolio security or currency
position at a disadvantageous time.
STRIPS
The Golden Oak Prime Obligation Money Market, Golden Oak Intermediate-Term
Income and Golden Oak Growth and Income Portfolios may invest in Separately
Traded Interest and Principal Securities ("STRIPS"), which are component parts
of U.S. Treasury Securities traded through the Federal Book-Entry System. The
Adviser will only purchase STRIPS that it determines are liquid or, if illiquid,
do not violate a Portfolio's investment policy concerning investments in
illiquid securities. Consistent with Rule 2a-7 adopted under the 1940 Act, the
Adviser will only purchase STRIPS for the Golden Oak Prime Obligation Money
Market Portfolio that have a remaining maturity of 397 days or less; therefore,
the Portfolio currently may only purchase interest component parts of U.S.
Treasury Securities. The Adviser or Sub-Adviser of a Portfolio will monitor the
level of such holdings to avoid the risk of impairing shareholders' redemption
rights and of deviations in the value of shares of the Golden Oak Prime
Obligation Money Market Portfolio.
U.S. Government Agency Securities
Certain of the investments of all of the Portfolios may include U.S. Government
Agency Securities. Agencies of the United States Government which issue
obligations consist of, among others, the Export Import Bank of the United
States, Farmers Home Administration, Federal Farm Credit Bank, Federal Housing
Administration, Government National Mortgage Association, Maritime
Administration, Small Business Administration, and the Tennessee Valley
Authority. Obligations of instrumentalities of the United States Government
include securities issued by, among others, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association and the United States Postal
Service. Some of these securities are supported by the full faith and credit of
the United States Treasury (e.g., Government National Mortgage Association).
Others are supported by the right of the issuer to borrow from the Treasury and
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 United States 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 the value of
the obligation prior to maturity.
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Variable Amount Master Demand Notes
The Golden Oak Prime Obligation Money Market, Golden Oak Intermediate-Term
Income and Golden Oak Michigan Tax Free Bond Portfolios 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. The Adviser or Sub-Adviser will monitor on an
ongoing basis the earning power, cash flow and liquidity ratio of the issuers of
such instruments and will similarly monitor the ability of an issuer of a demand
instrument to pay principal and interest on demand.
When-Issued Securities
The Golden Oak Prime Obligation Money Market, Golden Oak Intermediate-Term
Income and Golden Oak Michigan Tax Free Bond Portfolios may invest in
when-issued securities.
These securities involve the purchase of debt obligations 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 Portfolios 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 are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the 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 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 Portfolios
will maintain liquid assets in an amount at least equal in value to the
Portfolios' commitments to purchase when-issued securities. If the value of
these assets declines, the Portfolios will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
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.
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. 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.
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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 Limited ("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 are
supported by a strong 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 BankWatch ("Thomson") indicates a very high
likelihood that principal and interest will be paid on a timely basis.
Description of Municipal Note Ratings
Moody's highest rating for state and municipal and other short-term notes is
MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of
the best quality. They have strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing or both. Short-term municipal securities rated MIG-2 or
VMIG-2 are of high quality. Margins of protection are ample although not so
large as in the preceding group.
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
o Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
S&P note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a
plus(+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Description of Corporate Bond Ratings
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 and B is regarded as having predominantly 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 has less near-term vulnerability to default than other
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speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rate 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 capacity or willingness to pay interest and repay principal. The B
rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
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 edge." 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 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.
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 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.
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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 by Fitch are judged by Fitch to be strictly high grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions
liable to but slight market fluctuation other than through changes in the money
rate. The prime feature of an AAA bond is a showing of earnings several times or
many times interest requirements, with such stability of applicable earnings
that safety is beyond reasonable question whatever changes occur in conditions.
Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond
question and are readily salable, whose merits are not unlike those of the AAA
class, but whose margin of safety is less strikingly broad. The issue may be the
obligation of a small company, strongly secured but influenced as to rating by
the lesser financial power of the enterprise and more local type market.
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 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 Duff-1 are judged by Duff to be of the highest credit qualify with
negligible risk factors; only slightly more than U.S. Treasury debt. Bonds rated
Duff-2, 3 and 4 are judged by Duff to be of high credit quality with strong
protection factors. Risk is modest but may vary slightly from time to time
because of economic conditions.
Bonds rated BBB+, BBB, or BBB- are considered below average protection factors
but still considered sufficient for prudent investment. Considerable BBB
variability in risk during economic cycles. Bonds rated BB+, BB or BB- are
considered 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 or B- are considered below investment grade and possessing
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.
S-19
<PAGE>
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. 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 a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
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 AAA by Thomson BankWatch 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.
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.
INVESTMENT LIMITATIONS
Fundamental Policies
In addition to those identified in the Prospectus, the following policies are
fundamental and may not be changed without the consent of a majority of a
Portfolio's outstanding shares, except for the limitations provided in
paragraphs 6 and 8 below, which are non-fundamental policies only for the Golden
Oak Growth and Income Portfolio. The term "a majority of a Portfolio's
outstanding shares" means the vote of (i) 67% or more of the Portfolio's shares
present at a meeting if more than 50% of the outstanding shares of the Portfolio
are present or represented by proxy, or (ii) more than 50% of the Portfolio's
shares, whichever is less.
S-20
<PAGE>
A Portfolio may not:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only
in an amount not exceeding one-third 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 Portfolio'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 Portfolio shall, within
three days thereafter or such longer period as the Securities and
Exchange Commission (the "SEC") 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 solely to facilitate the orderly sale of
portfolio securities to accommodate heavy redemption requests if they
should occur and is not for investment purposes. All borrowings in
excess of 5% of a Portfolio'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 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, commodities or commodities contracts. However, subject to
their permitted investments, any Portfolio may invest in companies
which invest in real estate commodities or commodities contracts and
may invest in financial futures contracts and related options.
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 under federal securities laws in selling a
portfolio security.
8. Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder. The Golden
Oak Prime Obligation Money Market Portfolio will invest in the shares
of another money market fund only if (i) such other money market fund
is subject to Rule 2a-7 under the 1940 Act; (ii) such other money
market fund has investment criteria equal to or higher than those of
such Portfolio; and (iii) the Trust's Board of Trustees monitors the
activities of such other money market fund. The Portfolios are
prohibited from acquiring the securities of other investment companies
if, as a result of such acquisition, any such Portfolio 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 total Portfolios
assets; or securities (other than treasury stock) issued by all
investment companies represent more than 10% of the total assets of the
Portfolios. These investment companies typically incur fees that are
separate from those fees incurred directly by the Portfolio. A
Portfolio's purchase of such investment company securities results in
the layering of expenses, such that shareholders would indirectly bear
a proportionate share of the operating expenses of such investment
companies, including advisory fees.
It is the position of the SEC's staff that certain nongovernmental
issuers of CMOs and REMICs constitute investment companies pursuant to
the 1940 Act, and either (a) investments in such instruments are
subject to the limitations set forth above, or (b) the issuers of such
instruments
S-21
<PAGE>
have received orders from the SEC exempting such instruments from the
definition of investment company.
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 SEC.
NON-FUNDAMENTAL POLICIES
The following investment limitations of the Portfolios are non-fundamental and
may be changed by the Trust's Board of Trustees without shareholder approval.
No Portfolio may invest in warrants, except that the Golden Oak Diversified
Growth Portfolio and the Golden Oak Growth and Income Portfolio may invest in
warrants in an amount not exceeding 5% of the Portfolio's net assets as valued
at the lower of cost or market value. Included in that amount, but not to exceed
2% of the Portfolio's net assets, may be warrants not listed on the New York
Stock Exchange or American Stock Exchange or, for the Golden Oak Growth and
Income Portfolio, an exchange with comparable listing requirements.
No Portfolio may invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of a portfolio's assets (10% for the Golden Oak Prime Obligation
Money Market Portfolio).
No Portfolio may 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 adviser 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.
No Portfolio may invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
No Portfolio may purchase securities of any company which has (with
predecessors) a record of less than 3 years continuing operations if, as a
result more than 5% of total assets (taken at fair market value) of the
Portfolio would be invested in such securities, except obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities or
municipal securities which are rated by at least 2 nationally recognized bond
rating services.
No Portfolio except for the Golden Oak Growth and Income Portfolio may write or
purchase puts, calls, options or combinations thereof, except that the Golden
Oak Intermediate-Term Income, Golden Oak Diversified Growth and Golden Oak
Michigan Tax Free Bond Portfolios may write covered call options with respect to
any or all parts of its Portfolio securities, and the Golden Oak Diversified
Growth, Golden Oak Intermediate-Term Income and Golden Oak Michigan Tax Free
Bond Portfolios may purchase puts as described in the Prospectus. The Golden Oak
Growth and Income, Golden Oak Diversified Growth, Golden Oak Intermediate-Term
Income and Golden Oak Michigan Tax Free Bond Portfolios may sell options
previously purchased and enter into closing transactions with respect to covered
call options.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security.
S-22
<PAGE>
THE ADVISER
The Trust and Citizens' Commercial & Savings Bank (the "Adviser") have entered
into an advisory agreement (the "Advisory Agreement"). The Advisory Agreement
provides that the Adviser 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 Adviser will not be required to bear expenses of any Portfolio of the Trust
to an extent which would result in a Portfolio's inability to qualify as a
regulated investment company under provisions of the Internal Revenue Code of
1986, as amended (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 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 Portfolios by a majority of the outstanding shares of the
Portfolios, on not less than 30 days nor more than 60 days written notice to the
Adviser, or by the Adviser on 90 days written notice to the Trust.
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996 the Portfolios paid the following advisory fees:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fees Waived (000)
--------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Diversified $120 $171 $241 $20 $39 $26
Growth Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Growth and * * * * * *
Income Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate- $159 $208 $295 $93 $154 $177
Term Income Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax * * * * * *
Free Bond Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation $36 $28 $18 $266 $287 $477
Money Market Portfolio
===================================================================================================================================
</TABLE>
* Not in operation during such period.
THE SUB-ADVISERS
Wellington Management Company
Wellington Management Company ("Wellington Management") serves as
sub-adviser to the Golden Oak Prime Obligation Money Market Portfolio.
The Trust, the Adviser and Wellington Management have entered into a
sub-advisory agreement.
S-23
<PAGE>
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolio paid the following sub-advisory fees:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fees Waived (000)
---------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Prime Obligation $75 $27 $124 $0 $0 $0
Money Market Portfolio
===================================================================================================================================
</TABLE>
Nicholas-Applegate Capital Management
Effective August 31, 1995, Nicholas-Applegate Capital Management
("Nicholas-Applegate") began serving as sub-adviser to the Golden Oak
Diversified Growth Portfolio. The Adviser and Nicholas-Applegate have
entered into a sub-advisory agreement.
For the fiscal year ended January 31, 1996, the Nicholas-Applegate received the
following sub-advisory fee from the Adviser:
<TABLE>
<CAPTION>
=============================================================================================================
Portfolio Fees Paid (000) Fees Waived (000)
-----------------------------------------------------------------------
1996 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Golden Oak Diversified $54 $0
Growth Portfolio
=============================================================================================================
</TABLE>
Scudder, Stevens & Clark, Inc.
Scudder, Stevens & Clark, Inc. ("Scudder"), an investment counsel firm, serves
as sub-adviser to the Golden Oak Growth and Income Portfolio.
Certain investments may be appropriate for the Portfolio and also for other
clients advised by Scudder. Investment decisions for the Portfolio and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same date. In
such event, such transactions will be allocated among the clients in a manner
believed by Scudder to be equitable to each. In some cases, this procedure could
have an adverse effect on the price or amount of the securities purchased or
sold by the Portfolio. Purchase and sale orders for the Portfolio may be
combined with those of other clients of Scudder in the interest of achieving the
most favorable net results to the Portfolio.
The Golden Oak Growth and Income Portfolio had not commenced operations as of
January 31, 1996.
THE ADMINISTRATOR
The Trust and SEI Financial Management Corporation (the "Administrator") have
entered into an administration agreement (the "Administration Agreement") dated
January 28, 1993, as amended and restated on May 17, 1994. The Administration
Agreement provides that the Administrator shall not
S-24
<PAGE>
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 with respect to the Golden
Oak Family of Funds until January 31, 1998, and thereafter shall continue in
effect for successive two-year periods subject to annual review by the Trustees.
The Administrator, a wholly owned subsidiary of SEI Corporation ("SEI"), was
organized as a Delaware corporation in 1969 and has its principal business
offices at 680 East Swedesford Road, Wayne, PA 19087-1658. Alfred P. West, Jr.,
Henry H. Greer and Carmen V. Romeo constitute the Board of Directors of the
Administrator. Mr. West is the Chairman of the Board and Chief Executive Officer
of the Administrator and of SEI. Mr. Greer is the President and Chief Operating
Officer of the Administrator and of SEI. SEI and its subsidiaries 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 also serves as administrator to the following
other mutual funds: The Achievement Funds Trust, The Advisors' Inner Circle
Fund, ARK Funds, Bishop Street Funds, Conestoga Family of Funds, CoreFunds,
Inc., CrestFunds, Inc., CUFUND, First American Funds, Inc., First American
Investment Funds, Inc., Insurance Investment Products Trust, Inventor Funds,
Inc., Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The
PBHG Funds, Inc., The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone
Funds, STI Classic Funds and STI Classic Variable Trust.
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Administrator received the following fees:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fees Waived (000)
--------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Diversified $38 $57 $72 $0 $0 $0
Growth Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Growth and * * * * * *
Income Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate- $101 $145 $189 $0 $0 $0
Term Income Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax * * * * * *
Free Bond Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation $197 $209 $325 $5 $0 $6
Money Market Portfolio
===================================================================================================================================
</TABLE>
* Not in operation during such period.
S-25
<PAGE>
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly owned subsidiary of
SEI, and the Trust are parties to a distribution agreement (the "Distribution
Agreement"), which applies to both Class A and Class B shares of the Portfolios.
The Distribution Agreement shall be reviewed and ratified at least annually (i)
by the Trust's Trustees or by the vote of a majority of the outstanding shares
of the Trust, and (ii) by the vote of a majority of the Trustees of the Trust
who are not parties to the Distribution Agreement or interested persons (as
defined in the 1940 Act) of any party to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate in the event of any assignment, as defined
in the 1940 Act, and is terminable with respect to a particular Portfolio on not
less than sixty days' notice by the Trust's Trustees, by vote of a majority of
the outstanding shares of such Portfolio or by the Distributor. The Distributor
will receive no compensation for distribution of Class A shares. Class B has a
distribution plan (the "Class B Distribution Plan").
Class B Distributions
The Distribution Agreement and the Class B Distribution Plan adopted by the
Class B shareholders provides that the Class B shares of each Portfolio will pay
the Distributor a fee of .25% of the average daily net assets which the
Distributor can use to compensate/broker dealers and service providers,
including the Adviser and its affiliates which provide administrative and/or
distribution services to the Class B shareholders or their customers who
beneficially own Class B shares.
The Distribution Agreement is 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.
The Trust has adopted the Class B Distribution 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 the Class B Distribution Plan
must be approved annually by a majority of the Trustees of the Trust and by a
majority of the Trustees who are not interested persons of the Trust, and have
no direct or indirect financial interest in the operation of such Class B
Distribution Plan or any agreements related to it ("Qualified Trustees"). The
Class B Distribution Plan requires that quarterly written reports of amounts
spent under the Class B Distribution Plan and the purposes of such expenditures
be furnished to and reviewed by the Trustees. The Class B Distribution Plan may
not 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 the Plan will require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
S-26
<PAGE>
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolios paid the following distribution fees:
<TABLE>
<CAPTION>
=============================================================================================================================
Portfolio Distribution Fees Paid
---------------------------------------------------------------------------------
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Golden Oak Diversified Growth $209 $388 $382
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Golden Oak Growth and Income * * *
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate-Term $527 $876 $596
Income Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax Free * * *
Bond Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation $30 $22,430 $137,930
Money Market Portfolio
=============================================================================================================================
</TABLE>
* Not in operation during such period.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees and executive officers
of the Trust 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
executive officer is SEI Financial Management Corporation, 680 East Swedesford
Road, Wayne, PA 19087-1658. Certain officers of the Trust also serve as Trustees
and/or officers of The Achievement Funds Trust, The Advisors' Inner Circle Fund,
ARK Funds, Bishop Street Funds, Conestoga Family of Funds, CoreFunds, Inc.,
CrestFunds, Inc., CUFUND, First American Funds, Inc., First American Investment
Funds, Inc., Insurance Investment Products Trust, Inventor Funds, Inc., Marquis
Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The PBHG Funds, Inc.,
The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI Daily Income Trust, SEI
Index Funds, SEI Institutional Managed Trust, SEI International Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone Funds, STI Classic Funds and
STI Classic Variable Trust, each of which is an open-end management investment
company.
ROBERT A. NESHER - Trustee* - Date of Birth: 8/17/46. 8 South Street,
Kennebunkport, ME 04046. Retired since 1994. Director, Executive Vice President
of SEI Corporation (1986-1994). Director and Executive Vice President of SEI and
the Administrator and the Distributor (1981-1994).
JOHN T. COONEY - Trustee** - Date of Birth: 1/20/27.569 N. Post Oak Lane,
Houston, TX 77024. Retired since 1992. Formerly Vice Chairman of Ameritrust
Texas N.A. (1989-1992), and MTrust Corp. (1985-1989).
WILLIAM M. DORAN - Trustee* - Date of Birth: 5/26/40. 2000 One Logan Square,
Philadelphia, PA 19103. Partner of Morgan, Lewis & Bockius LLP(law firm).
Counsel to the Trust, Administrator and Distributor (1990-present). Director and
Secretary of SEI.
FRANK E. MORRIS - Trustee** - Date of Birth: 12/30/23. 105 Walpole Street,
Dover, MA 02030. Retired since 1990. Peter Drucker Professor of Management,
Boston College since 1989. President, Federal Reserve Bank of Boston
(1968-1988).
S-27
<PAGE>
ROBERT A. PATTERSON - Trustee** - Date of Birth: 11/5/17. 208 Old Main,
University Park, PA 16802. Pennsylvania State University, Senior Vice President,
Treasurer (Emeritus). Financial and Investment Consultant, Professor of
Transportation (1984-present). Vice President-Investments, Treasurer, Senior
Vice President (Emeritus) (1982-1984). Director, Pennsylvania Research Corp.
Member and Treasurer, Board of Trustees of Grove City College.
GENE PETERS - Trustee** - Date of Birth: 6/3/29. 943 Oblong Road, Williamstown,
MA 01267. Private investor from 1987 to present. Vice President and Chief
Financial Officer, Western Company of North America (petroleum service company)
(1980-1986). President of Gene Peters and Associates (import company)
(1978-1980). President and Chief Executive Officer of Jos. Schlitz Brewing
Company before 1978.
JAMES M. STOREY - Trustee** - Date of Birth: 4/12/31. Ten Post Office Square
South, Boston, MA 02109. Retired since 1993. Formerly Partner of Dechert Price &
Rhoads (law firm).
DAVID G. LEE - President, Chief Executive Officer - Date of Birth: 4/16/52.
Senior Vice President of the Administrator and Distributor since 1993. Vice
President of the Administrator and Distributor (1991-1993). President, GW Sierra
Trust Funds before 1991.
SANDRA K. ORLOW - Vice President, Assistant Secretary - Date of Birth: 10/18/53.
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1983.
KEVIN P. ROBINS - Vice President, Assistant Secretary - Date of Birth: 4/15/61.
Senior Vice President, General Counsel and Assistant Secretary of SEI, the
Administrator and the Distributor since 1994. Vice President and Assistant
Secretary of the SEI, Administrator and the Distributor (1992-1994). Associate,
Morgan, Lewis & Bockius (law firm) prior to 1992.
JEFFREY A. COHEN, CPA - Controller, Chief Financial Officer - Date of Birth:
4/22/61. Vice President, International and Domestic Funds Accounting, SEI
Corporation since 1991. Audit Manager, Price Waterhouse prior to 1991.
KATHRYN L. STANTON - Vice President, Assistant Secretary - Date of Birth:
11/18/58. Vice President and Assistant Secretary of SEI, the Administrator and
the Distributor since 1994. Associate, Morgan, Lewis & Bockius (law firm)
1989-1994.
JOSEPH M. LYDON - Vice President, Assistant Secretary - Date of Birth: 9/27/59.
Director of Business Administration of Fund Resources, SEI Corporation since
1995. Vice President of Fund Group and Vice President of the Advisor, Dreman
Value Management and President of Dreman Financial Services, Inc. prior to 1995.
TODD CIPPERMAN - Vice President, Assistant Secretary - Date of Birth: 2/14/66.
Vice President and Assistant Secretary of SEI, the Administrator and the
Director since 1995. Associate, Dewey Ballantine (law firm)(1994-1995).
Associate, Winston & Strawn (law firm)(1991-1994).
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 SEI, the Trust, Administrator and the Distributor (1990- present).
S-28
<PAGE>
- ---------------
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Trust as the term is defined in the 1940 Act.
** Messrs. Cooney, Morris, Patterson, Peters and Storey serve on the Audit
Committee of the Trust.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees. For the
fiscal year ended January 31, 1996, the Trust paid the unaffiliated Trustees
aggregate fees of $61,924.25.
COMPENSATION TABLE
<TABLE>
<CAPTION>
================================================================================================================================
Name of Person, Aggregate Pension or Estimated Annual Total Compensation
Position Compensation From Retirement Benefits Benefits Upon From Registrant and
Registrant Accrued as Part of Retirement Fund Complex Paid
Fund Expenses to Trustees for the
Fiscal Year Ended
January 31, 1996 1
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Patterson, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Gene Peters, Trustee $12,384.82 N/A N/A $12,384.82
- --------------------------------------------------------------------------------------------------------------------------------
Frank E. Morris, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, $0 N/A N/A $0
Trustee *
- --------------------------------------------------------------------------------------------------------------------------------
William M. Doran, $0 N/A N/A $0
Trustee *
- --------------------------------------------------------------------------------------------------------------------------------
James A. Storey, $12,384.82 N/A N/A $12,384.82
Trustee
================================================================================================================================
</TABLE>
1 Total Compensation for service on one board.
* A Trustee who is an "interested person" as defined in the 1940 Act.
COMPUTATION OF YIELD
From time to time, each Portfolio may advertise yield and/or total return. These
figures will be based on historical earnings and are not intended to indicate
future performance.
The "yield" of the Portfolios refers to the income generated by an investment in
a Portfolio over a seven-day or 30-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 seven-day or 30-day period is
assumed to be generated each seven-day or 30-day period over a year 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 Portfolio 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 Portfolios 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
reflecting deductions from shareholder accounts, and dividing such net change by
the value of the account at the beginning of the
S-29
<PAGE>
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 Portfolios 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 yield of these Portfolios fluctuates, and the annualization of a week's
dividend is not a representation by the Trust as to what an investment in the
Portfolio will actually yield in the future. Actual yields will depend on such
variables as asset quality, average asset maturity, the type of instruments the
Portfolio invests in, changes in interest rates on money market instruments,
changes in the expenses of the Portfolio and other factors.
For the 7-day period ended January 31, 1996, the Golden Oak Prime Obligation
Money Market Portfolios' yield was 5.26% for Class A and 5.01% for Class B and
the effective yield was 5.40% for Class A and 5.14% for Class B.
The yield of a Portfolio refers to the annualized income generated by an
investment in the Portfolio over a specified 30-day period. The yield is
calculated by assuming that the income generated by the investment during that
period generated each period over one year 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 current daily number of shares 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.
For the 30-day period ended January 31, 1996, the Portfolios' yields were 0.29%
for Class A of the Golden Oak Diversified Growth Portfolio and 4.88% for Class A
and 4.42% for Class B of the Golden Oak Intermediate Term Income Portfolio. As
of January 31, 1996, the Golden Oak Michigan Tax Free Bond and Golden Oak Growth
and Income Portfolios had not commenced operations.
The Portfolios may, from time to time, compare their performance to other mutual
funds tracked by mutual fund rating services, to broad groups of comparable
mutual funds or to unmanaged indices which may assume investment of dividends
but generally do not reflect deductions for administrative and management costs.
CALCULATION OF TOTAL RETURN
From time to time, the Golden Oak Diversified Growth, Golden Oak Growth and
Income, Golden Oak Intermediate-Term Income, Golden Oak Michigan Tax Free Bond
and Prime Obligation Money Market Portfolios may advertise total return. The
total return of the Portfolio refers to the average compounded rate of return to
a hypothetical investment for designated time periods (including but not limited
to, the period from which the Portfolios commenced operations through the
specified date), assuming that the entire investment is redeemed at the end of
each period. In particular, total return will be calculated according to the
following formula: 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
S-30
<PAGE>
of a hypothetical $1,000 payment made at the beginning of the designated time
period as of the end of such period.
Based on the foregoing, the average annual total return for the Portfolios from
inception through January 31, 1996 and for the one, five and ten year periods
ended January 31, 1995 were as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Class Average Annual Total Return
-------------------------------------------------------------------
One Year Five Ten Since
Year Year Inception
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Golden Oak Diversified Class A 18.81% N/A N/A 22.77%
Growth Portfolio
---------------------------------------------------------------------------------------------
Class B (without 18.43% N/A N/A 26.74%
load)
---------------------------------------------------------------------------------------------
Class B (with 11.59% N/A N/A 19.48%
load)
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Growth and Class A * * * *
Income Portfolio
---------------------------------------------------------------------------------------------
Class B (without * * * *
load)
---------------------------------------------------------------------------------------------
Class B (with * * * *
load)
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate- Class A 12.83% N/A N/A 18.76%
Term Income Portfolio
---------------------------------------------------------------------------------------------
Class B (without 12.54% N/A N/A 15.03%
load)
---------------------------------------------------------------------------------------------
Class B (with 7.46% N/A N/A 9.83%
load)
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax Class A * * * *
Free Bond Portfolio
---------------------------------------------------------------------------------------------
Class B (without * * * *
load)
---------------------------------------------------------------------------------------------
Class B (with * * * *
load)
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation Class A 5.74% N/A N/A 13.35%
Money Market Portfolio
---------------------------------------------------------------------------------------------
Class B (without 5.47% N/A N/A 9.74%
load)
===================================================================================================================================
</TABLE>
* Not in operation during such period.
S-31
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
It is currently the Trust's policy to pay for the 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 Portfolios
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 Portfolios
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 Portfolio'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 the Portfolio for
any period during which the New York Stock Exchange, the Adviser, the
Administrator and/or the Custodian are not open for business.
LETTER OF INTENT
Reduced sales charges are also applicable to the aggregate amount of purchases
made by any such purchaser previously enumerated within a 13-month period
pursuant to a written Letter of Intent provided to the Trust's transfer agent,
that does not legally bind the signer to purchase any set number of shares and
provides for the holding in escrow by the Administrator of 5% of the amount
purchased until such purchase is completed within the 13-month period. A Letter
of Intent may be dated to include shares purchased up to 90 days prior to the
date the Letter of Intent is signed. The 13-month period begins on the date of
the earliest purchase. If the intended investment is not completed, the
Administrator will surrender an appropriate number of the escrowed shares for
redemption in order to recover the difference between the sales charge on the
shares purchased at the reduced rate and the sales charge otherwise applicable
to the total shares purchased.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Golden Oak Prime Obligation Money Market
Portfolio 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 the Portfolio would
receive if it sold the instrument. During periods of declining interest rates,
the daily yield of the Portfolio 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 the Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio 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 Portfolio would experience a lower yield. The converse would
apply in a period of rising interest rates.
The Portfolio's use of amortized cost and the maintenance of the Portfolio's net
asset value at $1.00 are permitted by Rule 2a-7 promulgated under the 1940 Act,
provided that certain conditions are met. The regulations also require the
Trustees to establish procedures that are reasonably designed to stabilize the
net asset value per share at $1.00 for the Portfolio. Such procedures include
the determination of the extent of deviation, if any, of the Portfolio's current
net asset value per share
S-32
<PAGE>
calculated using available market quotations from the Portfolio's 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 Portfolio incurs a significant loss or
liability, the Trustees have the authority to reduce pro rata the number of
shares of the Portfolio 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 Portfolio
must annually distribute at least 90% of its investment company taxable income.
The securities of the Golden Oak Intermediate-Term Income, Golden Oak Michigan
Tax Free Bond, Golden Oak Diversified Growth and Golden Oak Growth and Income
Portfolios are valued by the Administrator pursuant to valuations provided by an
independent pricing service. 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.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Portfolios' Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Portfolios' Prospectus is not intended as a
substitute for careful tax planning.
Federal Income Taxes
The following discussion of federal income tax consequences is based on the Code
and the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
All Portfolios
In order to qualify for treatment as a regulated investment company ("RIC")
under the Code, each Portfolio 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 net short-term capital gain) (the "Distribution Requirement") and
also must meet several additional requirements. Among these requirements are the
following: (i) at least 90% of the Portfolio'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
certain other income, (ii) the Portfolio must derive less than 30% of its gross
income each taxable year from
S-33
<PAGE>
the sale or other disposition of stock or securities held for less than three
months; (iii) at the close of each quarter of the Portfolio's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, United States 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 Portfolio'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 Portfolio's taxable
year, not more than 25% of the value of its assets may be invested in securities
(other than United States Government securities or the securities of other RICs)
of any one issuer or of two or more issuers which the Portfolio controls and
which are engaged in the same, similar or related trades or businesses.
Any net realized long-term capital gains of the Portfolios will be distributed
at least annually. The Portfolios will have no tax liability with respect to
such gains and the distributions will be taxable to shareholders as long-term
capital gains, regardless of how long a shareholder has held shares in a
Portfolio. Such distributions will be designated as a capital gains dividend in
a written notice mailed to shareholders after the close of the Portfolio's
taxable year.
Any gain or loss recognized on a sale or redemption of shares in a Portfolio 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 generally will be treated as a short-term gain or loss. If
a shareholder disposes of shares in a Portfolio at a loss before having held
those shares for more than six months, however, such loss will be treated as a
long-term capital loss to the extent the shareholder has received a long-term
capital gain distribution on the shares.
A dividends received deduction generally is available to corporations that
receive dividends from domestic corporations. Dividends paid by the equity
Portfolios will be eligible for the dividends received deduction for corporate
shareholders to the extent they are derived by the Portfolio from dividends from
domestic corporations. Equity Portfolios shareholders will be advised each year
of the portion of ordinary income dividends eligible for the dividends received
deduction.
Dividends received from other portfolios, e.g., money market or fixed income
portfolios, will not be eligible for the dividends received deduction.
Individual shareholders are not entitled to the dividends received deduction
regardless of which portfolio paid the dividend.
Notwithstanding the distribution requirement described above, which only
requires a Portfolio 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
Portfolio will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute by the end of any calendar year at least 98% of its
ordinary income for that year and at least 98% of its capital gain net income
for the one-year period ending on October 31 of that year, plus certain other
amounts.
Although the Portfolios expect to qualify as regulated investment companies and
to be relieved of all or substantially all federal income taxes, depending upon
the extent of its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located, or in
which it is otherwise deemed to be conducting business, a Portfolio may be
subject to the tax laws of such states or localities. In addition, in those
states and localities which have income tax laws, the treatment of a Portfolio
and its shareholders under such laws may differ from its treatment under federal
income tax laws.
S-34
<PAGE>
If for any taxable year a Portfolio does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). Moreover, upon distribution to
shareholders, the Portfolio's income, including, in the case of the Michigan Tax
Free Bond Portfolio, Municipal Securities interest income, will be taxable to
shareholders to the extent of the Portfolio's current and/or accumulated
earnings and profits. However, in the case of corporate shareholders, such
distributions generally will be eligible for the dividends received deduction.
A Portfolio will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who (1)
has provided the Portfolio either an incorrect tax identification number or no
number at all, (2) who is subject to backup withholding by the Internal Revenue
Service for failure to properly report payments of interest or dividends, or (3)
who has failed to certify to the Portfolio that such shareholder is not subject
to backup withholding.
State Taxes
A Portfolio 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
Portfolios to shareholders and the ownership of shares may be subject to state
and local taxes.
Additional Tax Information Concerning the Michigan Tax Free Bond Portfolio
As indicated in the Prospectus, the Michigan Tax Free Bond Portfolio is designed
to provide shareholders with current tax-exempt interest income and is not
intended to constitute a balanced investment program. Certain recipients of
Social Security and railroad retirement benefits may be required to take into
account income from the Michigan Tax Free Bond Portfolio in determining the
taxability of their benefits. In addition, the Michigan Tax Free Bond Portfolio
may not be an appropriate investment for shareholders that are "substantial
users" or persons related to such users of facilities financed by private
activity bonds or industrial revenue bonds. A "substantial user" is defined
generally to include certain persons who regularly use a facility in their trade
or business. All shareholders should consult their tax advisors to determine the
potential effect of investing in the Michigan Tax Free Bond Portfolio, if any,
on their liability for federal, state, and local taxes.
If, at the close of each quarter of its taxable year, at least 50% of the value
of a Portfolio's total assets consists of securities the interest on which is
excludable from gross income, the Portfolio may pay "exempt-interest dividends"
to its shareholders. The policy of the Michigan Tax Free Bond Portfolio is to
pay each year as dividends substantially all of its interest income, net of
certain deductions. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Michigan Tax Free Bond
Portfolio, and designated by the Portfolio as an exempt-interest dividend in a
written notice mailed to shareholders within 60 days after the close of such
Portfolio's taxable year. However, aggregate exempt-interest dividends for the
taxable year may not exceed the net interest from Municipal Securities and other
securities exempt from the regular federal income tax received by the Portfolio
during the taxable year. The percentage of the total dividends paid for any
taxable year which qualifies as federal exempt-interest dividends will be the
same for all shareholders receiving dividends from the Michigan Tax Free Bond
Portfolio during such year, regardless of the period for which the shares were
held.
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 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
S-35
<PAGE>
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 were 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.
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 the 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.
Issuers of bonds purchased by the Michigan Tax Free Bond Portfolio (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 the
covenants.
Under the Code, if a shareholder receives an exempt-interest dividend with
respect to any share and such share is held for six months or less, any loss on
the sale or exchange of such share will be disallowed to the extent of the
amount of such exempt-interest dividend.
Although the Michigan Tax Free Bond Portfolio does not expect to earn any
investment company taxable income (as defined by the Code), any income earned on
taxable investments will be distributed and will be taxable to shareholders as
ordinary income. In general, "investment company taxable income" comprises
taxable net investment income and net short-term capital gain. The Michigan Tax
Free Bond Portfolio would be taxed on any undistributed investment company
taxable income. Since any such income will be distributed, it is anticipated
that no such tax will be paid by the Portfolio.
As indicated in the Prospectus, the Michigan Tax Free Bond Portfolio may acquire
puts with respect to Municipal Securities held in its portfolio. See "Additional
Description Of Permitted Investments -- Puts on Municipal Securities" in this
Statement of Additional Information. The policy of the Portfolio is to limit
acquisitions of puts to those under which an acquiring Portfolio will be treated
for federal income tax purposes as the owner of the Municipal Securities
acquired subject to the put and the interest on the Municipal Securities will be
tax-exempt to such Portfolio. Although the Internal Revenue Service has issued a
published ruling that provides some guidance regarding the tax consequences of
the purchase of puts, there is currently no guidance available from the Internal
Revenue Service that definitively establishes the tax consequences of many of
the types of puts that this Portfolio could acquire under the 1940 Act.
Therefore, although the Michigan Tax Free Bond Portfolio will only acquire a put
after concluding that it will have the tax consequences described above, the
Internal Revenue Service could reach a different conclusion. If the Michigan Tax
Free Bond Portfolio were not treated as the owner of the Municipal Securities,
income from such securities would probably not be tax-exempt.
S-36
<PAGE>
PORTFOLIO TRANSACTIONS
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 Adviser and/or Sub-Adviser is responsible for
placing the orders to execute transactions for the Portfolio. 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 Adviser and/or Sub-Adviser generally seeks
reasonably competitive spreads or commissions, the Trust will not necessarily be
paying the lowest spread or commission available if the difference is reasonably
justified by other aspects of the portfolio execution securities offered.
The money market securities in which the Portfolios 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 Adviser
and/or Sub-Adviser 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio/Class Dollar Amount of Load Dollar Amount of Load
Retained By SFS
------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Diversified Growth $1,958 --- $0 $230 --- $0
Portfolio-Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Growth and * * * * * *
Income Portfolio-Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate-Term $20 --- $0 $3 --- $0
Income Portfolio-Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax Free * * * * * *
Bond Portfolio-Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation N/A N/A N/A N/A N/A N/A
Money Market Portfolio-Class B
===================================================================================================================================
</TABLE>
* Not in operation during such period.
TRADING PRACTICES AND BROKERAGE
The Adviser and/or Sub-Adviser 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 affecting the overall benefit obtained by
the account
S-37
<PAGE>
on the transaction. The Adviser's and/or Sub-Adviser's determination of what are
reasonably competitive rates is based upon the professional knowledge of its
trading department as to rates paid and charged for similar transactions
throughout the securities industry. In some instances, the Adviser and/or
Sub-Adviser pays a minimal share transaction cost when the transaction presents
no difficulty. Some trades are made on a net basis where the Adviser and/or
Sub-Adviser either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission.
The Adviser and/or Sub-Adviser may allocate out of all commission business
generated by all of the funds and accounts under management by the Adviser
and/or Sub-Adviser, 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 Adviser and/or Sub-Adviser 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, as amended (the "1934 Act"),
higher commissions may be paid to broker/dealers who provide brokerage and
research services than to broker/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
broker/dealers who provide such brokerage and research services, the Adviser
and/or Sub-Adivser believes that the commissions paid to such broker/dealers are
not, in general, higher than commissions that would be paid to broker/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 broker/dealers who provide daily portfolio pricing services to the
Adviser and/or Sub-Adviser. 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 years ended January 31, 1995 and January 31, 1996, the Portfolios
paid the following brokerage commissions:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Total Brokerage Amount Paid to Amount Paid to
Commission Distributor Affiliates
===============================================================================================
1995 1996 1995 1996 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Diversified $85,419 $131,064 $0 $0 $0 $0
Growth Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate- $0 $0 $0 $0 $0 $0
Term Income Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime $0 $0 $0 $0 $0 $0
Obligation Money Market
Portfolio
===================================================================================================================================
</TABLE>
S-38
<PAGE>
For the fiscal year ended January 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:
<TABLE>
<CAPTION>
============================================================================================================================
Portfolio Total Dollar Amount Total Dollar Amount % of Directed
of Brokerage of Transactions Brokerage to Total
Commissions for Involving Directed Brokerage
Research Services Brokerage
Commissions for
Research Services
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Golden Oak Diversified $84,600 $84,600 100%
Growth Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Golden Oak N/A N/A N/A
Intermediate-Term
Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
Golden Oak Prime $0 $0 $0
Obligation Portfolio
============================================================================================================================
</TABLE>
For the fiscal year ended January 31, 1996, the Golden Oak Michigan Tax Free
Bond Portfolio and Golden Oak Growth and Income Portfolio have not commenced
operations.
The Adviser and/or Sub-Adviser 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 Adviser and/or Sub-Adviser and the Trust's
Board of Directors that the advantages of combined orders outweigh the possible
disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Adviser and/or Sub-Adviser may place orders with broker/dealers that have agreed
to defray certain Portfolio expenses such as custodian fees, and may, at the
request of the Distributor, give consideration to sales of shares of the Adviser
and/or Sub-Adviser as a factor in the selection of brokers and dealers to
execute portfolio transactions for such Portfolio.
It is expected that the Adviser and/or Sub-Adviser may execute brokerage or
other agency transactions through the Distributor or an affiliate of the
Adviser, both of which are registered broker-dealers, for a commission in
conformity with the 1940 Act, the 1934 Act and the rules promulgated thereunder
by the SEC. Under these provisions, the Distributor or an affiliate of the
Adviser is permitted to receive and retain compensation for effecting portfolio
transactions for a Portfolio on an exchange if a written contract is in effect
between the Distributor and the Trust expressly permitting the Distributor or an
affiliate of the Adviser to receive and retain such compensation. These rules
further require that commissions paid to the Distributor by a Portfolio 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
S-39
<PAGE>
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." In addition, the
Adviser and/or Sub-Adviser may direct commission business to one or more
designated broker/dealers in connection with such broker/dealer's provision of
services to a Portfolio or payment of certain Portfolio expenses (e.g., custody,
pricing and professional fees). 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 year ended January 31, 1994, the
Portfolios paid no brokerage commissions to the Distributor. Aggregate brokerage
commissions paid by the Portfolios for this period were $52,000.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the Portfolios each of which represents an equal proportionate
interest in that Portfolio with each other share. Shares are entitled upon
liquidation to a pro rata share in the net assets of the Portfolios.
Shareholders have no preemptive rights. The Declaration of Trust provides that
the Trustees of the Trust may create additional series of shares. 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.
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 its 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
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, 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 liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
5% SHAREHOLDERS
As of March 1, 1996, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% or more of
the shares of the Portfolios. The Trust believes that most of the shares
referred to below were held by the below persons in account for their fiduciary,
agency or custodial customers.
S-40
<PAGE>
Golden Oak Prime Obligation Money Market Portfolio Class-A: Washavco, Attn:
Trust Operations, 101 N. Washington Ave, Saginaw, MI 48607, 99.90%.
Golden Oak Prime Obligation Money Market Portfolio Class-B: Second National
Bank, c/o Citizens Bank, Attn: Caryl Irrer, One Citizens Banking Center, Flint,
MI 48502, 31.86%; Citizens Bank, Attn: Caryl Irrer, One Citizens Banking Center,
Flint, MI 48502, 42.22%; Commercial National Bank of Berwyn, c/o Citizens Bank,
Attn: Caryl Irrer, One Citizens Banking Center, Flint, MI 48502-2401, 8.38%.
Golden Oak Intermediate-Term Income Portfolio Class-A: Washavco, Attn: Trust
Operations, 101 N. Washington Ave, Saginaw, MI 48607, 100.00%.
Golden Oak Intermediate-Term Income Portfolio Class-B: Reggie L. Hockin & Lucy
C. Hockin, 1151 Westwood Dr., Flint, MI 48532, 17.19%; Edith F. Smith, 5625
Standish Road, Bentley, MI 48613, 22.24%; John W. Ennest TTEE, The John W.
Ennest Trust, 5412 Pepper Mill, Grand Blanc, MI 48532, 17.19%; Bruce H. &
Elizabeth A. Schwartz TTEE, FBO Bruce & Elizabeth Schwartz Rev. Living Trust,
16053 Pretty Lake Dr., Mecosta, MI 49332-9617, 7.64%; Hazel I. Beach & Terry
Niederstadt & William S. Beach & Darlene Niederstadt JTTN, 1046 S. Graham Rd.,
Flint, MI 48532, 7.12%; Harold R. Clingensmith & Josephine Clingensmith TTEES,
Harold and Josephine Clingensmith Living Trust, 3143 Poplar Ave., Grayling, MI
49738, 7.05%; Everen Clearing Corp. Cust., FBO Barbara L. Isetts, 4705 North
Mackinaw, Pinconning, MI 48650-8431, 6.45%.
Golden Oak Diversified Growth Portfolio Class-A: Washavco, Attn: Trust
Operations, 101 N. Washington Ave, Saginaw, MI 48607, 100%.
Golden Oak Diversified Growth Portfolio Class-B: Kemper Clearing Corp. Cust.,
FBO William C. Crick Sep. IRA, 603 Greenwich Lane, Grand Blanc, MI 48439, 5.06%;
John W. Ennest TTEE, The John W. Ennest Trust, 5412 Pepper Mill, Grand Blanc, MI
48439, 17.78%; Nicholas J. Cilfone & Elizabeth A. Cifone JTWROS, 4810 Arboretum,
Saginaw, MI 48603, 9.10%; James N. Johnson CONS, Lindsay S. Johnson, 5410 Stoney
Hill CT., Grand Blanc, MI 48439, 8.82%; Eagle Trust Company, Cust. for IRA of
David H. Buick, 3008 Gehring Dr., Flint, MI 48506, 8.71%, Everen Clearing Corp
Cust. FBO Barbara L. Isetts, 4705 North Mackinaw, Pinconning, MI 48650, 8.26%;
Everen Clearing Corp Cust. FBO Elaine H. Schultz, 5302 Holland, Saginaw, MI
48601-9409, 5.37%.
EXPERTS
The financial statements in this Statement of Additional Information have been
examined by Price Waterhouse LLP, independent accountants, as indicated in their
report, with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
FINANCIAL STATEMENTS
Following are the audited financial statements of the Portfolios for the fiscal
year ended January 31, 1996, and the Report of Independent Accountants of Price
Waterhouse LLP dated March 8, 1996, relating to the financial statements,
including the financial highlights of the Portfolios. The Golden Oak Michigan
Tax Free Bond and Golden Oak Growth and Income Portfolios had not commenced
operations as of January 31, 1996.
S-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Golden Oak Prime Obligation Money Market,
Golden Oak Intermediate-Term Income and
Golden Oak Diversified Growth Portfolios of
The Arbor Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Golden Oak Prime Obligation Money Market, Golden Oak Intermediate-Term
Income and Golden Oak Diversified Growth Portfolios of The Arbor Fund (hereafter
referred to as the "Fund") at January 31, 1996, the results of each of their
operations, the changes in each of their net assets and the financial highlights
for each of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at January 31, 1996, by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 8, 1996
8
<PAGE>
STATEMENT OF NET ASSETS GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Face
PRIME OBLIGATION MONEY Amount Value
MARKET PORTFOLIO (000) (000)
- ------------------------------------------------------
COMMERCIAL PAPER -- 53.0%
Abbey National PLC
5.610%, 02/29/96 $5,000 $4,978
American Express Credit
5.600%, 02/29/96 5,000 4,978
American Home Products
5.720%, 02/02/96 2,000 2,000
Banque National de Paris
5.510%, 05/21/96 5,000 4,916
Burlington Northern Santa Fe
5.900%, 02/28/96 1,500 1,493
Canadian Wheat Board
5.670%, 03/04/96 5,000 4,975
Cariplo Finance
5.610%, 03/04/96 1,000 995
Chevron Transport
5.520%, 04/17/96 5,600 5,535
CIESCO
5.580%, 03/08/96 6,000 5,967
ESC Securitization
5.680%, 02/22/96 2,000 1,993
General Electric Capital
5.700%, 02/09/96 2,000 1,998
Goldman Sachs Group
5.440%, 03/11/96 5,000 4,971
Household International
5.650%, 03/08/96 4,000 3,977
ING Finance
5.440%, 04/08/96 6,000 5,939
International Business
Machines Credit
5.650%, 02/13/96 1,000 998
5.510%, 04/24/96 5,000 4,937
Kredietbank NA Finance
5.740%, 02/05/96 2,000 1,999
NationsBank
5.190%, 06/28/96 6,000 5,872
Norwest Financial
5.690%, 02/28/96 3,000 2,987
PNC Funding
5.770%, 02/05/96 1,000 999
Province of Quebec
5.080%, 07/17/96 6,200 6,054
Sears Roebuck Acceptance
5.720%, 02/13/96 5,000 4,990
Toshiba America
5.400%, 04/02/96 2,500 2,477
Face
PRIME OBLIGATION MONEY Amount Value
MARKET PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------
COMMERCIAL PAPER--(CONTINUED)
Westpac Banking
5.530%, 04/30/96 $5,000 $4,932
Zeneca Wilmington
5.350%, 04/17/96 6,000 5,932
-------
Total Commercial Paper
(Cost $96,891,592) 96,892
-------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 8.2%
FFCB
5.562%, 11/15/96 1,000 958
FNMA
5.330%, 05/10/96 5,000 4,927
FNMA (A)
5.340%, 05/25/99 9,000 9,000
-------
Total U.S. Government
Agency Obligations
(Cost $14,885,113) 14,885
-------
FLOATING RATE INSTRUMENTS -- 11.5%
First Bank of South Dakota (A)
5.605%, 05/06/96 5,000 5,000
General Electric Capital (A)
5.867%, 08/22/96 3,000 3,001
Peoples Security Life (A)
6.090%, 3,000 3,000
PNC Bank (A)
5.549%, 01/06/97 5,000 4,996
SMM Trust 1995-I (A)
5.582%, 05/29/96 4,000 4,000
SMM Trust 1995-N (A)
5.925%, 11/15/96 1,000 1,000
-------
Total Floating Rate Instruments
(Cost $20,996,693) 20,997
-------
CERTIFICATES OF DEPOSITS -- 16.4%
Bank of Tokyo
5.590%, 03/12/96 6,000 6,000
BankAmerica
5.270%, 06/25/96 6,000 6,000
Chase Manhattan
5.770%, 04/15/96 4,000 4,000
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATEMENT OF NET ASSETS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Face
PRIME OBLIGATION MONEY Amount Value
MARKET PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------
CERTIFICATES OF DEPOSITS -- (CONTINUED)
First of America Bank
5.340%, 05/23/96 $5,000 $5,000
National Westminster Bank
5.760%, 02/22/96 6,000 6,000
Wilmington Trust of Delaware
5.680%, 03/27/96 3,000 3,000
-------
Total Certificates Of Deposits
(Cost $30,000,054) 30,000
-------
BANKERS ACCEPTANCE -- 3.3%
Barnett Banks
5.590%, 03/06/96 6,000 5,968
-------
Total Bankers Acceptance
(Cost $5,968,323) 5,968
-------
BANK NOTES -- 4.9%
Bank of Hawaii
5.570%, 11/06/96 6,000 6,006
Bank of New York
5.520%, 05/22/96 3,000 2,999
-------
Total Bank Notes
(Cost $9,004,651) 9,005
-------
REPURCHASE AGREEMENT -- 6.2%
Aubrey G. Lanston Incorporated
5.90%, dated 01/31/96, matures
02/01/96, repurchase price
$11,296,851 (collateralized
by U.S. Treasury Note, par
value $10,960,000, 6.50%,
matures 08/15/97: market
value $11,514,034) 11,295 11,295
-------
Total Repurchase Agreement
(Cost $11,295,000) 11,295
-------
Total Investments -- 103.5%
(Cost $189,041,425) 189,042
-------
OTHER ASSETS AND LIABILITIES,
NET-- (3.5%) (6,340)
--------
PRIME OBLIGATION MONEY Value
MARKET PORTFOLIO(concluded) (000)
- ------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A (unlimited
authorization--no par value) based
on 107,414,718 outstanding shares
of beneficial interest $107,415
Portfolio shares of Class B (unlimited
authorization--no par value) based
on 75,292,829 outstanding shares
of beneficial interest 75,293
Accumulated Net Realized Loss
on Investments (6)
-------
Net Assets-- 100.0% $182,702
========
Net Asset Value, Offering Price and
Redemption Price Per Share--
Class A $1.00
========
Net Asset Value, Offering Price and
Redemption Price Per Share--
Class B $1.00
========
FFCB--Federal Farm Credit Bank
FNMA--Federal National Mortgage Association
PLC--Private Limited Corporation
(A) Variable Rate Security - The rate reported in the Statement of Net Assets is
the rate in effect on January 31, 1996.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
STATEMENT OF NET ASSETS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Face Market
INTERMEDIATE-TERM INCOME Amount Value
PORTFOLIO (000) (000)
- ------------------------------------------------------
CORPORATE OBLIGATIONS -- 23.2%
American Express Credit
8.500%, 06/15/99 $ 500 $542
American General Finance
7.375%, 11/15/96 1,550 1,573
Anheuser Busch
6.900%, 10/01/02 3,000 3,097
Archer Daniels Midland
10.250%, 01/15/06 1,000 1,315
Chrysler Financial
13.250%, 10/15/99 1,000 1,245
Comerica
7.250%, 10/15/02 1,000 1,086
Consolidated Edison of NY
6.500%, 02/01/01 1,000 1,029
Eli Lilly
8.375%, 12/01/06 1,000 1,185
Ford Motor Credit
6.250%, 11/08/00 1,000 1,019
8.200%, 02/15/02 2,000 2,225
JP Morgan
7.625%, 09/15/04 2,000 2,203
Lehman Brothers Holding
5.750%, 02/15/98 1,000 1,000
Martin Marietta
6.500%, 04/15/03 1,000 1,017
Merck
7.750%, 05/01/96 500 503
Pacific Gas and Electric
8.750%, 01/01/01 1,300 1,453
RR Donnelley & Sons
9.125%, 12/01/00 500 577
Union Pacific
6.125%, 01/15/04 1,000 993
WMX Technologies
7.000%, 05/15/05 2,000 2,128
-------
Total Corporate Obligations
(Cost $23,673,695) 24,190
-------
Face Market
INTERMEDIATE-TERM INCOME Amount Value
PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------
U.S. GOVERNMENT AGENCY BONDS -- 2.4%
FNMA
5.990%, 10/01/03 $ 1,500 $1,489
SLMA
6.050%, 09/14/00 1,000 1,023
-------
Total U.S. Government Agency Bonds
(Cost $2,503,255) 2,512
-------
U.S. TREASURY OBLIGATIONS -- 66.7%
U.S. Treasury Note
6.875%, 02/28/97 20,000 20,402
7.875%, 04/15/98 14,300 15,153
7.750%, 02/15/01 18,500 20,512
7.500%, 05/15/02 3,700 4,115
7.875%, 11/15/04 7,600 8,787
5.875%, 11/15/05 800 817
-------
Total U.S. Treasury Obligations
(Cost $67,957,060) 69,786
-------
U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS -- 3.5%
FHLMC
4.750%, 04/15/10 1,000 995
6.500%, 03/15/17 304 304
FNMA
5.750%, 06/25/06 1,621 1,623
4.750%, 02/25/09 732 728
-------
Total U.S. Agency Mortgage-
Backed Obligations
(Cost $3,595,681) 3,650
-------
MUNICIPAL BONDS -- 0.7%
Texas State, GO
7.250%, 12/01/99 210 222
7.250%, 06/01/00 215 228
7.250%, 12/01/00 220 234
-------
Total Municipal Bonds
(Cost $684,829) 684
-------
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATEMENT OF NET ASSETS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Face Market
INTERMEDIATE-TERM INCOME Amount Value
PORTFOLIO (continued) (000) (000)
- ------------------------------------------------------
REPURCHASE AGREEMENT -- 2.4%
Lehman Government Securities 5.90%,
dated 01/31/96, matures 02/01/96,
repurchase price $2,504,410
(collateralized by U.S. T-Bill,
par value $2,615,000, matures
07/11/96: market value
$2,556,973) $2,504 $2,504
-------
Total Repurchase Agreement
(Cost $2,504,000) 2,504
-------
Total Investments -- 98.9%
(Cost $100,919,089) 103,326
-------
OTHER ASSETS AND LIABILITIES,
NET-- 1.1% 1,154
-------
- ------------------------------------------------------
Market
INTERMEDIATE-TERM INCOME Value
PORTFOLIO(concluded) (000)
- ------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A (unlimited
authorization--no par value) based
on 10,275,420 outstanding shares
of beneficial interest $102,367
Portfolio shares of Class B (unlimited
authorization--no par value) based
on 20,697 outstanding shares of
beneficial interest 216
Accumulated Net Realized Loss
on Investments (510)
Net Unrealized Appreciation
of Investments 2,407
--------
Net Assets-- 100.0% $104,480
========
Net Asset Value, Offering Price and
Redemption Price Per Share--
Class A $10.15
========
Net Asset Value, Offering Price and
Redemption Price Per Share--
Class B $10.15
========
Maximum Offering Price Per Share--
Class B ($10.15/95.5%) $10.63
========
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GO--General Obligation
SLMA--Student Loan Marketing Association
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATEMENT OF NET ASSETS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Market
DIVERSIFIED GROWTH Value
PORTFOLIO Shares (000)
- --------------------------------------------------------
COMMON STOCK -- 93.7%
AEROSPACE -- 4.4%
McDonnell Douglas 5,924 $527
Textron 7,200 566
-------
Total Aerospace 1,093
-------
APPAREL -- 1.4%
Liz Claiborne 12,500 348
-------
MONEY-CENTER BANKS -- 4.5%
BankAmerica 8,595 579
NationsBank 8,000 559
-------
Total Money-Center Banks 1,138
-------
CHEMICALS -- 2.8%
IMC Global 9,100 341
Sigma Aldrich 7,004 368
-------
Total Chemicals 709
-------
TELECOMMUNICATIONS EQUIPMENT-- 7.7%
Ascend Communications* 24,200 941
Glenayre Technologies* 11,100 444
U.S. Robotics* 6,144 542
-------
Total Telecommunications
Equipment 1,927
-------
COMPUTERS/OFFICE AUTOMATION-- 11.0%
Adaptec* 9,029 397
Bay Networks* 15,073 641
Cisco Systems* 7,207 600
Seagate Technology* 9,826 582
Sun Microsystems* 11,400 524
-------
Total Computers/Office
Automation 2,744
-------
DRUGS/PHARMACEUTICALS -- 1.5%
Glaxo PLC ADR 12,900 376
-------
ELECTRONIC INSTRUMENTS -- 2.0%
Raychem 7,500 502
-------
FINANCIAL SERVICES -- 5.8%
Bear Stearns 22,396 515
Lehman Brothers Holding 21,257 545
Morgan Stanley Group 8,288 395
-------
Total Financial Services 1,455
-------
Market
DIVERSIFIED GROWTH Value
PORTFOLIO(continued) Shares (000)
- -------------------------------------------------------
GROCERY PRODUCTS -- 3.2%
Dole Food 7,800 $291
IBP 14,200 378
Philip Morris 1,500 139
-------
Total Grocery Products 808
-------
HOSPITALS -- 1.4%
Health Management Associates,
Class A* 11,700 352
-------
HOTELS & LODGING -- 1.4%
HFS* 4,000 332
-------
OTHER PRODUCERS & MANUFACTURING-- 3.1%
Avery Dennison 6,900 368
Johnson Controls 5,600 405
-------
Total Other Producers &
Manufacturing 773
-------
MACHINERY & EQUIPMENT -- 1.4%
Applied Materials* 9,370 347
-------
MANAGED HEALTHCARE -- 1.9%
Foundation Health* 10,700 463
-------
MEDICAL SUPPLIES -- 4.9%
Boston Scientific* 12,415 636
Medtronic 10,400 594
-------
Total Medical Supplies 1,230
-------
METALS -- 2.0%
Phelps Dodge 7,800 491
-------
MULTI-LINE INSURERS -- 4.7%
Safeco 14,900 534
Travelers 9,744 640
-------
Total Multi-Line Insurers 1,174
-------
OIL & GAS PRODUCTION -- 5.7%
Panhandle Eastern 16,100 465
Shell Transport and Trading 4,400 347
Williams 12,989 612
-------
Total Oil & Gas Production 1,424
-------
OTHER HEALTH SERVICES -- 2.2%
HBO 6,689 562
-------
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENT OF NET ASSETS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Market
DIVERSIFIED GROWTH Value
PORTFOLIO(continued) Shares (000)
- ------------------------------------------------------
PAPER & PAPER PRODUCTS -- 1.3%
Kimberly-Clark 4,100 $331
-------
PETROLEUM REFINING -- 1.3%
Norsk Hydro A.S. ADR 7,900 323
-------
PRINTING & PUBLISHING -- 1.4%
Gartner Group, Class A* 6,300 348
-------
PROPERTY-CASUALTY INSURANCE-- 4.3%
General Re 3,100 474
Loews 7,260 600
-------
Total Property/Casualty
Insurance 1,074
-------
RAILROADS -- 1.5%
Canadian Pacific 18,900 369
-------
REAL ESTATE -- 0.2%
Castle & Cooke* 3,733 52
-------
RESTAURANTS -- 0.2%
McDonald's 1,200 60
-------
SEMI-CONDUCTORS/INSTRUMENTS-- 6.6%
Altera* 7,497 494
Avnet 9,400 403
KLA Instruments* 11,070 327
Xilinx* 11,212 433
-------
Total Semi-Conductors/
Instruments 1,657
-------
SOFTWARE -- 1.3%
Microsoft* 3,400 315
-------
TELEPHONE -- 0.8%
Sprint 4,400 190
-------
WHOLESALE -- 1.8%
McKesson 8,800 440
-------
Total Common Stock
(Cost $20,518,181) 23,407
-------
Face Market
DIVERSIFIED GROWTH Amount Value
PORTFOLIO(concluded) (000) (000)
- -------------------------------------------------------
REPURCHASE AGREEMENTS -- 4.6%
Lehman Government Securities (A)
5.42%, dated 01/31/96,
matures 02/01/96, repurchase
price $1,136,314 (collateralized
by U.S. Treasury Note, par value
$1,064,307, 7.75%, matures
11/30/99: market valu
$1,168,864) $1,136 $1,136
-------
Total Repurchase Agreements
(Cost $1,136,143) 1,136
-------
Total Investments -- 98.3%
(Cost $21,654,324) 24,543
-------
OTHER ASSETS AND LIABILITIES,
NET-- 1.7% 425
-------
NET ASSETS:
Portfolio shares of Class A (unlimited
authorization--no par value) based
on 2,415,724 outstanding shares of
beneficial interest $23,543
Portfolio shares of Class B (unlimited
authorization--no par value) based
on 18,895 outstanding shares of
beneficial interest 185
Distributions in Excess of Net
Investment Income (14)
Accumulated Net Realized Loss
on Investments (1,635)
Net Unrealized Appreciation
of Investments 2,889
-------
Net Assets-- 100.0% $24,968
=======
Net Asset Value, Offering Price and
Redemption Price Per Share--
Class A $10.26
=======
Net Asset Value, Offering Price and
Redemption Price Per Share--
Class B $10.20
=======
Maximum Offering Price Per Share--
Class B ($10.20/94.25%) $10.82
=======
* Non-income producing security
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STATEMENT OF OPERATIONS (000) GOLDEN OAK FAMILY OF FUNDS
For the Year Ended January 31, 1996
<TABLE>
<CAPTION>
PRIME OBLIGATION INTERMEDIATE-TERM DIVERSIFIED
MONEY MARKET INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Dividend Income $ -- $ -- $188
Interest Income 9,881 5,974 432
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Income 9,881 5,974 620
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Administration Fees 330 189 72
Waiver of Administration Fees (6) -- --
Investment Advisory Fees 495 472 267
Waiver of Investment Advisory Fees (477) (177) (26)
Investment Sub-Advisory Fees 124 -- --
Custodian Fees 14 9 5
Transfer Agent Fees 67 35 30
Professional Fees 37 22 7
Registration Fees 33 15 6
Distribution Fees(1) 138 1 --
Trustee Fees 6 4 2
Printing Expenses 15 12 3
Amortization of Organizational Costs 17 29 28
Other Expenses 6 3 2
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses 799 614 396
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income 9,082 5,360 224
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Securities Sold 5 1,628 3,411
Net Change in Unrealized Appreciation on Investments -- 4,323 2,316
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 5 5,951 5,727
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting From Operations 9,087 11,311 5,951
===========================================================================================================================
<FN>
(1) All distribution fees are incurred in the Class B Shares.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (000)
For the Periods Ended January 31,
<TABLE>
<CAPTION>
PRIME OBLIGATION
MONEY MARKET
PORTFOLIO
-------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Operations:
Net Investment Income $9,082 $4,371
Net Realized Gain (Loss) on Securities Sold 5 (13)
Net Change in Unrealized Appreciation (Depreciation) on Investments -- --
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Investment Operations 9,087 4,358
- ------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income
Class A (6,154) (3,990)
Class B (2,928) (382)
Realized Net Gains
Class A -- --
Class B -- --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (9,082) (4,372)
- ------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Class A:
Proceeds from Shares Issued 230,201 155,032
Reinvestment of Cash Distributions 7 4
Cost of Shares Redeemed (231,879) (163,135)
- ------------------------------------------------------------------------------------------------------------------
Total Class A Share Transactions (1,671) (8,099)
- ------------------------------------------------------------------------------------------------------------------
Class B:
Proceeds from Shares Issued 674,637 107,197
Reinvestment of Cash Distributions 123 6
Cost of Shares Redeemed (620,486) (86,288)
- ------------------------------------------------------------------------------------------------------------------
Total Class B Share Transactions 54,274 20,915
- ------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Capital Share Transactions 52,603 12,816
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 52,608 12,802
- ------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period 130,094 117,292
- ------------------------------------------------------------------------------------------------------------------
End of Period $182,702 $130,094
==================================================================================================================
Shares Issued and Redeemed
Class A:
Issued 230,201 155,032
Issued in Lieu of Cash Distributions 7 4
Redeemed (231,879) (163,135)
- ------------------------------------------------------------------------------------------------------------------
Total Class A Share Transactions (1,671) (8,099)
- ------------------------------------------------------------------------------------------------------------------
Class B:
Issued 674,637 107,197
Issued in Lieu of Cash Distributions 123 6
Redeemed (620,486) (86,288)
- ------------------------------------------------------------------------------------------------------------------
Total Class B Share Transactions 54,274 20,915
- ------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Capital Shares 52,603 12,816
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
GOLDEN OAK FAMILY OF FUNDS
<TABLE>
<CAPTION>
INTERMEDIATE-TERM DIVERSIFIED
INCOME GROWTH
PORTFOLIO PORTFOLIO
------------------ --------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Operations:
Net Investment Income $5,360 $3,778 $224 $209
Net Realized Gain (Loss) on Securities Sold 1,628 (2,162) 3,411 (376)
Net Change in Unrealized Appreciation (Depreciation) on Investments 4,323 (2,504) 2,316 (1,320)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Investment Operations 11,311 (888) 5,951 (1,487)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income
Class A (5,347) (3,761) (237) (209)
Class B (13) (17) (1) (1)
Realized Net Gains
Class A -- (5) (4,216) (562)
Class B -- -- (22) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (5,360) (3,783) (4,476) (774)
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Class A:
Proceeds from Shares Issued 28,102 29,647 7,863 13,863
Reinvestment of Cash Distributions -- 1 17 --
Cost of Shares Redeemed (9,830) (9,266) (17,509) (3,639)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Class A Share Transactions 18,272 20,382 (9,629) 10,224
- -----------------------------------------------------------------------------------------------------------------------------------
Class B:
Proceeds from Shares Issued 10 25 46 38
Reinvestment of Cash Distributions 7 9 22 3
Cost of Shares Redeemed (138) (61) (2) (76)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Class B Share Transactions (121) (27) 66 (35)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Capital Share Transactions 18,151 20,355 (9,563) 10,189
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 24,102 15,684 (8,088) 7,928
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period 80,378 64,694 33,056 25,128
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period $104,480 $80,378 $24,968 $33,056
===================================================================================================================================
Shares Issued and Redeemed
Class A:
Issued 2,857 3,060 737 1,341
Issued in Lieu of Cash Distributions -- -- 2 --
Redeemed (994) (961) (1,617) (352)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Class A Share Transactions 1,863 2,099 (878) 989
- -----------------------------------------------------------------------------------------------------------------------------------
Class B:
Issued 1 3 5 4
Issued in Lieu of Cash Distributions 1 1 2 --
Redeemed (14) (7) (1) (7)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Class B Share Transactions (12) (3) 6 (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Capital Shares 1,851 2,096 (872) 986
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
FINANCIAL HIGHLIGHTS GOLDEN OAK FAMILY OF FUNDS
For a Share Outstanding Throughout the Period
For the Periods Ended January 31,
<TABLE>
<CAPTION>
RATIO RATIO
OF OF
REALIZED NET NET NET NET RATIO OF RATIO OF
NET AND DISTRIBUTIONS ASSET ASSETS INCOME INCOME EXPENSES NET INCOME
ASSET UNREALIZED ------------------- VALUE END TO TO TO AVERAGE TO AVERAGE
VALUE NET GAIN (LOSS) NET NET END OF AVERAGE AVERAGE NET ASSETS NET ASSETS PORTFOLIO
BEGINNING INVESTMENT ON INVESTMENT REALIZED OF TOTAL PERIOD NET TO NET (EXCLUDING (EXCLUDING TURNOVER
OF PERIOD INCOME INVESTMENTS INCOME GAIN PERIOD RETURN (000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRIME OBLIGATION MONEY MARKET PORTFOLIO CLASS A
1996 $1.00 0.06 -- (0.06) -- $1.00 5.74% $107,409 0.40% 5.60% 0.70% 5.30% N/A
1995 1.00 0.04 -- (0.04) -- 1.00 4.21 109,076 0.40 4.20 0.68 3.92 N/A
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.87 117,188 0.40 2.83 0.67 2.56 N/A
PRIME OBLIGATION MONEY MARKET PORTFOLIO CLASS B
1996 $1.00 0.05 -- (0.05) -- $1.00 5.47% $75,293 0.65% 5.31% 0.95% 5.01% N/A
1995 1.00 0.04 -- (0.04) -- 1.00 3.95 21,018 0.65 3.95 0.93 3.67 N/A
1994(2) 1.00 -- -- -- -- 1.00 2.90* 104 0.65* 2.68* 0.93* 2.40* N/A
INTERMEDIATE-TERM INCOME PORTFOLIO CLASS A
1996 $9.52 0.56 0.63 (0.56) -- $10.15 12.83% $104,270 0.65% 5.68% 0.84% 5.49% 121.47%
1995 10.19 0.50 (0.67) (0.50) -- 9.52 (1.61) 80,064 0.65 5.21 0.86 5.00 141.51
1994(1) 10.00 0.46 0.23 (0.46) (0.04) 10.19 6.99 64,329 0.65 4.47 0.83 4.29 71.73
INTERMEDIATE-TERM INCOME PORTFOLIO CLASS B+
1996 $9.52 0.54 0.63 (0.54) -- $10.15 12.54% $210 0.90% 5.49% 1.09% 5.30% 121.47%
1995 10.19 0.48 (0.67) (0.48) -- 9.52 (1.85) 314 0.90 4.96 1.11 4.75 141.51
1994(3) 10.12 0.31 0.11 (0.31) (0.04) 10.19 6.72* 365 0.90* 4.27* 1.08* 4.09* 71.73
DIVERSIFIED GROWTH PORTFOLIO CLASS A
1996 $10.00 0.07 1.74 (0.07) (1.48) $10.26 18.81% $24,775 1.10% 0.62% 1.17% 0.55% 189.48%
1995 10.82 0.08 (0.64) (0.08) (0.18) 10.00 (5.24) 32,931 1.10 0.74 1.24 0.60 84.00
1994(1) 10.00 0.08 0.82 (0.08) -- 10.82 9.08 24,955 1.10 0.77 1.21 0.66 68.91
DIVERSIFIED GROWTH PORTFOLIO CLASS B+
1996 $9.96 0.04 1.72 (0.04) (1.48) $10.20 18.43% $193 1.35% 0.30% 1.42% 0.23% 189.48%
1995 10.81 0.05 (0.67) (0.05) (0.18) 9.96 (5.76) 125 1.35 0.49 1.49 0.35 84.00
1994(3) 9.54 0.02 1.27 (0.02) -- 10.81 22.00* 173 1.35* 0.33* 1.45* 0.23* 68.91
===================================================================================================================================
<FN>
* Annualized
+ Total return does not reflect the sales charge.
(1) Commenced operations February 1, 1993.
(2) Commenced operations January 20, 1994.
(3) Commenced operations June 18, 1993.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
1. Organization:
THE GOLDEN OAK FAMILY OF FUNDS are separate investment Portfolios of The Arbor
Fund (the "Trust"). The Trust was organized as a Massachusetts Business Trust
under a Declaration of Trust dated July 24, 1992 and had no operations through
February 1, 1993 other than those related to organizational matters and the sale
of initial shares to SEI Financial Management Corporation (the "Administrator"),
a wholly-owned subsidiary of SEI Corporation, on October 9, 1992. The Trust is
registered under the investment Company Act of 1940, as amended, (the "1940
Act") as an open-end management company. The financial statements included
herein relate to the Trust's Golden Oak Prime Obligation Money Market Portfolio
("the Money Market Portfolio"), Golden Oak Diversified Growth Portfolio ("the
Equity Portfolio"), and the Golden Oak Intermediate-Term Income Portfolio ("the
Bond Portfolio") (together, the "Portfolios"). The Portfolios' prospectus
provides a description of each Portfolio's investment objectives, policies and
strategies. The assets of each Portfolio are segregated, and a shareholder's
interest is limited to the Portfolio in which shares are held.
2. Significant Accounting Policies:
The following is a summary of the significant accounting policies followed by
the Portfolios.
SECURITY VALUATION--Investments in equity securities which are traded on a
national securities exchange (or reported on the NASDAQ national market
system) are stated at the last quoted sales price if readily available for
such equity securities on each business day; other equity securities traded
in the over-the-counter market and listed equity securities for which no
sale was reported on that date are stated at the last quoted bid price.
Debt obligations exceeding sixty days to maturity for which market
quotations are readily available are valued at the most recently quoted bid
price. Debt obligations with sixty days or less remaining until maturity
are valued at their amortized cost. Restricted securities for which
quotations are not readily available are valued at fair value using methods
determined in good faith under general trustee supervision. Investment
securities held by the Money Market Portfolio are stated at amortized cost
which approximates market value. Under the amortized cost method, any
discount or premium is amortized ratably to the maturity of the security
and is included in interest income. FEDERAL INCOME TAXES--It is each
Portfolio's intention to continue to qualify as a regulated investment
company for Federal income tax purposes by complying with the appropriate
provisions of the Internal Revenue Code of 1986, as amended. Accordingly,
no provision for Federal income taxes is required in the financial
statements. SECURITY TRANSACTIONS AND RELATED INCOME--Security transactions
are accounted for on the date the security is purchased or sold (trade
date). Dividend income is recognized on the ex-dividend date, and interest
income is recognized using the accrual method of accounting. Costs used in
determining realized gains and losses on sales of investment securities are
those of the specific securities sold. Purchase discounts and premiums on
securities held by the Bond Portfolio are accreted and amortized to
maturity using the effective interest method. REPURCHASE AGREEMENTS--The
Portfolios invest in tri-party repurchase agreements. Securities held as
collateral for tri-party
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
repurchase agreements are maintained in a segregated account by the
broker's custodian bank until maturity of the repurchase agreement.
Provisions of the repurchase agreements require that the market value of
the collateral, including accrued interest thereon, is sufficient in the
event of default of the counterparty. If the counterparty defaults and the
value of the collateral declines or if the counterparty enters an
insolvency proceeding, realization and/or retention of the collateral by
the Portfolios may be delayed or limited. NET ASSET VALUE PER SHARE--The
net asset value per share of each Portfolio is calculated on each business
day. In general, it is computed by dividing the assets of each Portfolio,
less its liabilities, by the number of outstanding shares of the Portfolio.
CLASSES OF SHARES--Class specific expenses are borne by that class. Income,
expenses and realized and unrealized gains and losses are allocated to the
respective classes on the basis of their relative daily net assets.
EXPENSES--Expenses that are directly related to one of the Portfolios are
charged directly to that Portfolio. Other operating expenses of the Trust
are prorated to the Portfolios on the basis of relative net assets.
OTHER--Distributions from net investment income are declared and paid
monthly to Shareholders of the Equity Portfolio. Distributions from net
investment income for the Money Market Portfolio and the Bond Portfolio are
declared daily and paid to Shareholders on a monthly basis. Any net
realized capital gains on sales of securities are distributed to
Shareholders at least annually.
3. Administration and Distribution Agreements:
The Trust and the Administrator have entered into an Administration Agreement
(the "Administration Agreement"). Under terms of the Administration Agreement,
the Administrator is entitled to a fee which is calculated daily and paid
monthly at an annual rate of .20% of the average daily net assets of each of the
Portfolios.
The Administrator has voluntarily agreed to waive a portion of its fee on the
Money Market Portfolio. Fee waivers are voluntary and may be terminated at any
time.
The Administrator serves as the shareholder servicing agent for the Portfolios.
Compensation for this service is paid under the Administration Agreement.
The Trust and SEI Financial Services Company (the "Distributor"), a wholly-owned
subsidiary of SEI Corporation, have entered into a Distribution Agreement (the
"Distribution Agreement"). The Distributor receives no fees for its distribution
services under the Distribution Agreement. The Trustees have adopted a
Distribution Plan pursuant to Rule 12b-1 of the 1940 Act (the "Plan") on behalf
of the Class B shares. The Plan provides for payment to the Distributor at an
annual rate of .25% of the average daily net assets for the Class B shares of
each Portfolio.
4. Investment Advisory Agreement:
The Trust has entered into an Investment Advisory Agreement with Citizens
Commercial &Savings Bank (the "Adviser") dated January 28, 1993 under which the
Adviser receives an annual fee equal to .74% of the average daily net assets of
the Equity Portfolio, .50% of the average daily net assets of the Bond Portfolio
and .30% of the average daily net assets of the Money Market
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
Portfolio. The Adviser has voluntarily agreed to waive all or a portion of its
fees (and to reimburse each Portfolio's expenses) in order to limit operating
expenses of the Class A and Class B shares (exclusive of distribution expenses)
to not more than 1.10% of the average daily net assets of the Equity Portfolio,
.65% of the average daily net assets of the Bond Portfolio and .40% of the
average daily net assets of the Money Market Portfolio. Fee waivers and expense
reimbursements are voluntary and may be terminated at any time.
Wellington Management Company (the "Sub-Adviser") serves as the investment
Sub-Adviser for the Money Market Portfolio pursuant to a sub-advisory agreement
dated January 28, 1993 with the Trust and the Adviser. The Sub-Adviser receives
an annual fee, computed daily and paid monthly, equal to .075% of the average
daily net assets of the Portfolio.
Nicholas-Applegate Capital Management serves as the investment Sub-Adviser for
the Equity Portfolio pursuant to a sub-advisory agreement dated September 1,
1995 with the Adviser.
5. Organizational Costs and Transactions with
Affiliates:
Organizational costs have been capitalized by the Trust and are being amortized
over sixty months beginning with the commencement of operations. In the event
any of the initial shares of the Trust are redeemed by any holder thereof during
the period that the Trust is amortizing its organizational costs, the redemption
proceeds payable to the holder thereof by the Trust will be reduced by the
unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption.
Certain officers and Trustees of the Trust are also officers of the
Administrator and/or Distributor. Such officers and Trustees are not compensated
by the Trust for serving in their respective roles.
6. Investment Transactions:
The cost of security purchases and the proceeds from the sale of securities,
other than short term investments during the year ended January 31, 1996, were
as follows:
INTERMEDIATE-TERM DIVERSIFIED
INCOME GROWTH
- ----------------------------------------------------
(000) (000)
Purchases:
U.S. Government $106,093 $ --
Other 21,853 60,992
Sales:
U.S. Government $77,288 $ --
Other 21,463 70,934
At January 31, 1996, the total cost of securities and the net realized gains or
losses on securities sold for Federal income tax purposes were not materially
different from amounts for financial reporting purposes. The aggregate gross
unrealized appreciation and depreciation on investment securities at January 31,
1996 for the Equity and Bond Portfolios are as follows:
INTERMEDIATE-TERM DIVERSIFIED
INCOME GROWTH
- --------------------------------------------------------
(000) (000)
Aggregate Gross
Unrealized
Appreciation $2,454 $3,391
Aggregate Gross
Unrealized
Depreciation (47) (502)
------ ------
Net Unrealized
Appreciation $2,407 $2,889
====== ======
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded) GOLDEN OAK FAMILY OF FUNDS
January 31, 1996
At January 31, 1996, the following Portfolios had available realized capital
losses to offset future net capital gains through fiscal year ended:
2003
(000)
----
Intermediate-Term Income $534
Diversified Growth 8
7. Concentration of Credit Risk:
The Money Market Portfolio invests primarily in money market instruments
maturing in one year or less whose ratings are within the highest ratings
category assigned by a nationally recognized statistical rating organization or,
if not rated, are believed to be of comparable quality. The Bond Portfolio
invests primarily in debt marketable instruments. The market value of these
investments will change in response to interest rate changes and other factors.
During periods of falling interest rates, the values of debt securities
generally rise. Conversely, during periods of rising interest rates the values
of such securities generally decline. The ability of the issuers of the
securities held by these Portfolios to meet their obligations may be affected by
economic and political developments in a specific industry, state or region.
Changes by recognized rating organizations in the ratings of any debt security
and in the ability of an issuer to make payments of interest and principal may
also affect the value of these investments.
<PAGE>
THE ARBOR FUND
Investment Adviser:
PNC INSTITUTIONAL MANAGEMENT CORPORATION
THE ARBOR FUND (the 'Trust') is an open-end management investment company that
offers financial institutions ('Shareholders') a convenient means of investing
their own funds, or funds for which they act in a fiduciary, agency or custodial
capacity, in one or more professionally managed diversified or nondiversified
portfolios of securities. This Prospectus relates to the following portfolios of
the Trust (the 'Portfolios'), each a money market portfolio:
o CALIFORNIA TAX EXEMPT PORTFOLIO
o INSTITUTIONAL TAX FREE PORTFOLIO
AN INVESTMENT IN THE PORTFOLIOS IS NEITHER INSURED NOR GUARANTEED BY THE UNITED
STATES GOVERNMENT. THERE IS NO ASSURANCE THAT THE PORTFOLIOS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Portfolios 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 May 31, 1996, has been filed with the Securities and Exchange
Commission and is available without charge by calling 1-800-545-6331. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MAY 31, 1996
<PAGE>
2
SUMMARY
The Portfolios are open-end management investment companies which provide a
convenient and economical way to invest in professionally managed diversified
and nondiversified portfolios of securities. The following summary provides
basic information about the shares of the California Tax Exempt Portfolio, a
nondiversified portfolio, and the Institutional Tax Free Portfolio, a
diversified portfolio (the 'Portfolios'). THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN
THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
What is the Investment Objective? Each of the Portfolios seeks to preserve
principal value and maintain a high degree of liquidity while providing current
income exempt from federal income taxes and, for the California Tax Exempt
Portfolio, to the extent possible, California state personal income taxes. There
can be no assurance that either Portfolio will achieve its investment objective
or be able to maintain a net asset value of $1.00 per share on a continuous
basis. See 'Investment Objective.'
What are the Permitted Investments? Under normal market conditions, each of the
Portfolios will invest at least 80% of its assets in municipal securities which
produce interest that, in the opinion of bond counsel, is exempt from federal
income tax and not included as a preference item under the alternative minimum
tax. In addition, the California Tax Exempt Portfolio will invest at least 65%
of its assets in municipal obligations which, in the opinion of bond counsel,
are exempt from California state personal income tax. These instruments will
satisfy quality, maturity and other standards set by the Trust and applicable
law. See 'Investment Policies,' 'General Investment Policies and Information'
and 'Description of Permitted Investments.'
Who is the Adviser? PNC Institutional Management Corporation serves as the
investment adviser of the Portfolios. See 'The Adviser.'
Who is the Administrator? SEI Financial Management Corporation serves as the
administrator and shareholder servicing agent of the Portfolios. See 'The
Administrator.'
Who is the Transfer Agent? DST Systems, Inc. serves as the transfer agent and
dividend disbursing agent for the Portfolios. See 'Transfer Agent.'
Who is the Distributor? SEI Financial Services Company serves as distributor of
the Portfolios' shares. See 'The Distributor.'
How do I Purchase and Redeem Shares? Purchases and redemptions may be made
through the Transfer Agent on days when the New York Stock Exchange and the
Federal Reserve wire system are open for business ('Business Days'). A purchase
order will be effective as of the Business Day received by the Distributor if
the Distributor receives an order and payment prior to 12:00 noon, Eastern time,
on such Business Day. Redemption orders must be placed prior to 12:00 noon,
Eastern time, on any Business Day for the order to be effective that day. See
'Purchase and Redemption of Shares.'
How are Dividends Paid? Substantially all of the net investment income
(exclusive of capital gain) of each Portfolio is determined and declared daily
as a dividend for Shareholders of record as of the close of business on that
day. Any realized net capital gain will be distributed at least annually.
Dividends are paid monthly in additional shares unless the Shareholder elects to
take the payment in cash. See 'General Information--Dividends.'
<PAGE>
3
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION FEES
<TABLE>
<CAPTION>
CALIFORNIA INSTITUTIONAL
TAX EXEMPT TAX FREE
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Transaction Fees.......................................................... None None
- ------------------------------------------------------------------------------------------------------------------
CALIFORNIA INSTITUTIONAL
ANNUAL OPERATING EXPENSES TAX EXEMPT TAX FREE
(AS A PERCENTAGE OF AVERAGE NET ASSETS) PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
Advisory Fees......................................................................... .095% .095%
12b-1 Fees............................................................................ None None
Other Expenses(1)..................................................................... .235% .105%
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses(2)........................................................... .330% .200%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Administrator has agreed to waive a portion of its fee in an amount that
operates to limit total operating expenses to not more than .33% of the
California Tax Exempt Portfolio's average daily net assets and .20% of the
Institutional Tax Free Portfolio's average daily net assets. Absent
voluntary waivers of fees, administration fees, as a percentage of average
daily net assets, would be .23% for the California Tax Exempt Portfolio and
.30% for the Institutional Tax Free Portfolio. Fee waivers by the
Administrator are voluntary and may be terminated at any time in its sole
discretion. Additional information may be found under 'The Administrator'
and 'The Distributor.'
(2) Absent the voluntary fee waivers described above, total operating expenses
would be .38% for the California Tax Exempt Portfolio and .48% for the
Institutional Tax Free Portfolio.
EXAMPLE
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<TABLE>
<CAPTION>
1 YR. 3 YRS. 5 YRS. 10 YRS.
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<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at
the end of each time period:
California Tax Exempt Portfolio................................. $ 3.00 $ 11.00 $ 19.00 $ 42.00
Institutional Tax Free Portfolio................................ $ 2.00 $ 6.00 $ 11.00 $ 26.00
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</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this
table is to assist the investor in understanding the various costs and expenses
that may be directly or indirectly borne by investors in the Portfolios. A
person who purchases shares through a financial institution may be charged
separate fees by that institution. Additional information may be found under
'The Adviser,' 'The Administrator' and 'The Distributor.'
<PAGE>
4
FINANCIAL HIGHLIGHTS THE ARBOR FUND
The following information has been audited by Price Waterhouse LLP, the Trust's
independent accountants, as indicated in their report dated March 8, 1996 on the
Trust's financial statements as of January 31, 1996 included in the Trust's
Statement of Additional Information under 'Financial Statements.' Additional
performance information is set forth in the 1996 Annual Report to Shareholders
and is available upon request and without charge by calling 1-800-545-6331. This
table should be read in conjunction with the Trust's financial statements and
notes thereto.
For a Share Outstanding Throughout the Period
For the Periods Ended January 31,
<TABLE>
<CAPTION>
REALIZED
NET ASSET AND DISTRIBUTIONS NET ASSETS
VALUE NET UNREALIZED FROM NET NET ASSET END OF
BEGINNING INVESTMENT LOSSES ON INVESTMENT CONTRIBUTION VALUE END TOTAL PERIOD
OF PERIOD INCOME SECURITIES INCOME OF CAPITAL OF PERIOD RETURN (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT PORTFOLIO
1996 .......... $ 1.00 0.034 -- (0.034) -- $ 1.00 3.42%++ $ 391,682
1995 .......... 1.00 0.027 (.008) (0.027) .008 1.00 2.79+ 396,004
1994(1) ....... 1.00 0.007 -- (0.007) -- 1.00 2.17* 402,814
INSTITUTIONAL TAX-FREE PORTFOLIO
1996 .......... $ 1.00 0.036 -- (0.036) -- $ 1.00 3.69% $ 116,736
1995 .......... 1.00 0.028 -- (0.028) -- 1.00 2.80 113,724
1994(1) ....... 1.00 0.007 -- (0.007) -- 1.00 2.20* 130,768
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<CAPTION>
RATIO
RATIO OF OF NET
EXPENSES TO INCOME TO
RATIO OF RATIO OF AVERAGE NET AVERAGE
EXPENSES TO NET INCOME ASSETS NET ASSETS
AVERAGE NET TO AVERAGE (EXCLUDING (EXCLUDING
ASSETS NET ASSETS WAIVERS) WAIVERS)
- -----------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT PORTFOLIO
1996 .......... 0.42% 3.36% 0.42% 3.36%
1995 .......... 0.28 2.72 0.34 2.66
1994(1) ....... 0.28* 2.14* 0.34* 2.08*
INSTITUTIONAL TAX-FREE PORTFOLIO
1996 .......... 0.30% 3.60% 0.48% 3.42%
1995 .......... 0.30 2.73 0.46 2.57
1994(1) ....... 0.30* 2.17* 0.47* 2.00*
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- ------------------------------------------------------------------------
<CAPTION>
</TABLE>
<TABLE>
<S> <C>
* Annualized.
+ The total return for the period ended January 31, 1995 includes the effect of a capital contribution from an
affiliate of the former Adviser. Without the capital contribution, the total return would have been .74%.
++ The total return for the period ended January 31, 1996 includes the effect of a capital contribution from an
affiliate of the former Adviser. Without the capital contribution, the total return would have been 2.42%.
(1) Commenced operations on October 6, 1993.
</TABLE>
<PAGE>
5
THE PORTFOLIOS AND THE TRUST
This Prospectus offers shares of the California Tax Exempt Portfolio and the
Institutional Tax Free Portfolio (each a 'Portfolio'). The Portfolios are two
separate investment portfolios of The Arbor Fund (the 'Trust'), an open-end
management investment company. The California Tax Exempt Portfolio (the
'California Portfolio') is a nondiversified portfolio and the Institutional Tax
Free Portfolio (the 'Institutional Portfolio') is a diversified portfolio, as
described below. The Portfolios are offered together in order to provide
investors with an investment alternative.
INVESTMENT OBJECTIVE
The investment objective of each Portfolio is to preserve principal value and
maintain a high degree of liquidity while providing current income exempt from
federal income taxes, and for the California Portfolio to the extent possible,
California state personal income taxes. There is no assurance that a Portfolio's
investment objective will be met.
Each Portfolio 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 each
Portfolio. Under these regulations, each Portfolio 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. For a further discussion of these rules, see the 'Description of Permitted
Investments.'
INVESTMENT POLICIES
THE CALIFORNIA PORTFOLIO invests, under normal market conditions, at least 80%
of its assets in municipal securities which produce interest that, in the
opinion of bond counsel, is exempt from federal income tax and not included as a
preference item under the federal alternative minimum tax ('AMT'). This
investment policy is a fundamental policy of the Portfolio. At least 65% of the
Portfolio's assets will be invested in municipal obligations which, in the
opinion of bond counsel, are exempt from California state personal income tax.
These constitute municipal obligations of the State of California and its
political subdivisions or municipal authorities and municipal obligations issued
by territories or possessions of the United States.
Municipal securities that the Portfolio may purchase consist of municipal bonds,
municipal notes, tax exempt commercial paper and participations in instruments
issued in connection with lease obligations or installment purchase contract
obligations of municipalities ('municipal lease obligations') that are rated, at
the time of investment, by at least two nationally recognized statistical rating
organizations (each, an 'NRSRO') (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 by the Portfolio's investment adviser (a 'first tier
security'), or rated according to the foregoing criteria in the second highest
short-term rating category or, if unrated, determined to be of comparable
quality by the Portfolio's investment adviser (a 'second tier security').
Some municipal obligations produce interest which, while exempt from ordinary
federal income tax, is subject to the AMT.
The Portfolio's concentration in investments in California municipal securities
involves greater risks than if its investments were more diversified. These
risks result from (1) provisions in the California Constitution and other
statutes that limit the taxing and spending authority of California government
entities, (2) the general financial condition of the State of California, and
(3) a variety of California laws and regulations that may affect, directly or
indirectly, California municipal securities. The ability of issuers of municipal
securities to pay interest on, or repay principal of, municipal securities may
be impaired as a result. A more complete description of these risks is contained
in the Statement of Additional Information.
<PAGE>
6
The Portfolio will invest in short-term securities, or in commitments to
purchase such securities on a when-issued or delayed delivery basis. Under
normal market conditions, the adviser has discretion to invest up to 20% of the
Portfolio's assets in taxable money market instruments (including repurchase
agreements) and securities subject to the AMT. For temporary defensive purposes
when the Adviser determines that market conditions warrant, the Portfolio may
invest up to 100% of its assets in municipal obligations of other states or
taxable money market instruments (including repurchase agreements, U.S. Treasury
securities and instruments of certain U.S. commercial banks or savings and loan
institutions).
Taxable money market instruments in which the Portfolio may invest consist of
U.S. Treasury bills, other marketable obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, whether or not backed by the
full faith and credit of the United States Treasury; commercial paper;
instruments of U.S. commercial banks or savings and loan institutions (not
including foreign branches of U.S. banks or U.S. branches of foreign banks)
which are members of the Federal Reserve System, the Bank Insurance Fund and
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
and which have total assets of $1 billion or more as shown on their last
published financial statements at the time of investment; and repurchase
agreements involving any of such obligations.
The Portfolio is a non-diversified investment company, as defined in the
Investment Company Act of 1940, as amended (the '1940 Act'), which means that
more than 5% of its assets may be invested in one or more issuers, although the
Adviser does not intend to invest more than 10% of its assets in any single
issuer with the exception of securities which are issued or guaranteed by the
U.S. Government. Since a relatively high percentage of assets of the Portfolio
may be invested in the obligations of a limited number of issuers, the value of
shares of the Portfolio may be more susceptible to any single economic,
political or regulatory occurrence than the shares of a diversified investment
company.
Shares of the California Tax Exempt Portfolio are offered only to residents of
states in which the shares are eligible for purchase.
For additional information regarding risks and permitted investments, see
'Description of Permitted Investments' in this Prospectus and the Statement of
Additional Information.
THE INSTITUTIONAL PORTFOLIO invests in U.S. dollar denominated municipal
securities of issuers located in all fifty states, the District of Columbia,
Puerto Rico and other U.S. territories and possessions. At least 80% of the
Portfolio's total assets will be invested in securities the interest on which is
exempt from federal income taxes and not included as a preference item under the
AMT, based on opinions from bond counsel for the issuers. This investment policy
is a fundamental policy of the Portfolio.
Municipal securities that the Portfolio may purchase consist of municipal bonds,
municipal notes, tax-exempt commercial paper and municipal lease obligations
that are 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 by the
Portfolio's investment adviser (a 'first tier security'), or rated according to
the foregoing criteria in the second highest short-term rating category or, if
unrated, determined to be of comparable quality by the Portfolio's investment
adviser (a 'second tier security').
The Portfolio will invest in short-term securities, in commitments to purchase
such securities on a when-issued or delayed delivery basis. Under normal market
conditions, the adviser has discretion to invest up to 20% of the Portfolio's
assets in taxable money market instruments (including repurchase agreements) and
securities subject to the AMT. Taxable money market instruments in which the
Portfolio may invest are the same as those described above under the California
Portfolio.
<PAGE>
7
The Portfolio is a diversified investment company, as defined in the 1940 Act
and, accordingly, is subject to the first limitation set forth in 'Investment
Limitations' below.
For additional information regarding risks and permitted investments, see
'Description of Permitted Investments' in this Prospectus and the Statement of
Additional Information.
GENERAL INVESTMENT POLICIES AND INFORMATION
The Portfolios may invest in when-issued or delayed delivery securities and
variable and floating rate obligations. When investing in when-issued
securities, the Portfolios will not accrue income until delivery of the
securities and will invest in such securities only for purposes of actually
acquiring the securities and not for the purpose of leveraging. In addition, the
Portfolios reserve the right to engage in securities lending.
Each Portfolio also reserves the right to purchase securities on a standby
commitment or put basis. There will be no limit to the percentage of portfolio
securities that a Portfolio may purchase subject to a standby commitment or put
but the amount paid directly or indirectly for a standby commitment held by a
Portfolio will not exceed 1/2 of 1% of the value of the total assets of the
Portfolio. Furthermore, each Portfolio will not invest more than 10% of its net
assets in securities which are considered to be illiquid.
The Portfolios intend to satisfy the diversification requirements necessary to
qualify as regulated investment companies under the Internal Revenue Code of
1986, as amended (the 'Code'), by limiting their investments so that, at the
close of each quarter of the taxable year, (a) not more than 25% of the market
value of the Portfolio's total assets is invested in the securities (other than
U.S. Government securities) of a single issuer and (b) at least 50% of the
market value of the Portfolio's total assets is represented by (i) cash and cash
items, (ii) U.S. Government securities and (iii) other securities limited in
respect to any one issuer to an amount not greater in value than 5% of the
market value of the Portfolio's total assets and to not more than 10% of the
outstanding voting securities of such issuer.
State, municipal and other short-term notes having the highest rating are of the
best quality. They have strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the market for
refinancing or both. Short-term municipal securities rated in the second highest
short-term rating category are of high quality. Margins of protection are ample
although not so large as in the preceding group. Bonds rated AA, the second
highest rating category, qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from the highest rated issues only in small degree. Together with the
highest rated bonds, 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 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 the highest rated bonds.
In the event a security owned by a Portfolio is downgraded below the rating
categories described in the section 'Investment Policies', the Portfolios'
investment adviser will review and take appropriate action with regard to such
security.
INVESTMENT LIMITATIONS
The following investment limitations and the investment objective of each
Portfolio are fundamental policies and cannot be changed with respect to a
Portfolio without the consent of the holders of a majority of that Portfolio's
outstanding shares.
A Portfolio may not:
1. Purchase any securities which would cause more than 25% of the total assets
of the Portfolio to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that this
<PAGE>
8
limitation does not apply to investments in obligations issued or guaranteed
by the U.S. Government or its agencies, instrumentalities and repurchase
agreements involving such securities or, for the California Portfolio, to
investments in tax-exempt securities issued by governments or political
subdivisions of governments.
2. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of the total assets of the Portfolio.
All borrowings will be repaid before making additional investments and any
interest paid on such borrowings will reduce the income of the Portfolio.
In addition, the Institutional Portfolio may not purchase securities of any
issuer (except securities issued or guaranteed by the United States, its
agencies or instrumentalities and repurchase agreements involving such
securities) if as a result more than 5% of the total assets of the Portfolio
would be invested in the securities of such issuer; provided that the Portfolio
may invest up to 25% of its total assets without regard to this restriction as
permitted by applicable law.
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations, identified as either fundamental or not, are
set forth in the Statement of Additional Information.
THE ADVISER
Effective December 1, 1995, PNC Institutional Management Corporation ('PIMC' or
the 'Adviser') serves as investment adviser to the Portfolios pursuant to
investment advisory agreements (the 'Advisory Agreements') with the Trust. Under
the Advisory Agreements, the Adviser makes the investment decisions for the
assets of the Portfolios and continuously reviews, supervises and manages each
Portfolio's investment program. The Adviser is independent of SEI Financial
Management Corporation (the 'Administrator') and discharges its responsibilities
subject to the supervision of, and policies established by, the Trustees of the
Trust.
PIMC is a wholly owned subsidiary of PNC Asset Management Group, Inc., which is
a wholly owned subsidiary of PNC Bank, National Association ('PNC Bank'). PIMC
was organized in 1977 by PNC Bank to perform advisory services for investment
companies and has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809. PNC Asset Management Group, Inc.'s principal business address is
1835 Market Street, Philadelphia, Pennsylvania 19102, and PNC Bank has principal
offices at Broad and Chestnut Streets, Philadelphia, Pennsylvania 19102. PNC
Bank and its predecessors have been in the business of managing the investments
of fiduciary and other accounts in the Philadelphia area since 1847. PNC Bank is
a wholly owned indirect subsidiary of PNC Bank Corp. PNC Bank Corp. is a
multi-bank holding company.
PNC Bank Corp., headquartered in Pittsburgh, Pennsylvania, is one of the largest
financial services organizations in the United States, with banking subsidiaries
in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts
and Florida. Its major businesses include corporate banking, consumer banking,
mortgage banking and asset management.
PNC Financial Services Group is PNC Bank Corp.'s mutual fund complex,
headquartered in Wilmington, Delaware. This group includes PIMC, PFPC Inc. (a
wholly owned, indirect subsidiary of PNC Bank Corp.) and PNC Bank. In 1973,
Provident National Bank (predecessor to PNC Bank) commenced advising the first
institutional money market mutual fund offered in the United States.
The PNC Financial Services Group is one of the largest U.S. bank managers of
mutual funds, with assets currently under management in excess of $30 billion as
of January 31, 1996 (including approximately $3.7 billion in tax-exempt money
market funds). This group, through PFPC and PFPC International Ltd., is also a
leading mutual fund service provider, having contractual relationships with
approximately 393 mutual funds with approximately 3.3 million shareholders and
in excess of $110 billion in assets as of January 31,
<PAGE>
9
1996. Additionally, this group, through PNC Bank's Institutional Investment
Service department, provides investment research to some 250 financial
institutions located in the United States and abroad. PNC Bank provides
custodial services for approximately $282 billion in assets including
approximately $170 billion in mutual fund assets as of January 31, 1996.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .095% of the average daily net assets of
each of the California Portfolio and the Institutional Portfolio.
THE ADMINISTRATOR
SEI Financial Management Corporation, 680 East Swedesford Road, Wayne, PA 19087
a wholly-owned subsidiary of SEI Corporation ('SEI'), provides the Portfolios
with administrative services, other than investment advisory services,
regulatory reporting, all necessary office space, equipment, personnel and
facilities, pursuant to an administration agreement with the Trust (the
'Administration Agreement'). The Administrator also serves as the shareholder
servicing agent of the Trust under the terms of the Administration Agreement.
For its services, the Administrator is entitled to a fee which is calculated
daily and paid monthly at an annual rate of .23% of the average daily net assets
of the California Portfolio and .30% of the average daily net assets of the
Institutional Portfolio. The Administrator has voluntarily agreed to waive a
portion of its fee in order to limit annual operating expenses (as a percentage
of average daily net assets) to .33% of the California Tax Exempt Portfolio and
.20% of the Institutional Portfolio. The Administrator reserves the right, in
its sole discretion, to terminate this voluntary fee waiver at any time. For the
fiscal year ended January 31, 1996, the Portfolio paid the Administrator
administration fees, as a percentage of average daily net assets, of .23% of the
California Portfolio and .13% of the Institutional Portfolio.
THE TRANSFER AGENT
DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105 (the
'Transfer Agent') serves as the transfer agent and dividend disbursing agent for
the Portfolios under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Financial Services Company (the 'Distributor'), 680 East Swedesford Road,
Wayne, Pennsylvania, 19087, a wholly-owned subsidiary of SEI, serves as the
distributor of the Portfolios' shares pursuant to a distribution agreement with
the Trust (the 'Distribution Agreement'). The Distributor receives no fee for
its services. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers.
The Distributor may, from time to time and at its own expense, provide
promotional incentives in the form of cash or other compensation to certain
financial institutions and intermediaries whose registered representatives have
sold or are expected to sell significant amounts of the shares of a Portfolio.
Such other compensation may take the form of payments for travel expenses,
including lodging, incurred in connection with trips taken by qualifying
registered representatives to places within or outside of the United States.
PURCHASE AND REDEMPTION OF SHARES
Shares are sold primarily to financial institutions, for the investment of funds
for which they act in a fiduciary, agency or custodial capacity. Shares are sold
without distribution fees, although financial institutions may charge their
customer accounts for services provided in connection with the purchase of
shares. Information concerning these services and any charges will be provided
to customers by the financial institution. Shares will be held of record by the
financial institutions, although customers may have the right to vote the shares
depending upon the terms of their relationship with the financial institution.
Confirmations of share purchases and
<PAGE>
10
redemptions will be sent to the financial institution as the shareholder of
record.
Purchases and redemptions of shares of a Portfolio may be made on days when the
New York Stock Exchange and the Federal Reserve wire system are open for
business ('Business Days').
There are no minimum initial investment or subsequent investment amounts
applicable to the purchase of shares of the Portfolios.
A purchase order will be effective as of the day received by the Transfer Agent
and eligible to receive dividends declared the same day if the Transfer Agent
receives the order before 12:00 noon, Eastern time, and the Custodian receives
Federal funds before the close of business on such day. Otherwise, the purchase
order will be effective the next Business Day assuming Federal funds are
received by the close of business on such day. The purchase price is the net
asset value per share next computed after the order is received and accepted by
the Trust. The net asset value per share of a Portfolio is determined by
dividing the total value of its investments and other assets, less any
liabilities, by its total outstanding shares. The net asset value per share is
calculated as of 12:00 noon, Eastern Time, each Business Day based on the
amortized cost method described in the Statement of Additional Information.
The Trust reserves the right to reject a purchase order when the Distributor and
Transfer Agent determines that it is not in the best interest of the Trust or
Shareholder(s).
Redemption orders may be made any time before 12:00 noon, Eastern Time, in order
to receive that day's redemption price. For redemption orders received before
12:00 noon, Eastern Time, payment will be made the same day by transfer of
Federal Funds. Otherwise, payment will be made on the next Business Day. The
redemption price is the net asset value per share of the Portfolio next
determined after receipt by the Transfer Agent of the redemption order. Redeemed
shares are entitled to dividends declared the day the redemption order is
effective.
Financial institutions may impose an earlier cut-off time for receipt of
purchase orders directed through them to allow for processing and transmittal of
these orders to the Transfer Agent for effectiveness the same day. Customers
should contact their financial institution for information as to the
institution's procedures for transmitting purchase, exchange or redemption of
shares to the Fund. Customers who desire to transfer the registration of shares
beneficially owned by them but held of record by a financial institution should
contact the institution to accomplish such change. Other Shareholders who desire
to transfer the registration of their shares should contact the Transfer Agent
to accomplish such change.
The purchase price and the redemption price are expected to remain constant at
$1.00 per share.
COMPUTATION OF YIELD
From time to time a Portfolio advertises its 'current yield,' 'effective
compound yield' and 'tax equivalent yield.' These yield figures are based on
historical earnings and are not intended to indicate future performance. No
representation can be made concerning actual future yields. The 'current yield'
of the Portfolio refers to the income generated by an investment in a Portfolio
over a stated 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 Portfolio 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. The 'tax equivalent yield'
is calculated by determining the rate of return that would have been achieved on
a fully taxable investment to produce the after-tax equivalent of the
Portfolio's yield, assuming certain tax brackets for a Shareholder.
<PAGE>
11
Each Portfolio may periodically compare performance to other mutual funds
tracked by mutual fund rating services, to broad groups of comparable mutual
funds or to unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs.
TAXES
The following summary of 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 each
Portfolio or its Shareholders. Accordingly, Shareholders are urged to consult
their tax advisors regarding specific questions as to federal, state and local
income taxes.
State and local tax consequences of an investment in the Portfolios may differ
from the federal income tax consequences described below. Additional information
concerning taxes is set forth in the Statement of Additional Information.
TAX STATUS OF A PORTFOLIO:
Each Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Trust's other portfolios. Each Portfolio intends to
qualify for the special tax treatment afforded regulated investment companies as
defined under Subchapter M of 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) that it
distributes to Shareholders.
TAX STATUS OF DISTRIBUTIONS:
Each Portfolio will distribute all of its net investment income (including, for
this purpose, net short-term capital gains) to Shareholders. Dividends from net
investment income will be taxable to Shareholders as ordinary income whether
received in cash or in additional shares. Dividends from net capital gains (the
excess of net long-term capital gain over net short-term capital loss) will be
treated as long-term capital gains, regardless of how long the Shareholder has
held shares. Corporate shareholders should note that Portfolio distributions
will not qualify for the dividends-received deduction that is generally
available to corporate taxpayers.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the Portfolio's total assets consists of obligations the interest on which is
excludable from gross income, the Portfolio may pay 'exempt-interest dividends'
to its Shareholders. Those dividends constitute the portion of the aggregate
dividends designated by the Portfolio equal to the excess of the excludable
interest over certain amounts disallowed as deductions. Exempt-interest
dividends are excludable from a Shareholder's gross income for federal income
tax purposes but may have certain collateral federal tax consequences as
described in the Statement of Additional Information.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolio to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of 'exempt-interest'
dividends.
Interest on indebtedness incurred or continued by a Shareholder in order to
purchase or carry shares of the Portfolios is not deductible for federal income
tax purposes. Furthermore, the Portfolio may not be an appropriate investment
for persons (including corporations and other business entities) who are
'substantial users' (or persons related to 'substantial users') of facilities
financed by industrial development private activity bonds. Such persons should
consult their advisers before purchasing shares. A 'substantial user' is defined
generally to include 'certain persons' who regularly use in their trade or
business a part of a facility financed from the proceeds of such bonds.
Interest received on direct U.S. Treasury obligations is exempt from tax at the
state level when received directly and may be exempt, depending on the state,
when received by a Shareholder from a
<PAGE>
12
Portfolio provided certain conditions are satisfied. Interest received on
repurchase agreements collateralized by U.S. Government obligations normally is
not exempt from state taxation. Each Portfolio will inform Shareholders annually
of the percentage of income and distributions derived from direct U.S. Treasury
obligations. Shareholders should consult their tax advisors to determine whether
any portion of the income dividends received from a Portfolio is considered tax
exempt in their particular states.
Each Portfolio intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax.
Dividends declared by a Portfolio in October, November or December of any year
and payable to Shareholders of record on a date in such a month will be deemed
to have been paid by the Portfolio and received by the Shareholders on December
31 of the year declared if paid by the Portfolio during the following January.
The Portfolios make annual reports to Shareholders of the Federal income tax
status of dividends and distributions, and with respect to the California
Portfolio, the annual report provides the tax status of such dividends and
distributions with respect to California state personal income tax.
CALIFORNIA TAXES
The California Portfolio intends to qualify to pay dividends to Shareholders
that are exempt from California personal income tax ('California exempt-interest
dividends'). The Portfolio will qualify to pay California exempt-interest
dividends if (1) at the close of each quarter of the Portfolio's taxable year,
at least 50 percent of the value of the Portfolio's total assets consists of
obligations the interest on which would be exempt from California personal
income tax if the obligations were held by an individual ('California Portfolio
Obligations') and (2) the Portfolio continues to qualify as a regulated
investment company.
If the Portfolio qualifies to pay California exempt-interest dividends,
dividends distributed to Shareholders will be considered California exempt-
interest dividends if they meet certain requirements. See the Statement of
Additional Information. The Portfolio will notify Shareholders of the amount of
exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the Portfolio
may not be entitled to exclude California exempt-interest dividends from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends will be taxable to Shareholders at ordinary income tax
rates for California personal income tax purposes to the extent of the
Portfolio's earnings and profits.
Interest on indebtedness incurred or continued by a Shareholder in connection
with the purchase of shares of the Portfolio will not be deductible for
California personal income tax purposes if the Portfolio distributes California
exempt-interest dividends.
The foregoing is a general, abbreviated summary of certain of the provisions of
the California Revenue and Taxation Code presently in effect as they directly
govern the taxation of Shareholders subject to California personal income tax.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Portfolio transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
GENERAL INFORMATION
THE TRUST
The Trust is an open-end management investment company that has diversified and
non-diversified portfolios. The Trust is organized as a Massachusetts Business
Trust under a Declaration of Trust dated July 24, 1992. The Declaration of Trust
permits the Trust to offer separate portfolios of shares and different classes
of shares within each portfolio. All consideration received by the Trust for
<PAGE>
13
shares of any portfolio and all assets of such portfolio belong to that
portfolio and are subject to liabilities related thereto.
The Trust 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 and registering the
shares under federal and state securities laws, pricing, insurance expenses,
litigation and other extraordinary expenses, brokerage costs, interest charges,
taxes and organization expenses.
Please refer to 'Financial Highlights' in this Prospectus for more information
regarding the Portfolios' expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of 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 the Shareholder of record to one vote. 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.
REPORTING
The Trust issues unaudited financial information semiannually 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 DST Systems, Inc., P.O. Box 419240,
Kansas City, Missouri 64141-6240.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
each Portfolio is determined and declared on each Business Day as a dividend for
Shareholders of record as of the close of business on that day. Dividends are
paid by the Portfolio in additional shares, unless the Shareholder has elected
to take such payment in cash, on the first business day of each month.
Shareholders may change their election by providing written notice to the
Administrator at least 15 days prior to the distribution. Currently, capital
gains of the Portfolio, if any, are distributed at least annually.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Price Waterhouse LLP
serves as the independent accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
PA 19101 (the 'Custodian'), acts as custodian of the Trust. The Custodian holds
cash, securities and other assets of the Trust as required by the 1940 Act.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of certain of the permitted investments for each
Portfolio:
COMMERCIAL PAPER--Commercial paper is a term used to designate unsecured
short-term promissory
<PAGE>
14
notes issued by banks, municipalities, corporations and other entities.
Maturities on these issues vary from a few to 270 days.
MUNICIPAL SECURITIES--Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses and for lending such funds to other public institutions and
facilities, and (ii) certain private activity and industrial development bonds
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
(tolls from a toll bridge, for example). Certificates of participation represent
an interest in an underlying obligation or commitment, such as an obligation
issued in connection with a leasing arrangement. The payment of principal and
interest on private activity and industrial development bonds generally is
dependent solely on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Municipal securities include both municipal notes and
municipal bonds. Municipal notes include general obligation notes, tax
anticipation notes, revenue anticipation notes, bond anticipation notes,
certificates of indebtedness, demand notes and construction loan notes and
participation interests in municipal notes. Municipal bonds include general
obligation bonds, revenue or special obligation bonds, private activity and
industrial development bonds and participation interests in municipal bonds.
The Portfolios may purchase municipal lease obligations, including certificates
of participation ('COPs') in municipal leases. The Portfolios may acquire
municipal lease obligations that may be assigned by the lessee to another party
provided the obligation continues to provide tax-exempt interest. The Portfolios
will not purchase municipal lease obligations to the extent they hold municipal
lease obligations and illiquid securities in an amount exceeding 10% of their
respective total assets unless the Adviser determines that the municipal lease
obligations are liquid pursuant to guidelines established by the Board of
Trustees of the Trust. Pursuant to these guidelines, the Advisor, in making this
liquidity determination, will consider, among other factors, the strength and
nature of the secondary market for such obligations, the prospect for its future
marketability and whether such obligations are rated. The Board of Trustees of
the Trust will be responsible for determining the credit quality of unrated
municipal leases, on an ongoing basis, including an assessment of the likelihood
that the lease will not be cancelled. In addition, the Portfolios may purchase
participation interests in other municipal securities (such as industrial
development bonds).
Restrictions on Investments in Municipal Securities. The Adviser may not invest
more than 25% of a Portfolio's assets in municipal securities the interest on
which is derived from revenues of similar type projects. This restriction does
not apply to municipal securities in any of the following categories: public
housing authorities; general obligations of states and localities; state and
local housing finance authorities; or municipal utilities systems. Moreover, in
seeking to attain its investment objective a Portfolio may invest all or any
part of its assets in municipal securities that are industrial development
bonds.
Economic, business, or political developments might affect all municipal
securities of a similar type. To the extent that a significant portion of a
Portfolio's assets are invested in municipal securities payable from revenues on
similar projects, the Portfolio will be subject to the peculiar risks presented
by such projects to a greater extent than it would be if the Portfolio's assets
were not so invested. For example, certain municipal securities may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue and legislation may have the effect of limiting ad
valorem taxes on real property or restricting the ability of taxing entities to
increase real property tax revenues. Municipal securities that are payable only
<PAGE>
15
from the revenues derived from a particular facility, such as a utility or
housing project, may be adversely affected by laws or regulations that make it
more difficult for the particular facility to generate revenues sufficient to
pay such interest and principal, including, among others, laws and regulations
that limit the amount of fees, rates or other charges that may be imposed for
use of the facility or that increase competition among facilities of that type
or that limit or otherwise have the effect of reducing the use of such
facilities generally, thereby reducing the revenues generated by the particular
facility. If the payment of interest and principal on municipal securities are
insured in whole or in part by a government created fund, the municipal
securities may be adversely affected by laws or regulations that restrict the
aggregate insurance proceeds available for payment of principal and interest in
the event of a default on such securities. State and local tax revenues
generally mirror economic conditions and may be adversely affected by regional
or national recessions.
REPURCHASE AGREEMENTS--Repurchase agreements are agreements by which a Portfolio
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 Portfolio will have actual or constructive
possession of the security as collateral for the repurchase agreement.
Collateral must be maintained at a value at least equal to 102% of the
repurchase price. The Portfolio bears a risk of loss in the event the other
party defaults on its obligations and the Portfolio is delayed in or prevented
from disposing of the collateral securities or if the Portfolio realizes a loss
in the sale of the collateral securities. The Portfolio 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 money market
funds 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 nationally
recognized statistical rating organizations (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 (a '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.
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 Portfolio 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 of reducing the yield otherwise payable on the underlying
security. The Portfolio will limit standby commitment or put transactions to
institutions believed to present minimal credit risk.
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
<PAGE>
16
with a demand notice period exceeding seven days may be considered illiquid if
there is no secondary market or remarketing agent making a 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.
A Portfolio will maintain with the Custodian a separate account with liquid high
grade debt securities or cash in an amount at least equal to these commitments.
The interest rate realized on these securities is fixed as of the purchase date
and no interest accrues to a Portfolio before settlement. These securities are
subject to market fluctuations 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 a Portfolio generally purchases securities on a when-issued or
forward commitment basis with the intention of actually acquiring securities, a
Portfolio may dispose of a when-issued security or forward commitment prior to
settlement if it deems appropriate.
<PAGE>
17
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Summary............................................. 2 The Administrator................................... 9
Expense Summary..................................... 3 The Transfer Agent.................................. 9
Financial Highlights................................ 4 The Distributor..................................... 9
The Portfolios and The Trust........................ 5 Purchase and Redemption of Shares................... 9
Investment Objective................................ 5 Computation of Yield................................ 10
Investment Policies................................. 5 Taxes............................................... 11
General Investment Policies and Information......... 7 General Information................................. 12
Investment Limitations.............................. 7 Description of Permitted Investments 14
The Adviser......................................... 8
</TABLE>
<PAGE>
TRUST:
THE ARBOR FUND
PORTFOLIOS:
CALIFORNIA TAX EXEMPT PORTFOLIO
INSTITUTIONAL TAX FREE PORTFOLIO
INVESTMENT ADVISER:
PNC INSTITUTIONAL MANAGEMENT CORPORATION
This Statement of Additional Information is not a prospectus and relates only to
the Trust's California Tax Exempt Portfolio and Institutional Tax Free Portfolio
(the "Portfolios"). It is intended to provide additional information regarding
the activities and operations of the Trust and should be read in conjunction
with the Portfolios' Prospectus dated May 31, 1996. A Prospectus may be obtained
by calling 1-800-545-6331.
TABLE OF CONTENTS
THE TRUST...................................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS........................................S-2
INVESTMENT LIMITATIONS.....................................................S-13
NON-FUNDAMENTAL POLICIES...................................................S-14
THE ADVISER ...............................................................S-15
THE ADMINISTRATOR..........................................................S-16
THE DISTRIBUTOR............................................................S-17
TRUSTEES AND OFFICERS OF THE TRUST.........................................S-17
COMPUTATION OF YIELD.......................................................S-19
CALCULATION OF TOTAL RETURN................................................S-20
PURCHASE AND REDEMPTION OF SHARES..........................................S-21
DETERMINATION OF NET ASSET VALUE...........................................S-21
TAXES......................................................................S-22
PORTFOLIO TRANSACTIONS.....................................................S-25
TRADING PRACTICES AND BROKERAGE............................................S-26
DESCRIPTION OF SHARES......................................................S-26
SHAREHOLDER LIABILITY......................................................S-26
LIMITATION OF TRUSTEES' LIABILITY..........................................S-27
5% SHAREHOLDERS............................................................S-27
EXPERTS....................................................................S-27
FINANCIAL STATEMENTS.......................................................S-27
May 31, 1996
PIC-F-002-03
<PAGE>
THE TRUST
The Portfolios are open-end management investment company portfolios that are a
part of The Arbor Fund (the "Trust"). The Trust was established under
Massachusetts law as a Massachusetts business trust under an Agreement and
Declaration of Trust dated July 24, 1992. The Declaration of Trust permits the
Trust to offer separate series of shares of beneficial interest ("shares") and
different classes of shares of each Portfolio. Each share of each Portfolio
represents an equal proportionate interest in that Portfolio. See "Description
of Shares." This Statement of Additional Information relates only to the Trust's
California Tax Exempt Portfolio and Institutional Tax Free Portfolio. PNC
Institutional Management Corporation (the "Adviser") serves as investment
adviser to the Portfolios. CoreStates Bank, N.A. (the "Custodian") acts as
custodian of the Portfolios' assets.
DESCRIPTION OF PERMITTED INVESTMENTS
Municipal Notes include, among others, 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, state aid anticipation notes,
tax and revenue anticipation notes, certificates of indebtedness, demand notes,
and construction loan notes. The maturities of the instruments at the time of
issue will generally range from one month to 13 months.
Municipal Bonds are debt obligations issued to obtain funds for various public
purposes. Municipal bonds include, among others, general obligation bonds,
revenue or special obligation bonds, private activity and industrial development
bonds and participation interests in municipal bonds. General obligation bonds
are backed by the taxing power of the issuing municipality. A Portfolio may
purchase private activity or industrial development bonds if the interest paid
is exempt from federal income tax. These bonds are issued by or on behalf of
public authorities to raise money to finance various privately-owned or
- -operated facilities for business and manufacturing, housing, sports, and
pollution control. These bonds are also used to finance public facilities such
as airports, mass transit systems, ports, parking or sewage or solid waste
disposal facilities, as well as certain other categories. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
Repurchase Agreements are agreements under which securities are acquired from a
securities dealer or bank subject to resale on an agreed upon date and at an
agreed upon price which includes principal and interest. The Portfolio involved
bears a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. The Adviser
enters into repurchase agreements only with financial institutions which it
deems to present minimal risk of bankruptcy during the term of the agreement
based on guidelines that are periodically reviewed by the Board of Trustees.
These guidelines currently permit the Portfolios to enter into repurchase
agreements only with approved banks and primary securities dealers, as
recognized by the Federal Reserve Bank of New York, which have minimum net
capital of $100 million, or with a member bank of the Federal Reserve System.
Repurchase agreements are considered to be loans collateralized by the
underlying security. Repurchase agreements entered into by the Portfolios will
provide that the underlying security at all times shall have a value at least
equal to 102% of the price stated in the agreement. This underlying security
will be marked to market daily. The Adviser monitors compliance with this
requirement. Under all repurchase agreements entered into by the Portfolios, the
Custodian or its agent must take possession of the underlying collateral.
However, if the seller defaults, the Portfolios could realize a loss on the sale
of the underlying security to the extent the proceeds of the sale are less than
the resale price. In addition, even though the Bankruptcy Code provides
protection for most repurchase agreements, if the seller should be involved in
bankruptcy or insolvency proceedings, the Portfolios may incur delay and costs
in selling the security and may suffer a loss of principal and interest if the
Portfolios are treated as an unsecured creditor.
S-2
<PAGE>
Standby Commitments-Put Transactions - The Portfolios reserve the right to
engage in put transactions. The Adviser has the authority to 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 the Portfolios 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 puts is to maintain flexibility and liquidity to permit the Portfolios
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 Portfolios would
limit their put transactions to institutions which the Adviser believes present
minimal credit risks, and the Adviser would use its best efforts to initially
determine and continue to monitor the financial strength of the sellers of the
options in accordance with credit guidelines adopted by the Trust's Board of
Trustees. In the event that any writer is unable to honor a put for financial
reasons, a Portfolio 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 a Portfolio and the writer may excuse the writer from
repurchasing the securities; for example, a change in the published rating of
the underlying 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. A Portfolio 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.
The 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 Portfolio.
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, a Portfolio could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Portfolio, the Portfolio could, of course, sell the
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 the Portfolios may purchase subject to a put or a standby
commitment but the amount paid directly or indirectly for premiums on all puts
and standby commitments outstanding will not exceed 1/2 of 1% of the value of
the total assets of such Portfolio calculated immediately after any such put is
acquired.
When-Issued and Delayed Delivery Securities - In such transactions, instruments
are bought with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous yield or price at the time of
the transaction. Delivery of payment for these securities may take as long as a
month or more after the date of the purchase commitment but will take place no
more than 120 days after the trade date. Delivery and payment normally take
place within 45 days after the date of commitment to purchase. The Portfolios
will only make commitments to purchase obligations on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date. The when-issued or delayed delivery
securities are subject to market fluctuation, and no interest accrues to the
purchaser during the period prior to settlement. The payment obligation and the
interest rate that will be received on the securities are each fixed at the time
the purchaser enters into the commitment. Purchasing obligations on a
when-issued or delayed delivery basis could be a form of leveraging and can
involve a risk that the yields available in the market when the delivery takes
place may actually 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 will maintain
liquid assets in an amount at least equal in value to the Portfolios'
commitments to purchase when-issued and delayed delivery securities. If the
value of these assets declines, the Portfolios will place additional liquid
assets in the account on a daily basis so that the value of the assets in the
account is equal to the amount of such commitments.
U.S. Government Agency Securities - agencies of the United States Government
which issue obligations consist of, among others, Farmers Home Administration,
Federal Farm Credit System, Federal Housing Administration,
S-3
<PAGE>
Government National Mortgage Association, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority. The Portfolios may
purchase securities issued or guaranteed by the Government National Mortgage
Association which represent participation in Veterans Administration- and
Federal Housing Administration-backed mortgage pools. Obligations of
instrumentalities of the United States Government include securities issued by,
among others, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Land Banks, Federal National Mortgage Association and the United States
Postal Service. Some of these securities are supported by the full faith and
credit of the United States Treasury (e.g., Government National Mortgage
Association), others are supported by the right of the issuer to borrow from the
Treasury and 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 the value of the obligation prior to maturity.
Certificates of Deposit - a negotiable interest bearing instrument with a
specific maturity. Certificates of deposit 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.
Time Deposits - a non-negotiable receipt 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.
Special Considerations Relating to California Municipal Securities
The ability of issuers to pay interest on, and repay principal of, California
municipal securities ("California Municipal Securities") may be affected by (1)
amendments to the California Constitution and related statutes that limit the
taxing and spending authority of California government entities, (2) voter
initiatives, (3) a wide variety of California laws and regulations, including
laws related to the operation of health care institutions and laws related to
secured interests in real property and (4) the general financial condition of
the State of California. The following information constitutes only a brief
summary, and is not intended as a complete description. The information has been
drawn, in some cases by excerpt, from official statements relating to securities
offerings of the State of California available as of the date of this Statement
of Additional Information. While the information has not been independently
verified by the California Tax Exempt Portfolio, the Portfolio has no reason to
believe that such information is not correct in all material respects.
Amendments to the California Constitution and Related Statutes. Certain of the
California Municipal Securities may be obligations of issuers who rely in whole
or in part on ad valorem real property taxes as a source of revenue. On June 6,
1978, California voters approved an amendment to the California Constitution
known as Proposition 13, which added Article XIIIA to the California
Constitution. The effect of Article XIIIA is to limit ad valorem taxes on real
property, and to restrict the ability of taxing entities to increase real
property tax revenues. On November 7, 1978, California voters approved
Proposition 8, and on June 3, 1986, California voters approved Proposition 46,
both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real property to
1% of full cash value (as defined in Section 2), to be collected by the counties
and apportioned according to law; provided that the 1% limitation does not apply
to ad valorem taxes or special assessments to pay the interest and redemption
charges on (i) any indebtedness approved by the voters prior to July 1, 1978, or
(ii) any bonded indebtedness for the acquisition or improvement of real property
approved on or after July 1, 1978, by two-thirds of the votes cast by the voters
voting on the proposition. Section 2 of Article XIIIA defines "full cash value"
to mean "the County Assessor's valuation of real property as shown on the
1975/76 tax bill under 'full cash value' or, thereafter, the appraised value of
real property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The "full cash value" may be adjusted
annually to reflect inflation at a rate not to exceed 2% per year, or reduction
S-4
<PAGE>
in the consumer price index or comparable local data, or reduced in the event of
declining property value caused by damage, destruction or other factors. The
California State Board of Equalization has adopted regulations, binding on
county assessors, interpreting the meanings of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to pay
debt service on indebtedness approved by the voters prior to July 1, 1978, and
that each county will levy the maximum tax permitted by Article XIIIA of $4.00
per $100 assessed valuation (based on the former practice of using 25%, instead
of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes in fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 of assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB to
the California Constitution. Under Article XIIIB, State and local governmental
entities have an annual "appropriations limit" and are not allowed to spend
certain moneys called "appropriations subject to limitation" in an amount higher
than the "appropriations limit." Article XIIIB does not affect the appropriation
of moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising the
tax rates or fee schedules over the subsequent two years.
Article XIIIB, like XIIIA, may require further interpretation by both the
Legislature and the courts to determine its applicability to specific situations
involving the State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
Voter Initiatives. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (as
modified by Proposition 111, which was enacted on June 5, 1990), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace "Test 2" in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under "Test 3," schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If "Test 3" is used in any
year, the difference between "Test 3" and "Test 2" would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Legislation
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adopted prior to the end of the 1988-89 Fiscal Year, implementing Proposition
98, determined the K-14 schools' funding guarantee under Test 1 to be 40.3
percent of the General Fund Tax revenues, based on 1986-87 appropriations.
However, that percent would be adjusted to account for redirection of local
property taxes, since such a subsequent redirection directly affects the share
of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses, with
the Governor's concurrence, to suspend the K-14 schools' minimum funding formula
for a one-year period. In the fall of 1989, the Legislature and the Governor
utilized this provision to avoid having 40.3 percent of revenues generated by a
special supplemental sales tax enacted for earthquake relief go to K-14 schools.
Proposition 98 also contains provisions transferring certain State tax revenues
in excess of the Article XIIIB limit to K-14 schools.
The 1991-92 Budget Act appropriated $18.4 billion for K-14 schools, applying
Test 2 of Proposition 98. During the course of the fiscal year, revenues proved
to be substantially below expectations. In response to the changing revenue
situation and to fully fund the Proposition 98 guarantee in both the 1991-92 and
1992-93 Fiscal Years without exceeding it, the Legislature enacted several bills
as part of the 1992-93 budget package which responded to the fiscal crisis in
education funding. In Fiscal Year 1991-92, Proposition 98 appropriations for
K-14 schools were reduced by $1.083 billion. In order to not adversely impact
cash received by school districts, however, a short-term loan was appropriated
from the non-Proposition 98 State General Fund. The Legislature then
appropriated $16.6 billion to K-14 schools for 1992-93 (the minimum guaranteed
by Proposition 98), but designated $1.083 billion of this amount to "repay" the
prior year loan, thereby reducing cash outlays in 1992-93 by that amount.
In addition to reducing the 1991-92 Fiscal Year appropriations for K-14 schools
by $1.083 billion and converting that amount to a loan (the "inter-year
adjustment"), Chapter 703, Statutes of 1992 ("Chapter 703") also provided for an
adjustment to Test 1, based on the additional local property taxes that were
shifted to schools and community colleges. The Test 1 percentage changed from 40
percent to 38.5 percent based on the most recent data indicating a shift amount
of $1.1 billion. Additionally, Chapter 703 contained a provision that if an
appellate court should determine that the Test 1 recalculation or the inter-year
adjustment is unconstitutional, unenforceable or invalid, Proposition 98 would
be suspended for the 1992-93 Fiscal Year, with the result that K-14 schools
would receive the amount intended by the 1992-93 Budget Act compromise.
In the 1992-93 Budget Act, a new loan of $732 million was made to K-12 schools
in order to maintain per-average daily attendance ("ADA") funding at the same
level as 1991-92, at $4,217. An additional loan of $241 million was made to
community college districts. These loans are to be repaid from future
Proposition 98 entitlements. Including both State and local funds, and adjusting
for the loans and repayments, on a cash basis, total Proposition 98 K-12 funding
in 1992-93 increased to $21.5 billion, 2.4 percent more than the amount in
1991-92 ($21.0 billion).
On October 29, 1992, because of a special statute of limitations contained in
Chapter 703, litigation was commenced concerning that law. The Governor filed a
civil action, now dismissed, to, in effect, enforce the inter-year adjustment. A
second civil action, California Teachers' Association, et al. v. Gould, et al.
(the "CTA case"), was filed by a teachers' organization, the Superintendent of
Public Instruction and others to declare the inter-year adjustment and the
provision for conditional suspension of Proposition 98 to be unlawful and to
declare invalid the provision making the $732 million loan described above
"repayable" from future years' Proposition 98 funds (see page A-63 of Appendix
A). A third civil action was filed by business, local government and taxpayer
organizations seeking to enforce the budget plan for school financing as
originally intended in Chapter 703.
One cause of action in the CTA case was heard by the Sacramento County Superior
Court on November 12, 1993. The cause of action addressed both Chapter 703 and
the corrective legislation. The court ruled orally from the bench that the
$1.083 billion reduction in the 1991-92 school appropriations was proper to the
extent that the base for determining the Proposition 98 guarantee in future
years did not include the $1.083 billion. However, the court
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also ruled that the State could not implement the loan provisions to recover the
excess funds or to use the excess funds as an offset against the next fiscal
year's guarantee.
In addition, the court ruled that the $732 million loan to schools and the $241
million loan to community colleges in Fiscal Year 1992-93 violated Proposition
98, and that the loans were required to be included in the base for determining
the Proposition 98 guarantee in future years. A judgment consistent with the
Court's oral ruling was entered on April 26, 1994. The State and the plaintiffs
have appealed the ruling. The impact of this lawsuit has not been reflected in
the Proposition 98 guarantee for the 1992-93 Fiscal Year or for the 1993-94,
1994-95, or 1995-96 Fiscal Years.
The 1993-94 Budget Act projected the Proposition 98 minimum funding level at
$13.5 billion based on the "Test 3" calculation where the guarantee is
determined by the change in per capita growth in General Fund revenues, which
are projected to decrease on a year-over-year basis. This amount also takes into
account increased property taxes transferred to school districts from other
local governments.
Legislation accompanying the 1993-94 Budget Act (Chapter 66/93) provided a loan
of $609 million to K-12 schools in order to maintain per ADA funding at $4,187
and a loan of $178 million to community colleges. These loans have been combined
with the K-14 1992-93 loans into one loan totalling $1.760 billion. Repayment of
this loan would be from future years' Proposition 98 entitlements, and would be
conditioned on maintaining current funding levels per pupil for K-12 schools.
Chapter 66/93 also reduced the "Test 1" percentage to 33% to reflect the
property tax shift among local government agencies.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98 funds
for K-14 schools based on Test 2. This exceeds the minimum Proposition 98
guarantee by $8 million to maintain K-12 funding per pupil at $4,217. Based upon
updated State revenues, growth rates and inflation factors, the 1994-94 Budget
Act includes an additional $286 million with Proposition 98 for the 1993-94
Fiscal Year, to reflect a need in the continuous statutory appropriations for
school districts and county offices of education. These and various other minor
appropriation adjustments increase the 1993-94 Proposition 98 guarantee to $13.8
billion, which exceeds the minimum guarantee in that year by $272 million and
provides per pupil funding of $4,225.
The 1995-96 Governor's Budget adjusts the 1993-94 minimum guarantee to reflect
changes in enrollment and inflation, and 1993-94 Proposition 98 appropriations
are increased to $14.1 billion, primarily to reflect changes in the statutory
continuous appropriations for apportionments. The revised appropriations now
exceed the minimum guarantee by $32 million. The appropriation level still
provides per-pupil funding of $4,225. The 1994-95 Proposition 98 minimum
guarantee has also been adjusted for changes in factors described above, and is
now calculated to be $14.9 billion. Within the minimum guarantee, the dollars
per pupil have been maintained at the prior year's level; consequently, the
1994-95 minimum guarantee now includes a loan repayment of $135 million, and the
per-pupil funding increases to $4,231.
The 1995-96 Governor's Budget proposes to appropriate $15.9 billion of
Proposition 98 funds to K-14 schools to meet the guarantee level. Included
within the guarantee is a loan repayment of $379 million for the combined
outstanding loans of $1.76 billion. Funding per pupil is estimated to increase
by $61 over 1994-95 to $4,292.
On November 4, 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales
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taxes on the sale of real property by local governments, (vi) requires that any
tax imposed by a local government on or after August 1, 1985 be ratified by a
majority vote of the electorate within two years of the adoption of the
initiative or be terminated by November 15, 1988, (vii) requires that, in the
event a local government fails to comply with the provisions of this measure, a
reduction in the amount of property tax revenue allocated to such local
government occurs in an amount equal to the revenues received by such entity
attributable to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeals in City of Westminster v.
County of Orange 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is not possible to predict the
impact of this decision on charter cities, on special taxes, or on new taxes
imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87. Proposition 87
amended Article XVI, Section 16, of the California Constitution by authorizing
the California Legislature to prohibit redevelopment agencies from receiving any
of the property tax revenue raised by increased property tax rates levied to
repay bonded indebtedness of local governments which is approved by voters on or
after January 1, 1989. It is not possible to predict whether the California
Legislature will enact such a prohibition nor is it possible to predict the
impact of Proposition 87 on redevelopment agencies and their ability to make
payments on outstanding debt obligations.
Other Relevant California Laws. A wide variety of California laws and
regulations may affect, directly or indirectly, the payment of interest on, or
the repayment of the principal of, California Municipal Securities in which the
California Tax Exempt Portfolio may invest. The impact of such laws and
regulations on particular California Municipal Securities may vary depending
upon numerous factors including, among others, the particular type of Municipal
Security involved, the public purpose funded by the Municipal Security and the
nature and extent of insurance or other security for payment of principal and
interest on the Municipal Security. For example, California Municipal Securities
which are payable only from the revenues derived from a particular facility may
be adversely affected by California laws or regulations which make it more
difficult for the particular facility to generate revenues sufficient to pay
such interest and principal, including, among others, laws and regulations which
limit the amount of fees, rates or other charges which may be imposed for use of
the facility or which increase competition among facilities of that type or
which limit or otherwise have the effect of reducing the use of such facilities
generally, thereby reducing the revenues generated by the particular facility.
California Municipal Securities, the payment of interest and principal on which
is insured in whole or in part by a California governmentally created fund, may
be adversely affected by California laws or regulations which restrict the
aggregate insurance proceeds available for payment of principal and interest in
the event of a default on such Municipal Securities.
Certain California Municipal Securities in which the Portfolio may invest may be
obligations that are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect such
revenues and, consequently, payment on those California Municipal Securities.
The federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such
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payment has not increased in relation to inflation, costs or other factors.
Other reductions or limitations may be imposed in payment for services rendered
to Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California Legislature appropriates adequate funding therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by ten percent through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held. If the
injunction is deemed to have been granted improperly, the State of California
would be entitled to recapture the payment differential for the intended
reduction period. It is not possible to predict at this time whether any
decreases will ultimately be implemented.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December, 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
Certain California Municipal Securities in which the Portfolio may invest may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust, two of which
limit the creditor's right to obtain a deficiency judgment. One of the
limitations is based on the method of foreclosure and the other on the type of
debt secured. Under the former, a deficiency judgment is barred when the
foreclosure is accomplished by means of a nonjudicial trustee's sale. Under the
latter, a deficiency judgment is barred when the foreclosed mortgage or deed of
trust secures certain purchase money obligations. Another California statute,
commonly known as the "one form of action" rule, requires the creditors secured
by real property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory provision
limits any deficiency judgment obtained by a creditor secured by real property
following a judicial sale of such property
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to the excess of the outstanding debt over the fair value of the property at the
time of the sale, thus preventing the creditor from obtaining a large deficiency
judgment against the debtor as the result of low bids at a judicial sale. The
fifth statutory provision gives the debtor the right to redeem the real property
from any judicial foreclosure sale as to which a deficiency judgment may be
ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a home mortgage could be in excess of seven
months after the initial default. Such time delays in collections could disrupt
the flow of revenues available to an issuer for the payment of debt service on
the outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain California Municipal Securities in which the Portfolio may invest may be
obligations which finance the acquisition of single family home mortgages for
low and moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to the California
statutory limitations described above applicable to obligations secured by real
property. Under California anti-deficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and cannot in any event exceed
six months' advance interest on the amount prepaid in excess of 20% of the
original amount of the mortgage loan. This limitation could affect the flow of
revenues available to an issuer for debt service on the outstanding debt
obligations which financed such home mortgages.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific California Municipal Securities the
California Tax Exempt Portfolio will invest from time to time or predicting the
nature or extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the Municipal
Securities in which the California Tax Exempt Portfolio may invest and,
therefore, on the units of the California Tax Exempt Portfolio.
The General Financial Condition of the State of California. From mid-1990 to
late 1993, the State suffered a recession with the worst economic, fiscal and
budget conditions since the 1930s. Construction, manufacturing (especially
aerospace), and financial services, among others, were all severely affected.
Job losses were the worst of any post-war recession. Employment levels
stabilized by late 1993 and steady growth occurred in 1994 and is expected to
continue in 1995, but pre-recession job levels are not expected to be reached
until late 1996. Economic indicators show a steady recovery underway in the
State since the start of 1994.
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The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-12 schools
and community colleges, health and welfare, and corrections -- growing at rates
higher than the growth rates for the principal revenue sources of the State
General Fund. As a result, the State experienced recurring budget deficits in
the late 1980s and early 1990s. The State Controller reports that expenditures
exceeded revenues for four of the five fiscal years ending with 1991-92;
revenues and expenditures were equal in 1992-93, and the State had an operating
surplus of $1.1 billion in 1993-94. However, at June 30, 1994, according to the
Department of Finance, the State's special Fund for Economic Uncertainties still
had an accumulated deficit, on a budget basis, of approximately $1.5 billion.
The accumulated budget deficits over the past several years, together with
expenditures for school funding which have not been reflected in the budget, and
reduction of available internal borrowable funds, have combined to significantly
deplete the State's cash resources to pay its ongoing expenses. In order to meet
its cash needs, the State has had to rely for several years on a series of
external borrowings, including borrowings past the end of a fiscal year. Such
borrowings are expected to continue in future fiscal years. To meet its cash
flow needs in the 1994-95 Fiscal Year, the State has issued, in July and August,
1994, $4.0 billion of revenue anticipation warrants which mature on April 25,
1996, and $3.0 billion of revenue anticipation notes maturing on June 28, 1995.
On July 25, 1994, all three of the rating agencies rating the State's long-term
debt lowered their ratings of the State's general obligation bonds. Moody's
Investors Service lowered its rating from "Aa" to "A1," Standard & Poor's
Ratings Group lowered its rating from "A+" to "A" and termed its outlook as
"stable," and Fitch Investors Service lowered its rating from "AA" to "A."
The 1994-95 Fiscal Year Budget (as updated in the January 10, 1995 Governor's
Budget) is projected to have $42.4 billion of General Fund revenues and
transfers and $41.7 billion of budgeted expenditures. In addition, the 1994-95
Budget Act anticipates deferring retirement of about $1 billion of the
accumulated budget deficit to the 1995-96 Fiscal Year when it is intended to be
fully retired by June 30, 1996.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "Funds") filed for protection under Chapter 9 of
the federal Bankruptcy Code, after reports that the Funds had suffered
significant market losses in their investments, causing a liquidity crisis for
the Funds and the County. More than 180 other public entities, most of which,
but not all, are located in the County, were also depositors in the Funds. As of
mid-January, 1995, following a restructuring of most of the Funds' assets to
increase their liquidity and reduce their exposure to interest rate increases,
the County estimated the Funds' loss at about $1.69 billion, or 22% of their
initial deposits of approximately $7.5 billion. Many of the entities which
deposited moneys in the Funds, including the County, are facing cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. This may also affect their ability to meet their
outstanding obligations.
The State has no existing obligation with respect to any outstanding obligations
or securities of the County or any of the other participating entities. However,
in the event the County is unable to maintain county-administered State programs
because of insufficient resources, it may be necessary for the State to
intervene, but the State cannot presently predict what, if any, action may
occur. At this time, it appears that school districts may have collectively lost
up to $230 million from the amounts they had on deposit in the Funds. Under
existing legal precedent, the State is obligated to intervene when a school
district's fiscal problems would otherwise deny its students basic educational
quality. The State is not presently able to predict whether any school districts
will face insolvency because of their participation in the Fund, and if so, the
potential amount or form of aid which the State may have to provide. The
Governor has called a special session of the legislature which is expected to
consider various responses to the Orange County situation.
For the first time in four years, the State enters the upcoming fiscal year with
strengthening revenues based on an improving economy. On January 10, 1995, the
Governor presented his 1995-96 Fiscal Year Budget Proposal (the
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"Proposed Budget"). The Proposed Budget estimates General Fund revenues and
transfers of $42.5 billion (an increase of 0.2 percent over 1994-95). This
nominal increase from the 1994-95 Fiscal Year reflects the Governor's
realignment proposal and the first year of his tax cut proposal (see principal
features of the Proposed Budget below for further discussions). Without these
two proposals, General Fund revenues would be projected at approximately $43.8
billion, or an increase of 3.3 percent over 1994-95. Expenditures are estimated
at $41.7 billion (essentially unchanged from 1994-95). Special Fund revenues are
estimated at $13.5 billion (10.7 percent higher than 1994-95) and Special Fund
expenditures are estimated at $13.8 billion (12.2 percent higher than 1994-95).
The Proposed Budget projects that the General Fund will end the fiscal year at
June 30, 1996 with a budget surplus in the Special Fund for Economic
Uncertainties of about $92 million, or less than 1 percent of General Fund
expenditures, and will have repaid all of the accumulated budget deficits.
The following are the principal features of the Proposed
Budget:
1. The principal feature of the Proposed Budget is a
proposed 15 percent cut in personal income and corporate tax
rates, which would be phased in at 5 percent per year starting
in 1996. Existing personal income tax rates, which are
scheduled to drop from an 11 percent top rate to 9.3 percent
in 1996, would be continued during the time the overall tax
cut takes effect. This proposal would reduce General Fund
revenues by $225 million in 1995-96, but the revenue reduction
would reach $3.6 billion by 1998-99.
2. The Governor has proposed an expansion of the
realignment program between the State and counties, so that
counties will take on greater responsibility for welfare and
social services, while the State will take on increased
funding of trial court costs. The proposal includes transfer
of about $1 billion of State revenues, from sales taxes and
trial court funding moneys, to counties. The net effect of the
shifts, however, is estimated to save the General Fund about
$240 million.
3. The Governor proposes further cuts in health and
welfare costs totaling about $1.4 billion. Some of these
cuts would require legislative approval.
4. Proposition 98 funding for schools and community
colleges will increase by about $1.2 billion, reflecting
strong General Fund revenue growth. Per-pupil expenditures are
projected to increase by $61 to $4,292. For the first time in
several years, a cost-of-living increase (2.2 percent) is
added to the enrollment growth factor. The Governor proposes
to set aside about $514 million of the Proposition 98 funding
increase to repay prior years' loans from the General Fund to
schools. As the legality of these loans is currently being
challenged in a lawsuit, the Governor proposes to set the
amount aside in escrow until the litigation (the CTA case) is
resolved.
5. The Proposed Budget includes increases in funding
for the University of California ($63 million General Fund)
and the California State University system ($3 million General
Fund). The Governor has proposed a four-year funding "compact"
for the higher educational units which includes both annual
increases in State funding and increases in student fees.
6. The Proposed Budget assumes receipt of $830
million in new federal aid for costs of undocumented and
refugee immigrants, above commitments already made by the
federal government. This amount is much less than an estimated
$2.8 billion which had been included in the Governor's
pro-forma two-year plan from last summer.
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The 1995-96 Budget will be subject to the Budget Adjustment or
"Trigger" legislation enacted in June, 1994. The Proposed Budget contains a cash
flow projection (based on all the assumptions described above) which shows about
$1 billion of unused borrowable resources at June 30, 1996, providing this
amount of "cushion" before the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in
February 1995 notes that the Proposed Budget (and hence the margin of cushion
under the "trigger") is subject to a number of major risks, including receipt of
the expected federal immigration aid and other federal actions to allow health
and welfare cuts, and the outcome of several lawsuits concerning previous budget
actions which the State has lost at the trial court level and which are under
appeal. The Analyst's Report also estimates that, despite more favorable
revenues, the two-year budget estimates made in July, 1994 are about $2 billion
out of balance, principally because federal immigration aid appears likely to be
much lower than previously estimated. This shortfall is much smaller than the
State has faced in recent years, and has been addressed in the Governor's
Budget.
Additional Considerations. With respect to Municipal Securities issued by the
State of California and its political subdivisions, as well as certain other
governmental issuers such as the Commonwealth of Puerto Rico, the Trust cannot
predict what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax status of
interest on such obligations, or which proposals, if any, might be enacted. Such
proposals, if enacted, might materially adversely affect the availability of
California Municipal Securities for investment by the California Tax Exempt
Portfolio and the value of the Fund's investments. In such event, the Trustees
would reevaluate the investment objective and policies of the California Tax
Exempt Portfolio and consider changes in its investment structure or possible
dissolution.
INVESTMENT LIMITATIONS
In addition to those listed in the Prospectus, the following are fundamental
policies and may not be changed without the consent of a majority of a
Portfolio's outstanding shares. The term "a majority of a Portfolio's
outstanding shares" means the vote of (i) 67% or more of the Portfolio's shares
present at a meeting if more than 50% of the outstanding shares of the Portfolio
are present or represented by proxy, or (ii) more than 50% of the Portfolio's
shares, whichever is less.
A Portfolio may not:
1. Borrow money except for temporary or emergency purposes and then only
in an amount not exceeding 10% of the value of total assets. The
California Tax Exempt Portfolio has a fundamental policy that to the
extent such borrowing exceeds 5% of the value of the Portfolio's total
assets, borrowing will be done from a bank and in accordance with the
requirements of the Investment Company Act of 1940, as amended (the
"1940 Act"). This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate heavy
redemption requests if they should occur and is not for investment
purposes. All borrowings of the Portfolios will be repaid before making
additional investments and any interest paid on such borrowings will
reduce income.
2. Purchase securities of other investment companies.
3. Make loans, except that any Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies
and may enter into repurchase agreements.
4. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (1) above in aggregate amounts not to exceed
10% of the net assets of such Portfolio taken at current value at the
time of the incurrence of such loan.
S-13
<PAGE>
5. Invest in companies for the purpose of exercising control.
6. Acquire more than 10% of the voting securities of any one issuer.
7. Purchase or sell real estate, real estate limited partnership
interests, commodities or commodities contracts including futures
contracts. However, subject to its permitted investments, any Portfolio
may invest in municipal securities or other obligations secured by real
estate or other interests therein.
8. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Portfolio may obtain short-term
credits as necessary for the clearance of security transactions.
9. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
10. Issue senior securities (as defined in the 1940 Act) except in
connection with permitted borrowings as described in the Prospectuses
and this Statement of Additional Information or as permitted by rule,
regulation or order of the Securities and Exchange Commission (the
"SEC").
11. Invest more than 25% of total assets in issues within the same state or
similar type projects (except in specified categories). This investment
limitation applies only to the Institutional Tax Free Portfolio.
12. With the exception of the California Tax Exempt Portfolio, purchase
securities of any issuer (except securities issued or guaranteed by the
United States, its agencies or instrumentalities) and any security
guaranteed thereby if as a result more than 5% of the total assets of
the Portfolio would be invested in the securities of such issuer;
provided that the Portfolio may invest up to 25% of its total assets
without regard to this restriction as permitted by applicable law.
13. Purchase any securities which would cause more than 25% of the total
assets of the Portfolio 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 obligations issued or guaranteed by the U.S. Government or its
agencies, instrumentalities or, for the California Tax Exempt
Portfolio, to investments in tax-exempt securities issued by
governments or political subdivisions of governments.
In addition, it is a fundamental policy of the Portfolios to invest only in high
quality, U.S. dollar denominated obligations maturing in 397 days or less
(although obligations subject to repurchase agreements may have a maturity in
excess thereof), and to maintain an average maturity (on a dollar weighted
basis) of 90 days or less.
NON-FUNDAMENTAL POLICIES
The following investment limitations of the Portfolios are non-fundamental and
may be changed by the Trust's Board of Trustees without shareholder approval.
No Portfolio may invest in warrants, calls, straddles, spreads or combinations
thereof, except as permitted by the Prospectus and this Statement of Additional
Information. No Portfolio may invest more than 10% of its net assets in
restricted securities. No Portfolio may invest in illiquid securities in an
amount exceeding, in the aggregate, 10% of a Portfolio's net assets. An illiquid
security is a security that cannot be disposed of promptly (within seven days),
and in the usual course of business without a loss, and includes repurchase
agreements maturing in excess of seven days, time deposits with a withdrawal
penalty, non-negotiable instruments and instruments for which no market exists.
S-14
<PAGE>
No Portfolio may 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 adviser 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.
No Portfolio may invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
No Portfolio may purchase securities of any company which has (with
predecessors) a record of less than 3 years continuing operations if, as a
result more than 5% of total assets (taken at fair market value) of the
Portfolio would be invested in such securities, except obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
municipal securities which are rated by at least 2 nationally recognized bond
rating services or are determined by the Adviser to be of high quality.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security.
THE ADVISER
Effective as of November 30, 1995, Prudential Investment Corporation
("Prudential") resigned as the investment adviser to each Portfolio. Effective
December 1, 1995, the Board of Trustees approved the appointment of PNC
Institutional Management Corporation (the "PIMC" or the "Adviser") as the
investment adviser to each Portfolio. The Trust and PIMC have entered into
advisory agreements relating to each Portfolio (the "Advisory Agreements"). Each
Advisory Agreement provides that the Adviser 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.
Each Advisory Agreement provides that if in any fiscal year the aggregate
expenses of a Portfolio (as defined under the securities regulations of any
state having the jurisdiction over the Portfolio) exceeds the expense
limitations of any such state, the Adviser will bear its share of the amount of
such excess in proportion to the aggregate fees otherwise payable to it under
the agreement and to the Trust's administrator, under its administration
agreement with the Trust. The obligation of the Adviser to reimburse the Trust
under this provision is limited in any fiscal year to the amount of its fees
otherwise payable under the agreement attributable to the Portfolio for such
fiscal year, provided, however, that notwithstanding the foregoing, the Adviser
shall reimburse the Trust of the full amount of its share of any such excess
expenses regardless of the amount of fees otherwise payable to it during such
fiscal year to the extent that the securities regulations of any state having
jurisdiction over the Portfolio so require. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
The continuance of each Advisory Agreement, after the initial 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 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 a Portfolio, by a majority of the outstanding shares of that
Portfolio, on 60 days' written notice to the Adviser, or by the Adviser on 60
days' written notice to the Trust.
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolios paid the following advisory fees:
S-15
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fee Waivers (000)
--------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Tax Exempt Portfolio
Prudential $80 $31 $236 $0 $0 $0
PIMC N/A N/A $50 N/A N/A $0
- -----------------------------------------------------------------------------------------------------------------------------------
Institutional Tax Free Portfolio
Prudential $29 $94 $75 $0 $0 $0
PIMC N/A N/A $13 N/A N/A $0
===================================================================================================================================
</TABLE>
THE ADMINISTRATOR
The Trust and SEI Financial Management Corporation (the "Administrator") have
entered into an administration agreement (the "Administration Agreement"). 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 five years and
thereafter shall continue in effect for successive two-year periods subject to
annual review by the Trustees.
The Administrator, a wholly owned subsidiary of SEI Corporation ("SEI"), was
organized as a Delaware corporation in 1969 and has its principal business
offices at 680 East Swedesford Road, Wayne, PA 19087-1658. Alfred P. West, Jr.,
Henry H. Greer and Carmen V. Romeo constitute the Board of Directors of the
Administrator. Mr. West is the Chairman of the Board and Chief Executive Officer
of the Administrator and of SEI. Mr. Greer is the President and Chief Operating
Officer of the Administrator and of SEI. SEI and its subsidiaries 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 also serves as administrator to the following
other mutual funds: The Achievement Funds Trust, The Advisors' Inner Circle
Fund, ARK Funds, Bishop Street Funds, Conestoga Family of Funds, CoreFunds,
Inc., CrestFunds, Inc., CUFUND, First American Funds, Inc., First American
Investment Funds, Inc., Insurance Investment Products Trust, Inventor Funds,
Inc., Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The
PBHG Funds, Inc., The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone
Funds, STI Classic Funds and STI Classic Variable Trust.
For the fiscal periods ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolios paid the following administrative fees:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fee Waivers (000)
--------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Tax Exempt Portfolio $176 $718 $908 $0 $218 $0
- -----------------------------------------------------------------------------------------------------------------------------------
Institutional Tax Free Portfolio $48 $186 $349 $0 $192 $203
===================================================================================================================================
</TABLE>
S-16
<PAGE>
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"). The Distribution Agreement shall be reviewed and ratified at least
annually (i) by the Trust's Trustees or by the vote of a majority of the
outstanding shares of the Trust, and (ii) by the vote of a majority of the
Trustees of the Trust who are not parties to the Distribution Agreement or
interested persons (as defined in the 1940 Act) of any party to the Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate in the event of any
assignment, as defined in the 1940 Act, and is terminable with respect to a
particular Portfolio on not less than sixty days' notice by the Trust's
Trustees, by vote of a majority of the outstanding shares of such Portfolio or
by the Distributor. The Distributor does not receive compensation for the
distribution of Portfolio shares.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees and executive officers
of the Trust 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
executive officer is SEI Financial Management Corporation, 680 East Swedesford
Road, Wayne, PA 19087-1658. Certain officers of the Trust also serve as Trustees
and/or officers of The Achievement Funds Trust, The Advisors' Inner Circle Fund,
ARK Funds, Bishop Street Funds, Conestoga Family of Funds, CoreFunds, Inc.,
CrestFunds, Inc., CUFUND, First American Funds, Inc., First American Investment
Funds, Inc., Insurance Investment Products Trust, Inventor Funds, Inc., Marquis
Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The PBHG Funds, Inc.,
The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI Daily Income Trust, SEI
Index Funds, SEI Institutional Managed Trust, SEI International Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone Funds, STI Classic Funds and
STI Classic Variable Trust, each of which is an open-end management investment
company.
ROBERT A. NESHER - Trustee* - Date of Birth: 8/17/46. 8 South Street,
Kennebunkport, ME 04046. Retired since 1994. Director, Executive Vice President
of SEI Corporation (1986-1994). Director and Executive Vice President of SEI and
the Administrator and the Distributor (1981-1994).
JOHN T. COONEY - Trustee** - Date of Birth: 1/20/27. 569 N. Post Oak Lane,
Houston, TX 77024. Retired since 1992. Formerly Vice Chairman of Ameritrust
Texas N.A. (1989-1992), and MTrust Corp. (1985-1989).
WILLIAM M. DORAN - Trustee* - Date of Birth: 5/26/40. 2000 One Logan Square,
Philadelphia, PA 19103. Partner of Morgan, Lewis & Bockius LLP(law firm).
Counsel to the Trust, Administrator and Distributor (1990- present). Director
and Secretary of SEI.
FRANK E. MORRIS - Trustee** - Date of Birth: 12/30/23. 105 Walpole Street,
Dover, MA 02030. Retired since 1990. Peter Drucker Professor of Management,
Boston College since 1989. President, Federal Reserve Bank of Boston
(1968-1988).
ROBERT A. PATTERSON - Trustee** - Date of Birth: 11/5/17. 208 Old Main,
University Park, PA 16802. Pennsylvania State University, Senior Vice President,
Treasurer (Emeritus). Financial and Investment Consultant, Professor of
Transportation (1984-present). Vice President-Investments, Treasurer, Senior
Vice President (Emeritus) (1982-1984). Director, Pennsylvania Research Corp.
Member and Treasurer, Board of Trustees of Grove City College.
S-17
<PAGE>
GENE PETERS - Trustee** - Date of Birth: 6/3/29. 943 Oblong Road, Williamstown,
MA 01267. Private investor from 1987 to present. Vice President and Chief
Financial Officer, Western Company of North America (petroleum service company)
(1980-1986). President of Gene Peters and Associates (import company)
(1978-1980). President and Chief Executive Officer of Jos. Schlitz Brewing
Company before 1978.
JAMES M. STOREY - Trustee** - Date of Birth: 4/12/31. Ten Post Office Square
South, Boston, MA 02109. Retired since 1993. Formerly Partner of Dechert Price &
Rhoads (law firm).
DAVID G. LEE - President, Chief Executive Officer - Date of Birth: 4/16/52.
Senior Vice President of the Administrator and Distributor since 1993. Vice
President of the Administrator and Distributor (1991-1993). President, GW Sierra
Trust Funds before 1991.
SANDRA K. ORLOW - Vice President, Assistant Secretary - Date of Birth: 10/18/53.
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1983.
KEVIN P. ROBINS - Vice President, Assistant Secretary - Date of Birth: 4/15/61.
Senior Vice President, General Counsel and Assistant Secretary of SEI, the
Administrator and the Distributor since 1994. Vice President and Assistant
Secretary of the SEI, Administrator and the Distributor (1992- 1994). Associate,
Morgan, Lewis & Bockius (law firm) prior to 1992.
JEFFREY A. COHEN, CPA - Controller, Chief Financial Officer - Date of Birth:
4/22/61. Vice President, International and Domestic Funds Accounting, SEI
Corporation since 1991. Audit Manager, Price Waterhouse prior to 1991.
KATHRYN L. STANTON - Vice President, Assistant Secretary - Date of Birth:
11/18/58. Vice President and Assistant Secretary of SEI, the Administrator and
the Distributor since 1994. Associate, Morgan, Lewis & Bockius (law firm)
1989-1994.
JOSEPH M. LYDON - Vice President, Assistant Secretary - Date of Birth: 9/27/59.
Director of Business Administration of Fund Resources, SEI Corporation since
1995. Vice President of Fund Group and Vice President of the Advisor, Dreman
Value Management and President of Dreman Financial Services, Inc, prior to 1995.
TODD 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).
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 SEI, the Trust, Administrator and the Distributor (1990-present).
- ---------------
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Trust as the term is defined in the 1940 Act.
** Messrs. Cooney, Morris, Patterson, Peters and Storey serve on the Audit
Committee of the Trust.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees. For the
fiscal period ended January 31, 1996, the Trust paid the unaffiliated Trustees
aggregate fees of approximately $61,924.25.
S-18
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
================================================================================================================================
Name of Person, Aggregate Pension or Retirement Estimated Annual Total Compensation
Position Compensation From Benefits Accrued as Benefits Upon From Registrant and
Registrant Part of Fund Expenses Retirement Fund Complex Paid to
Trustees for the Fiscal
Year Ended January
31, 1996 1
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Robert E. Patterson, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Frank E. Morris, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Gene Peters, Trustee $12,384.82 N/A N/A $12,384.82
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, $0 N/A N/A $12,384.82
Trustee*
- --------------------------------------------------------------------------------------------------------------------------------
William M. Doran, $0 N/A N/A $0
Trustee*
- --------------------------------------------------------------------------------------------------------------------------------
James M. Storey, $12,384.82 N/A N/A $12,384.82
Trustee
================================================================================================================================
</TABLE>
1 Total compensation for service on one board.
* A Trustee who is an "interested person" as defined by the 1940 Act.
COMPUTATION OF YIELD
From time to time the Portfolios may advertise their "current yield," "effective
compound yield" and "tax equivalent yield". These yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Portfolios refers to the income generated by an investment in a
Portfolio over a seven-day or 30-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 seven-day or 30-day period is assumed to
be generated each seven-day or 30-day period over a year 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 Portfolio 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 each Portfolio 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
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 Portfolios 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 yield of these Portfolios fluctuates, and the annualization of a week's
dividend is not a representation by the Trust as to what an investment in the
Portfolio will actually yield in the future. Actual yields will depend on such
variables as asset quality, average asset maturity, the type of instruments the
Portfolio invests in, changes in interest rates on money market instruments,
changes in the expenses of the Portfolio and other factors.
S-19
<PAGE>
Yields are one basis upon which investors may compare the Portfolios with other
money market funds; however, yields of other money market 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.
For the seven-day period ended January 31, 1996, the Portfolios' yields were
2.83% for the California Tax Exempt Portfolio and 3.19% for the Institutional
Tax Free Portfolio.
For the seven-day period ended January 31, 1996, the Portfolios' tax-equivalent
yields were 5.70% for the California Tax Exempt Portfolio and 5.28% for the
Institutional Tax Free Portfolio.
Each Portfolio may also 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 Portfolios refers to the annualized income generated by an
investment in the Portfolios over a specified 30-day period. The yield is
calculated by assuming that the income generated by the investment during that
30-day period is generated over one year 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
current daily number of shares 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.
For the 30-day period ended January 31, 1996, the Portfolios' yields were 2.96%
for the California Tax Exempt Portfolio and 3.27% for the Institutional Tax Free
Portfolio.
Each Portfolio may also advertise tax equivalent yield based on a 30-day period
and computed by dividing that portion of the yield of the Portfolio 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 Portfolio's yield that is not
tax-exempt.
For the 30-day period ended January 31, 1996, the Portfolios' tax-equivalent
yields were 5.97% for the California Tax Exempt Portfolio and 5.41% for the
Institutional Tax Free Portfolio.
CALCULATION OF TOTAL RETURN
From time to time, each Portfolio may advertise total return. The total return
of a Portfolio refers to the average compounded rate of return to a hypothetical
investment for designated time periods (including but not limited to, the period
from which the Portfolios commenced operations through the specified date),
assuming that the entire investment is redeemed at the end of each period. In
particular, total return will be calculated according to the following formula:
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.
Based on the foregoing, the average annual total return for the Portfolios from
inception through January 31, 1996 and for the one, five and ten year periods
ended January 31, 1996 were as follows:
S-20
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================
Portfolio Class Average Annual Total Return
----------------------------------------------------------
One Five Ten Since
Year Year Year Inception
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California Tax Exempt Class A 3.42% N/A N/A 7.04%
Portfolio
- ---------------------------------------------------------------------------------------------------------------
Institutional Tax Free Class A 3.69% N/A N/A 7.33%
Portfolio
===============================================================================================================
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
It is currently the Trust's policy to pay for the 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 Portfolios
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 Portfolios
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 Portfolio'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 the Portfolio for
any period during which the New York Stock Exchange, the Adviser, the
Administrator and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Portfolio 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 the Portfolio would receive if it sold the instrument. During periods of
declining interest rates, the daily yield of the Portfolio 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 the
Portfolio resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Portfolio 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 Portfolio would experience a lower yield.
The converse would apply in a period of rising interest rates.
A Portfolio's use of amortized cost and the maintenance of the Portfolio'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 Portfolios. Such
procedures include the determination of the extent of deviation, if any, of the
Portfolio's current net asset value per share calculated using available market
quotations from the Portfolio's 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
Portfolios incur a significant loss or liability, the Trustees have the
authority to reduce pro rata the number of shares of the Portfolios 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
S-21
<PAGE>
or from future dividends while each other Portfolio must annually distribute at
least 90% of its investment company taxable income.
The securities of the Portfolios are valued by the Administrator pursuant to
valuations provided by an independent pricing service. 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.
TAXES
Federal Income Tax
In order to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended ("Code"), each Portfolio
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 net short-term capital
gain) and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Portfolio'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 certain other income, (ii) the Portfolio must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of stocks or securities held for less than three months; (iii) at
the close of each quarter of the Portfolio'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 Portfolio'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 Portfolio'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 Portfolio controls and which are engaged in the
same, similar or related trades or businesses.
Dividends received from the Portfolios will not be eligible for a dividends
received deduction. Notwithstanding the distribution requirement described
above, which only requires a Portfolio 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 Portfolio will be subject to a nondeductible 4%
federal 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 year, plus
certain other amounts. Each Portfolio intends to make sufficient distributions
prior to the end of each calendar year to avoid the imposition of federal excise
tax.
Additional Tax Information Concerning the Portfolios
As indicated in the Prospectus, the Portfolios are designed to provide
shareholders with current tax-exempt interest income and are not intended to
constitute a balanced investment program. Certain recipients of Social Security
and railroad retirement benefits may be required to take into account income
from the Portfolios in determining the taxability of their benefits. In
addition, the Portfolios may not be an appropriate investment for shareholders
that are "substantial users" or persons related to such users of facilities
financed by private activity bonds or industrial revenue bonds. A "substantial
user" is defined generally to include certain persons who regularly use a
facility in their trade or business. All shareholders should consult their tax
advisors to determine the potential effect of investing in the Portfolios, if
any, on their liability for federal, state, and local taxes.
S-22
<PAGE>
If, at the close of each quarter of its taxable year, at least 50% of the value
of a Portfolio's total assets consists of securities the interest on which is
excludable from gross income, the Portfolio may pay "exempt-interest dividends"
to its shareholders. The policy of each Portfolio is to pay each year as
dividends substantially all of its interest income, net of certain deductions.
An exempt-interest dividend is any dividend or part thereof (other than a
capital gain dividend) paid by a Portfolio, and designated by the Portfolio as
an exempt-interest dividend in a written notice mailed to shareholders within 60
days after the close of such Portfolio's taxable year. However, aggregate
exempt-interest dividends for the taxable year may not exceed the net interest
from Municipal Securities and other securities exempt from the regular federal
income tax received by the Portfolio during the taxable year. The percentage of
the total dividends paid for any taxable year which qualifies as federal
exempt-interest dividends will be the same for all shareholders receiving
dividends from a Portfolio during such year, regardless of the period for which
the shares were held.
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 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 were 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.
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 the 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.
Issuers of bonds purchased by the Portfolios (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 the covenants.
Under the Code, if a shareholder receives an exempt-interest dividend with
respect to any share and such share is held for six months or less, any loss on
the sale or exchange of such share will be disallowed to the extent of the
amount of such exempt-interest dividend.
Any net realized long-term capital gains of each of the Portfolios will be
distributed at least annually. The Portfolios will have no tax liability with
respect to such gains and the distributions will be taxable to shareholders as
long-term capital gains, regardless of how long a shareholder has held shares in
a Portfolio. Such distributions will be designated as a capital gains dividend
in a written notice mailed to shareholders after the close of a Portfolio's
taxable year. If a shareholder disposes of shares in a Portfolio at a loss
before having held those shares for more than six months, such loss will be
treated as a long-term capital loss to the extent the shareholder has received a
long-term capital gain distribution on the shares.
S-23
<PAGE>
Although neither Portfolio expects to earn any investment company taxable income
(as defined by the Code), any income earned on taxable investments will be
distributed and will be taxable to shareholders as ordinary income. In general,
"investment company taxable income" comprises taxable net investment income and
net short-term capital gains. A Portfolio would be taxed on any undistributed
investment company taxable income. Since any such income will be distributed, it
is anticipated that no such tax will be paid by either Portfolio.
As indicated in the Prospectus, the Portfolios may acquire puts with respect to
Municipal Securities held in its portfolio. See "Additional Description Of
Permitted Investments --Puts on Municipal Securities" in this Statement of
Additional Information. The policy of the Portfolios is to limit acquisitions of
puts to those under which an acquiring Portfolio will be treated for federal
income tax purposes as the owner of the Municipal Securities acquired subject to
the put and the interest on the Municipal Securities will be tax-exempt to such
Portfolio. Although the Internal Revenue Service has issued a published ruling
that provides some guidance regarding the tax consequences of the purchase of
puts, there is currently no guidance available from the Internal Revenue Service
that definitively establishes the tax consequences of many of the types of puts
that a Portfolio could acquire under the 1940 Act. Therefore, although the
Portfolios will only acquire a put after concluding that it will have the tax
consequences described above, the Internal Revenue Service could reach a
different conclusion. If a Portfolio were not treated as the owner of the
Municipal Securities, income from such securities would probably not be
tax-exempt.
Although both Portfolios expect to qualify as a regulated investment companies
and to be relieved of all or substantially all federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located, or
in which it is otherwise deemed to be conducting business, a Portfolio may be
subject to the tax laws of such states or localities. In addition, in those
states and localities which have income tax laws, the treatment of a Portfolio
and its shareholders under such laws may differ from its treatment under federal
income tax laws.
If for any taxable year a Portfolio does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). Moreover, upon distribution to
shareholders, the Portfolio's income, including Municipal Securities interest
income, will be taxable to shareholders to the extent of the Portfolio's current
and/or accumulated earnings and profits.
State Taxes
A Portfolio 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
Portfolios to Shareholders and the ownership of shares may be subject to state
and local taxes. Depending upon applicable state and local law, Shareholders of
a Portfolio may be exempt from state and local taxes on distributions of
tax-exempt interest income derived from obligations of the state and/or
municipalities in which they reside, but Shareholders may be subject to tax on
income derived from obligations of other jurisdictions. Each Portfolio will make
periodic reports to Shareholders of the source of distributions on a
state-by-state basis. Shareholders should consult their tax advisors concerning
the state and local tax consequences of investments in the Trust, which may
differ from the federal income tax consequences described above.
California State Taxes. If the California Tax Exempt Portfolio qualified to pay
California exempt-interest dividends, dividends distributed to Shareholders will
be considered California exempt-interest dividends (1) if they are designated as
exempt-interest dividends by the Portfolio in a written notice to Shareholders
mailed within 60 days of the close of the Portfolio's taxable year and (2) to
the extent the interest received by the Portfolio during the year on California
Tax Exempt Obligations exceeds expenses of the Portfolio that would be
disallowed under California personal income tax law as allocable to tax exempt
interest if the Portfolio were an individual. If the aggregate dividends so
designated exceed the amount that may be treated as California exempt-interest
dividends, only that percentage of each dividend distribution equal to the
ratios of aggregate California exempt-interest dividends to aggregate dividends
so designated will be treated as a California exempt-interest dividend.
S-24
<PAGE>
Corporations subject to California franchise tax that invest in the Portfolio
may not be entitled to exclude California exempt-interest dividends from income.
The Portfolio is treated as a separate taxable entity for California tax
purposes, and is therefore subject to California franchise or corporate income
tax on its net income. However, the Portfolio intends to qualify as a regulated
investment company under the Code, and if it does so qualify, will be entitled,
for California tax purposes, to a deduction for dividends paid to Shareholders.
As a regulated investment company, the Portfolio will pay California franchise
or corporate income tax only on any undistributed income, net of allocable
expenses.
The foregoing discussion, as well as the discussion in the Prospectus, provides
only a general, abbreviated summary of certain of the provisions of the
California Revenue and Taxation Code presently in effect as they directly govern
the taxation of Shareholders subject to California personal income tax. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Portfolio transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
PORTFOLIO TRANSACTIONS
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 Adviser is responsible for placing the orders
to execute transactions for the Portfolio. The Adviser 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 most favorable execution. Best price and most
favorable 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 affecting the overall benefit obtained by the account on the
transaction. The Adviser's determination of what are reasonably competitive
rates is based upon the professional knowledge of its 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. Some trades are made on a net basis
where the Trust either buys securities directly from the dealer or sells them to
the dealer. In these instances, there is no direct commission charged but there
is a spread (the difference between the buy and sell price) which is the
equivalent of a commission. While the Adviser 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 Portfolios 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. The Adviser will at times
deal directly with the dealers who make a market in the securities involved,
although the Adviser may deal with other entities in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. At other times, 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.
For the fiscal year ended January 31, 1996, the Portfolios did not pay any
brokerage commissions.
TRADING PRACTICES AND BROKERAGE
The Adviser 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 most favorable 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 fund may obtain, it
is the opinion of the Adviser and the Trust's Board of Trustees that the
advantages of combined orders outweigh the possible disadvantages of separate
transactions.
S-25
<PAGE>
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and most favorable
execution, the Trust may place orders with broker-dealers which have agreed to
defray certain Trust expenses such as custodian fees.
It is expected that the Trust may execute brokerage or other agency transactions
through the Distributor which is a registered broker-dealer, for a commission in
conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended,
and rules promulgated by the SEC. Under these provisions, the Distributor 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 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 renumeration 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 periods ended January 31, 1994 and January 31,
1995, the Portfolios paid no brokerage commissions to the Distributor or to any
unaffiliated brokers or dealers.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the Portfolios each of which represents an equal proportionate
interest in that Portfolio with each other share. Shares are entitled upon
liquidation to a pro rata share in the net assets of the Portfolios,
Shareholders have no preemptive rights. The Declaration of Trust provides that
the Trustees of the Trust may create additional series of shares. 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.
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 advisers, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust
S-26
<PAGE>
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 liability for his or her willful misfeasance,
bad faith, gross negligence or reckless disregard of his or her duties.
5% SHAREHOLDERS
As of March 1, 1996, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% or more of
the shares of the Portfolios. The Trust believes that most of the shares
referred to below were held by the below persons in account for their fiduciary,
agency or custodial customers.
California Tax Exempt Portfolio: Wells Fargo Bank, NA, C/O Quality Control
Department, 525 Market Street, 17th Floor, San Francisco, CA 94105, 97.94%.
Institutional Tax Free Portfolio: Wells Fargo Bank, NA, C/O Quality Control
Department, 525 Market Street, 17th Floor, San Francisco, CA 94105, 99.07%.
EXPERTS
The financial statements in this Statement of Additional Information have been
examined by Price Waterhouse LLP, independent accountants, as indicated in their
report, with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
FINANCIAL STATEMENTS
Following are the audited financial statements of the Portfolios for the fiscal
period ended January 31, 1996 and the Report of Independent Accountants of Price
Waterhouse LLP date March 8, 1996, relating to the financial statements,
including financial highlights of the Portfolios.
S-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
California Tax-Exempt and Institutional
Tax-Free Portfolios of
The Arbor Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the California Tax-Exempt and Institutional Tax-Free Portfolios of The Arbor
Fund (hereafter referred to as the "Fund") at January 31, 1996, the results of
each of their operations, the changes in each of their net assets and the
financial highlights for each of the respective periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at January 31, 1996, by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 8, 1996
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1996 Face
CALIFORNIA TAX-EXEMPT Amount Value
PORTFOLIO (000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS -- 99.5%
CALIFORNIA -- 98.2%
Big Bear Lake, California Industrial
Development Revenue, Southwest Gas
Project, Ser A, AMT (A) (B) (C)
3.050%, 02/07/96 ........................... $ 5,100 $ 5,100
California Department of Water Resources,
Central Valley Project, Ser N-V1 (A) (B) (C)
3.100%, 02/07/96 ........................... 7,100 7,100
California Health Facilities Financing
Authority, Adventist Health
Systems, Ser A (A) (B) (C)
2.900%, 02/07/96 ........................... 6,000 6,000
California Health Facilities Financing
Authority, Catholic Healthcare West,
Ser 95C, MBIA (A) (B) (C)
2.850%, 02/07/96 ........................... 10,000 10,000
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser 93A (A) (B)
2.800%, 02/07/96 ........................... 8,000 8,000
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser 93B (A) (B)
2.800%, 02/07/96 ........................... 3,600 3,600
California Health Facilities Financing
Authority, Scripps Memorial Hospital,
Ser 91B, MBIA (A) (B) (C)
2.900%, 02/07/96 ........................... 6,700 6,700
California Pollution Control Financing
Authority, Burney Forrest Project,
Ser 84, AMT (A) (B) (C)
3.750%, 02/01/96 ........................... 1,000 1,000
California Pollution Control Financing
Authority, Exxon Project (A) (B)
3.500%, 02/01/96 ........................... 1,600 1,600
California Pollution Control Financing
Authority, Pacific Gas & Electric,
Ser 88A, TECP (C)
3.150%, 02/01/96 ........................... 7,000 7,000
California Pollution Control Financing
Authority, Pacific Gas & Electric,
Ser 88C, TECP (C)
3.050%, 02/07/96 ........................... 3,800 3,800
California Pollution Control Financing
Authority, Pacific Gas & Electric,
Ser C, TECP (C)
3.150%, 02/02/96 ........................... 4,000 4,000
3.650%, 02/09/96 ........................... 9,500 9,500
</TABLE>
<TABLE>
<CAPTION>
Face
CALIFORNIA TAX-EXEMPT Amount Value
PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------------
<S> <C> <C>
California Pollution Control Financing
Authority, Shell Oil Project,
Ser 85A, AMT (A) (B)
3.700%, 02/01/96 ................... $ 2,300 $ 2,300
California Pollution Control Financing
Authority, Shell Oil Project,
Ser 94B, AMT (A) (B)
3.700%, 02/01/96 ................... 200 200
California Pollution Control Financing
Authority, Sierra Pacific Project
(A) (B) (C)
3.300%, 02/07/96 ................... 7,400 7,400
California Pollution Control Financing
Authority, U.S. Borax Project,
Ser 95A (A) (B) (C)
3.200%, 02/07/96 ................... 5,100 5,100
California State RAW, BTP92
Ser 94C (A) (B) (C) (D)
3.390%, 02/07/96 ................... 10,000 10,000
California State RAW, Ser C, FGIC (C)
5.750%, 04/25/96 ................... 9,150 9,192
California Statewide Communities
Development Authority, Chevron
USA Project, Ser 94, AMT (A) (B)
3.700%, 02/01/96 ................... 1,190 1,190
California Statewide Communities
Development Authority, Irvine County
Project, Ser 95A-1 (A) (B) (C)
2.800%, 02/07/96 ................... 6,000 6,000
California Statewide Communities
Development Authority, Irvine County
Project, Ser 95A-5 (A) (B) (C)
2.850%, 02/07/96 ................... 3,900 3,900
California Statewide Communities
Development Authority, Irvine County
Project, Ser 95A-6 (A) (B) (C)
2.850%, 02/07/96 ................... 4,500 4,500
California Statewide Communities
Development Authority, St. Joseph
Health Systems Group (A) (B) (C)
3.200%, 02/01/96 ................... 1,300 1,300
Chula Vista, California, San Diego Gas
& Electric, Ser 92B, AMT (A) (B)
3.050%, 02/07/96 ................... 1,000 1,000
Contra Costa County, California, Multi-
Family Housing Park Regency,
Ser A, AMT (A) (B) (C)
3.400%, 02/07/96 ................... 20,400 20,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996 Face
CALIFORNIA TAX-EXEMPT Amount Value
PORTFOLIO(continued) (000) (000)
- --------------------------------------------------------------
<S> <C> <C>
Contra Costa, California, Transportation
Authority Sales Tax Revenue,
Ser A, FGIC (A) (B) (C)
2.900%, 02/07/96 .................... $ 3,500 $ 3,500
Corona, California, Multi-Family
Housing Revenue, Cog Partners
Project, Ser 85D (A) (B) (C)
3.475%, 02/07/96 .................... 5,200 5,200
Cupertino, California, TRAN
4.750%, 07/05/96 .................... 5,225 5,243
Glendale, California, Reliance
Development, Glendale Public
Parking Project, Ser 84 (A) (B) (C)
3.650%, 02/15/96 .................... 6,200 6,200
Huntington Park, California,
Redevelopment Agency, Casa Rita
Apartments, Ser 94A, AMT (A) (B) (C)
3.350%, 02/07/96 .................... 4,000 4,000
Kings County, California, Edgewater
Isle Project, Ser 85A (A) (B) (C)
3.100%, 02/07/96 .................... 7,570 7,570
Los Angeles County, California,
Housing Authority, Malibu
Meadows II Project, Ser B (A) (B)
3.350%, 02/07/96 .................... 2,300 2,300
Los Angeles County, California,
Metropolitan Transportation
Authority, Union Station Project,
Ser A (A) (B) (C)
2.950%, 02/07/96 .................... 14,000 14,000
Los Angeles County, California, Sales Tax
Revenue, Ser A, FGIC (A) (B) (C)
2.750%, 02/07/96 .................... 5,050 5,050
Los Angeles County, California, TRAN (C)
4.500%, 07/01/96 .................... 22,200 22,264
Los Angeles, California,
Redevelopment Agency,
Multi-Family Housing,
Lanewood Apartments (A) (B) (C)
3.100%, 02/07/96 .................... 300 300
Milpitas, California, TRAN
4.750%, 07/05/96 .................... 2,450 2,458
Monterey County, California,
Reclamation & Distribution Project,
Ser 95A (A) (B) (C)
3.400%, 02/07/96 .................... 4,000 4,000
Mount Diablo, California, TRAN
4.500%, 10/24/96 .................... 12,000 12,050
</TABLE>
<TABLE>
<CAPTION>
Face
CALIFORNIA TAX-EXEMPT Amount Value
PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------------------
<S> <C> <C>
Oakland, California, TRAN
4.500%, 07/31/96 .................... $ 5,000 $ 5,015
Pasadena, California, Historical
Rehabilitation Revenue, Dodsworth
Building Project (A) (B) (C)
3.100%, 02/07/96 .................... 3,900 3,900
Sacramento, California, Administration
Center and Courthouse
Project (A) (B) (C)
2.850%, 02/07/96 .................... 3,000 3,000
Sacramento, California, Municipal Utility
District, Ser I, TECP (C)
3.100%, 03/19/96 .................... 8,000 8,000
3.100%, 03/20/96 .................... 7,000 7,000
San Bernardino County, California,
Housing Authority, Multifamily
Housing Revenue, Montclair
Heritage Project, Ser A (A) (B) (C)
2.900%, 02/07/96 .................... 4,620 4,620
San Bernardino County, California,
Housing Authority, Multifamily
Housing Revenue, Rialto Heritage
Park Apartments, Ser 93 (A) (B) (C)
2.900%, 02/07/96 .................... 4,330 4,330
San Diego, California, Housing
Authority, Multifamily Housing
Revenue, Lusk Mira Apartments,
Ser 85E (A) (B) (C)
3.050%, 02/07/96 .................... 3,600 3,600
San Diego, California, San Diego Gas
& Electric Co., Ser 95A, TECP
3.100%, 02/01/96 .................... 2,000 2,000
3.050%, 02/07/96 .................... 10,200 10,200
San Diego, California, TECP
3.600%, 02/22/96 .................... 5,000 5,000
San Francisco, California, City & County
Financing Authority Revenue, Yerba
Buena Garden Project (A) (B) (C)
3.350%, 02/07/96 .................... 5,000 5,000
San Francisco, California, City & County
Redevelopment Agency, Bayside
Village Project, Ser A (A) (B) (C)
3.250%, 02/07/96 .................... 7,200 7,200
San Francisco, California, City & County
Redevelopment Agency, Multifamily
Revenue, Fillmore Center Project,
Ser 92B-1 (A) (B) (C)
3.050%, 02/07/96 .................... 8,900 8,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996 Face
CALIFORNIA TAX-EXEMPT Amount Value
PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------------------
<S> <C> <C>
San Francisco, California, TRAN
4.500%, 07/25/96 ...................... $ 10,000 $ 10,027
San Juan Modesto-Santa Clara-Redding,
California, San Juan Project,
Subordinate Lien Revenue,
Ser B, AMBAC (A) (B) (C)
2.900%, 02/07/96 ...................... 1,900 1,900
Sonoma County, California, TRAN
4.250%, 11/01/96 ...................... 9,000 9,026
Southeast Resource Recovery Facilities
Authority, California Lease Revenue,
Ser A (A) (B) (C)
3.300%, 02/07/96 ...................... 2,900 2,900
Southern California Public Power Authority,
Transmission Project Revenue,
Southern Transmission,
Ser 91, AMBAC (A) (B) (C)
2.750%, 02/07/96 ...................... 12,100 12,100
Southern California Public Power Authority,
Transmission Project Revenue,
San Juan Power Project,
MBIA (A) (B) (C) (D)
3.300%, 02/07/96 ...................... 3,360 3,360
State of California, Various Purpose GO,
Ser 92A-2, Custodial Receipts -
Topstar, FGIC (A) (B) (C) (D)
3.050%, 02/07/96 ...................... 10,500 10,500
Vallejo, California, Housing Authority,
Multifamily Revenue, Crow Western
Project-Phase II, Ser 85C (A) (B) (C)
3.200%, 02/07/96 ...................... 9,200 9,200
West Covina, California, Redevelopment
Agency, Barranca Garvey Public
Package (A) (B) (C)
3.050%, 02/07/96 ...................... 8,000 8,000
--------
Total California .................. 384,795
--------
PUERTO RICO -- 1.3%
Puerto Rico Industrial, Medical, Higher
Education and Environmental
Pollution Control Facilities Authority
(Ana G. Mendez Educational
Foundation, FEAGM Project)
(A) (B) (C)
3.200%, 02/07/96 ...................... 5,000 5,000
--------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT Value
PORTFOLIO(concluded) (000)
- -------------------------------------------------
<S> <C>
Total Municipal Bonds
(Cost $389,795,506) ..... $ 389,795
---------
Total Investments -- 99.5%
(Cost $389,795,506) ..... 389,795
---------
OTHER ASSETS AND LIABILITIES -- 0.5%
Other Assets and Liabilities, Net .. 1,887
---------
Total Other Assets and Liabilities . 1,887
---------
NET ASSETS:
Portfolio Shares (unlimited
authorization - no par value)
based on 391,745,363 outstanding
shares of beneficial interest .. 394,787
Accumulated Net Realized Loss
on Investments ................. (3,105)
---------
Total Net Assets: (100.0%) ......... $ 391,682
=========
Net Asset Value, Offering Price
and Redemption Price Per Share-- $ 1.00
=========
<FN>
(A) Variable Rate Securities - the rate reported in the Statement of Net Assets
is the rate in effect on January 31, 1996.
(B) Put or Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the lesser of the
put, demand or maturity date.
(C) Securities are held in connection with a letter of credit or standby bond
purchase agreement issued by a major commercial bank or other financial
institution.
(D) Tax-exempt derivative securities relating to municipal obligations,
including tender option bonds, participations, beneficial interests in
trusts and partnership interests.
AMBAC -- American Municipal Bond Assurance Company
AMT -- Alternative Minimum Tax
FGIC -- Financial Guaranty Insurance Company
GO -- General Obligation
MBIA -- Municipal Bond Investors Assurance
RAW -- Revenue Anticipation Warrant
Ser -- Series
TECP -- Tax Exempt Commercial Paper
TRAN -- Tax and Revenue Anticipation Note
</FN>
</TABLE>
The accompanying notes are an integral part of thefinancial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996 Face
INSTITUTIONAL TAX-FREE Amount Value
PORTFOLIO (000) (000)
- ---------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS -- 99.7%
ARIZONA -- 2.6%
Maricopa County, Arizona, PCRB,
Arizona Public Services
Corporation, (C)
3.400%, 02/01/96 ................ $3,000 $3,000
------
CALIFORNIA -- 4.4%
California State, Higher Education
Loan Authority, Student Loan
Refunding, Ser 95E-5,
AMT, (C)
4.250%, 06/01/96 ................ 1,000 1,000
California State, Higher Education
Loan Authority Student Loan
Refunding, Ser 87-A, (C)
3.900%, 07/01/96 ................ 2,300 2,300
Southeast Resource Recovery
Facilities Authority, California,
Ser A, (A) (B) (C)
3.300%, 02/07/96 ................ 1,800 1,800
------
Total California ............ 5,100
------
COLORADO -- 1.8%
Arapahoe County, Colorado CSX
Beckett Aviation Project,
Ser 83 (A) (B) (C)
3.480%, 02/15/96 ................ 1,900 1,900
Colorado State, Frasier Meadows
Manor Project,
Ser 94, (A) (B) (C)
3.250%, 02/01/96 ................ 210 210
------
Total Colorado .............. 2,110
------
GEORGIA -- 4.2%
Burke County, Georgia, PCRB,
Ogelthorpe Power Corporation
Project, Ser A
3.050%, 02/07/96 ................ 1,400 1,400
Fulton County, Georgia, The Alfred
and Adele Davis Academy Project,
Ser 1995, (A) (B) (C)
3.300%, 02/01/96 ................ 3,500 3,500
------
Total Georgia ............... 4,900
------
</TABLE>
<TABLE>
<CAPTION>
Face
INSTITUTIONAL TAX-FREE Amount Value
PORTFOLIO(continued) (000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
HAWAII -- 4.0%
State of Hawaii, GO, Custodial Receipts -
Topstar, Ser A-7, (A) (B) (C)
3.150%, 02/07/96 ............................ $ 4,700 $ 4,700
-------
ILLINOIS -- 14.1%
Chicago, Illinois, GO, (A) (B) (C)
3.750%, 05/01/96 ............................ 2,800 2,800
Illinois State, Development Finance
Authority, Illinois Power Company
Project, Ser B, (A) (B) (C)
3.200%, 02/07/96 ............................ 3,300 3,300
Illinois State, Development Authority,
Webster Wayne Shopping Center
Project, (A) (B) (C)
3.300%, 02/08/96 ............................ 3,000 3,000
Illinois State, Educational Facilities Authority,
Depaul University Project, (A) (B) (C)
3.450%, 02/07/96 ............................ 2,300 2,300
Illinois State, Educational Facilities Authority,
Art Institute of Chicago, (A) (B) (C)
3.150%, 02/07/96 ............................ 3,000 3,000
3.450%, 02/07/96 ............................ 2,000 2,000
-------
Total Illinois .......................... 16,400
-------
INDIANA -- 0.1%
Hammond, Indiana, PCRB, Amoco Oil
Project, (A) (B)
3.650%, 02/01/96 ............................ 100 100
-------
LOUISIANA -- 1.8%
Jefferson Parish, Louisiana, Hospital
Service District No.2, FGIC, (A) (B),
3.100%, 02/07/96 ............................ 2,100 2,100
-------
MARYLAND -- 8.1%
Maryland State, Health and Higher
Education Authority, Helix Health
Hospital Issue, Ser A, (A) (B) (C)
3.300%, 02/08/96 ............................ 5,000 5,000
Montgomery County, Maryland, Housing
Opportunities Commission,
Ser B, Annual Mandatory Tender, FHA
3.900%, 11/14/96 ............................ 4,500 4,500
-------
Total Maryland .......................... 9,500
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996
Face
INSTITUTIONAL TAX-FREE Amount Value
PORTFOLIO(continued) (000) (000)
- --------------------------------------------------------------
<S> <C> <C>
MISSISSIPPI -- 3.1%
Jackson County, Mississippi, Chevron USA
Project, Ser 93, (A) (B)
3.650%, 02/01/96 ...................... $3,610 $3,610
------
MISSOURI -- 7.6%
Missouri State, Health and Educational
Facilities Authority, School District
Funding Program, Ser 95 H
4.500%, 08/19/96 ...................... 2,500 2,507
Missouri State, Health and Educational
Facilities Authority, Saint Anthony's
Medical Center, (A) (B) (C)
3.500%, 02/06/96 ...................... 3,700 3,700
St. Louis, Missouri, Industrial Development
Authority, American Cancer Society,
(A) (B) (C)
3.650%, 02/07/96 ...................... 2,700 2,700
------
Total Missouri .................... 8,907
------
NEW YORK -- 4.5%
Nassau County, New York,
Ser 95-B, TAN
4.500%, 04/15/96 ...................... 1,500 1,502
New York State, Local Government
Assistance Corporation,
Ser 95-E (A) (B) (C)
2.950%, 02/07/96 ...................... 3,700 3,700
------
Total New York .................... 5,202
------
NORTH CAROLINA -- 7.5%
Raleigh Durham, North Carolina, Airport
Authority, American Airlines Project
Ser B, (A) (B) (C)
3.750%, 02/01/96 ...................... 4,200 4,200
Wake County, North Carolina, Pollution
Control Authority, Carolina Power and
Light Project, Ser B, (A) (B) (C)
3.550%, 02/07/96 ...................... 4,500 4,500
------
Total North Carolina .............. 8,700
------
OREGON -- 8.0%
Klamath Falls, Oregon, Electric Revenue,
Salt Caves Hydroelectric Project,
Ser 86D
4.400%, 05/02/96 ...................... 4,380 4,380
</TABLE>
<TABLE>
<CAPTION>
Face
INSTITUTIONAL TAX-FREE Amount Value
PORTFOLIO(continued) (000) (000)
- ------------------------------------------------------------------
<S> <C> <C>
Oregon State, Health, Housing, Educational,
& Cultural Facilities Authority, Guide
Dogs For the Blind Project,
Ser A, (A) (B) (C)
3.100%, 02/08/96 ......................... $3,000 $3,000
Oregon State, GO, Ser 73-G, (A) (B) (C)
3.350%, 02/07/96 ......................... 2,000 2,000
------
Total Oregon ......................... 9,380
------
PENNSYLVANIA -- 4.1%
Beaver County, Pennsylvania, Toledo
Edison Project, Ser 92-E, (C)
3.850%, 03/06/96 ......................... 1,200 1,200
Pennsylvania State, Higher Education
Authority, Carnegie Melon University,
(A) (B) (C)
3.700%, 02/01/96 ......................... 200 200
Sayre, Pennsylvania, Health Care Facilities
Authority, Ser K, AMBAC (A) (B) (C)
3.100%, 02/07/96 ......................... 3,400 3,400
------
Total Pennsylvania ................... 4,800
------
SOUTH CAROLINA -- 2.9%
York County, South Carolina, PCRB, Saluda
River National Rural Utilities Cooperative
Financing Corporation, Ser 84E-1
3.800%, 02/15/96 ......................... 3,400 3,400
------
SOUTH DAKOTA -- 1.8%
Lawrence County, South Dakota, PCRB,
Homestake Mining Project, Ser 83
(A) (B) (C)
3.250%, 02/07/96 ......................... 2,100 2,100
------
TENNESSEE -- 2.7%
Metropolitan Tennessee, Nashville &
Davidson General Accident Insurance
Project, Ser 86, AMT,
4.100%, 05/01/96 ......................... 3,200 3,200
------
TEXAS -- 4.7%
Brazos River, Texas, Dow Chemical Project,
Ser 91, TECP
3.500%, 03/25/96 ......................... 2,000 2,000
Gulf Coast, Texas, PCRB, Amoco Oil
Company Project, Ser 92, (A) (B)
3.400%, 02/01/96 ......................... 800 800
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996
Face
INSTITUTIONAL TAX-FREE Amount Value
PORTFOLIO(continued) (000) (000)
- -------------------------------------------------------------------------
<S> <C> <C>
Red River, Texas, PCRB, Southwestern
Public Service Corporation Project,
(A) (B) (C)
3.100%, 02/08/96 ..................... $ 2,700 $ 2,700
--------
Total Texas ...................... 5,500
--------
UTAH -- 2.8%
Intermountain, Utah, Power Agency,
Ser 85F, (C)
3.750%, 03/15/96 ..................... 3,300 3,300
--------
VERMONT -- 2.2%
Vermont State, Educational & Health
Facilities Authority, VHA New England,
Ser 85-G, AMBAC (A) (B) (C)
3.150%, 02/07/96 ..................... 2,560 2,560
--------
WASHINGTON -- 3.9%
Washington State, Public Power Supply
System, Nuclear Project Number 1,
Ser 1A2 (A) (B) (C)
3.100%, 02/07/96 ..................... 4,600 4,600
--------
WISCONSIN -- 2.8%
Whitewater, Wisconsin, Trek Bicycle
Corporation Project, Ser 95,
AMT, (A) (B) (C)
3.450%, 02/08/96 ..................... 3,235 3,235
--------
Total Municipal Bonds
(Cost $116,403,978) ........... 116,404
--------
Total Investments -- 99.7%
(Cost $116,403,978) ........... 116,404
--------
OTHER ASSETS AND LIABILITIES -- 0.3%
Other Assets and Liabilities, Net ........ 332
--------
Total Other Assets and Liabilities ....... 332
--------
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL TAX-FREE Value
PORTFOLIO(concluded) (000)
- ----------------------------------------------------
<S> <C>
NET ASSETS:
Portfolio Shares (unlimited
authorization - no par value) based
on 116,758,647 outstanding shares
of beneficial interest ............ $ 116,759
Accumulated Net Realized Loss
on Investments .................... (23)
---------
Total Net Assets: (100.0%) ............ 116,736
=========
Net Asset Value, Offering Price
and Redemption Price Per Share-- .. $ 1.00
=========
<FN>
(A) Variable Rate Security - the rate reported in the Statement of Net Assets
is the rate in effect on January 31, 1996.
(B) Put or Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the lessor of the
put demand date or maturity date.
(C) Security is held in connection with a letter of credit or standby bond
purchase agreement issued by a major commercial bank or other financial
institution.
AMBAC -- American Municipal Bond Assurance Company
AMT -- Alternative Minimum Tax
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Authority
GO -- General Obligation
PCRB -- Pollution Control Revenue Bonds
Ser -- Series
TAN -- Tax Anticipation Notes
TECP -- Tax Exempt Commercial Paper
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF OPERATIONS (000) THE ARBOR FUND
For the Year Ended January 31, 1996
<TABLE>
<CAPTION>
CALIFORNIA INSTITUTIONAL
TAX-EXEMPT TAX-FREE
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Interest Income.................................... $14,944 $4,541
- -----------------------------------------------------------------------------------
Total Investment Income......................... 14,944 4,541
- -----------------------------------------------------------------------------------
Expenses:
Administration Fees................................ 908 349
Waiver of Administration Fees...................... -- (203)
Investment Advisory Fees........................... 286 87
Custodian Fees..................................... 38 16
Transfer Agent Fees................................ 56 31
Professional Fees.................................. 225 10
Registration Fees.................................. 85 6
Trustee Fees....................................... 15 2
Printing Expenses.................................. 6 2
Amortization of Organizational Costs............... 36 47
Other Expenses..................................... 20 4
- -----------------------------------------------------------------------------------
Total Expenses.................................. 1,675 351
- -----------------------------------------------------------------------------------
Net Investment Income.............................. 13,269 4,190
Realized Loss on Security Transactions............. (3,043) (4)
Change in Unrealized Depreciation on Investments... 3,012 --
- -----------------------------------------------------------------------------------
Net Realized and Unrealized Loss on Investments.. (31) (4)
- -----------------------------------------------------------------------------------
Increase in Net Assets Resulting From Operations... $13,238 $4,186
===================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (000) THE ARBOR FUND
For the Periods Ended January 31,
<TABLE>
<CAPTION>
CALIFORNIA INSTITUTIONAL
TAX-EXEMPT TAX-FREE
PORTFOLIO PORTFOLIO
-------------------------------- --------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Operations:
Net Investment Income ................... $ 13,269 $ 11,084 $ 4,190 $ 3,432
Net RealizedLoss on Security Transactions (3,043) (61) (4) (18)
Net Change in Unrealized Depreciation
on Investments ........................ 3,012 (3,012) -- --
- ------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Investment Operations .......... 13,238 8,011 4,186 3,414
- ------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ................... (13,269) (11,084) (4,190) (3,432)
Net Realized Gains ...................... -- (49) -- (8)
- ------------------------------------------------------------------------------------------------------------
Total Distributions .................. (13,269) (11,133) (4,190) (3,440)
- ------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ............. 1,185,021 1,243,534 862,136 739,857
Cost of Shares Redeemed ................. (1,189,342) (1,250,234) (859,120) (756,875)
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Capital Share Transactions .... (4,321) (6,700) 3,016 (17,018)
- ------------------------------------------------------------------------------------------------------------
Contribution of Capital From Affiliate .... 30 3,012 -- --
- ------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in
Net Assets ......................... (4,322) (6,810) 3,012 (17,044)
- ------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period ..................... 396,004 402,814 113,724 130,768
- ------------------------------------------------------------------------------------------------------------
End of Period ........................... $ 391,682 $ 396,004 $ 116,736 $ 113,724
- ------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Issued .................................. 1,185,021 1,243,534 862,136 739,857
Redeemed ................................ (1,189,342) (1,250,234) (859,120) (756,875)
- ------------------------------------------------------------------------------------------------------------
NetIncrease (Decrease) in Share
Transactions .......................... (4,321) (6,700) 3,016 (17,018)
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS THE ARBOR FUND
For a Share Outstanding Throughout the Period
For thePeriods Ended January 31,
<TABLE>
<CAPTION>
REALIZED NET
NET ASSET AND DISTRIBUTIONS ASSET
VALUE NET UNREALIZED FROM NET VALUE
BEGINNING INVESTMENT LOSSES ON INVESTMENT CONTRIBUTION END OF TOTAL
OF PERIOD INCOME SECURITIES INCOME OF CAPITAL PERIOD RETURN
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT PORTFOLIO
1996..... $1.00 0.034 -- (0.034) -- $1.00 3.42%(DOUBLE DAGGER)
1995..... 1.00 0.027 (.008) (0.027) .008 1.00 2.79(DAGGER)
1994(1).. 1.00 0.007 -- (0.007) -- 1.00 2.17*
INSTITUTIONAL TAX-FREE PORTFOLIO
1996..... $1.00 0.036 -- (0.036) -- $1.00 3.69%
1995..... 1.00 0.028 -- (0.028) -- 1.00 2.80
1994(1).. 1.00 0.007 -- (0.007) -- 1.00 2.20*
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
RATIO OF RATIO OF
RATIO OF EXPENSES NET
RATIO OF NET TO INCOME TO
EXPENSES INCOME AVERAGE AVERAGE
TO TO NET NET
NET ASSETS AVERAGE AVERAGE ASSETS ASSETS
END OF NET NET (EXCLUDING (EXCLUDING
PERIOD (000) ASSETS ASSETS WAIVERS) WAIVERS)
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT PORTFOLIO
1996..... $391,682 0.42% 3.36% 0.42% 3.36%
1995..... 396,004 0.28 2.72 0.34. 2.66
1994(1).. 402,814 0.28* 2.14* 0.34* 2.08*
INSTITUTIONAL TAX-FREE PORTFOLIO
1996..... $116,736 0.30% 3.60% 0.48% 3.42%
1995..... 113,724 0.30 2.73 0.46 2.57
1994(1).. 130,768 0.30* 2.17* 0.47* 2.00*
===================================================================
<FN>
* Annualized
(DAGGER) The total return for the period ended January 31, 1995 includes
the effect of a capital contribution from an affiliate of the
former Adviser. Without the capital contribution, the total
return would have been .74%.
(DOUBLE DAGGER) The total return for the period ended January 31, 1996 includes
the effect of a capital contribution from an affiliate of the
former Adviser. Without the capital contribution, the total
return would have been 2.42%.
(1) Commenced operations on October 6, 1993.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE ARBOR FUND
January 31, 1996
1. Organization:
THE CALIFORNIA TAX-EXEMPT AND INSTITUTIONAL TAX-FREE PORTFOLIOS are separate
investment portfolios of The Arbor Fund (the "Trust"). The Trust was organized
as a Massachusetts Business Trust under a Declaration of Trust dated July 24,
1992 and had no operations through February 1, 1993 other than those related to
organizational matters and the sale of initial shares to SEI Financial
Management Corporation (the "Administrator"), a wholly-owned subsidiary of SEI
Corporation, on October 9, 1992. The Trust is registered under the Investment
Company Act of 1940, as amended, as an open-end management company. The
financial statements included herein relate to the Trust's California Tax-Exempt
Portfolio and the Institutional Tax-Free Portfolio (the "Portfolios"). The
Portfolio's prospectus provides a description of each Portfolio's investment
objectives, policies and strategies. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the Portfolio in which
shares are held. The Portfolios commenced operations on October 6, 1993
("commencement of operations").
2. Significant Accounting Policies:
The following is a summary of the significant accounting policies followed by
the Portfolios.
SECURITY VALUATION--Investment securities held by the Portfolios are stated
at amortized cost, which approximates market value. Under this valuation
method, purchase discounts and premiums are accreted and amortized ratably
to maturity and are included in interest income.
FEDERAL INCOME TAXES--It is each Portfolio's intention to continue to
qualify as a regulated investment company for Federal income tax purposes
by complying with the appropriate provisions of the Internal Revenue Code
of 1986, as amended. Accordingly, no provision for Federal income tax is
required in the financial statements.
SECURITY TRANSACTIONS AND RELATED INCOME--Security transactions are
accounted for on the date the security is purchased or sold (trade date).
Dividend income is recognized on the ex-dividend date, and interest income
is recognized on the accrual method of accounting. Costs used in
determining realized gains and losses on the sale of investment securities
are those of the specific securities sold.
NET ASSET VALUE PER SHARE--The net asset value per share of each Portfolio
is calculated on each business day. In general, it is computed by dividing
the assets of each Portfolio, less its liabilities, by the number of
outstanding shares of the Portfolio.
EXPENSES--Expenses that are directly related to one of the Portfolios are
charged directly to that Portfolio. Other operating expenses of the Trust
are prorated to the Portfolios on the basis of relative net assets.
OTHER--Distributions from net investment income are declared daily and paid
monthly to Shareholders. Any net realized gains on sales of securities are
distributed to Shareholders at least annually.
3. Administration and Distribution Agreements:
The Trust and the Administrator have entered into an Administration Agreement
dated January 28,1993 (the "Administration Agreement"). Under terms of the
Administration Agreement, the Administrator is entitled to a fee, which is
calculated daily and paid monthly at an annual rate of .23% And .30% Of the
average daily net assets of the California Tax-Exempt and Institutional Tax-Free
Portfolios, respectively. The Administrator has agreed to
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) THE ARBOR FUND
January 31, 1996
voluntarily waive a portion of its fee in order to limit annual operating
expenses to .30% of the average daily net assets of the Institutional Tax-Free
Portfolio.Fee waivers by the Administrator are voluntary and may be terminated
at any time. The Administrator also serves as the shareholder servicing agent
for the portfolios. Compensation for this service is paid under the
Administration Agreement.
The Trust and SEI Financial Services Company (the "Distributor"), a wholly-owned
subsidiary of SEI Corporation, have entered into a Distribution Agreement (the
"Distribution Agreement"). The Distributor receives no fees for its services
under the Distribution Agreement.
4. Investment Advisory Agreement:
The Trust has entered into an investment advisory agreement (the"Advisory
Agreement") with PNC Institutional Management Corporation (the "Adviser"), a
wholly-owned subsidiary of PNC Bank, N.A., dated December 1, 1995. Formerly, the
Adviser was The Prudential Investment Corporation. Under the terms of the
Advisory Agreement, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .075% of the average daily net assets of
each of the California Tax-Exempt and Institutional Tax-Free Portfolios up to
$300 million; .070% of the average daily net assets of each such Portfolio from
$300 million to $500 million; and .050% of each such Portfolio's average daily
net assets over $500 million.
5. Organizational Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Trust and are being amortized
over sixty months beginning with the commencement of operations. In the event
any of the initial shares of the Trust are redeemed by any holder thereof during
the period that the Trust is amortizing its organizational costs, the redemption
proceeds payable to the holder thereof by the Trust will be reduced by the
unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption.
Certain Officers and Trustees of the Trust are also Officers of the
Administrator and/or Distributor. Such Officers and Trustees are not compensated
by the Trust for servicing in their respective roles.
On December 15, 1994, Prudential Securities Group, Inc. ("PSG"), an affiliate
of the former Adviser to the Portfolio, granted to the California Tax-Exempt
Portfolio (the "Portfolio") the right to require PSG to purchase from the
Portfolio sufficient amounts of two bonds, at amortized cost plus accrued
interest, in order to maintain the Portfolio's marked-to-market net asset value
per share at no less than $.9971 (the "Agreement"). The Portfolio's rights under
the Agreement provided for immediate exercise upon the occurrence of certain
conditions, including reaching the date of July 19, 1995.
The securities subject to the Agreement were:
PAR
(000) DESCRIPTION
- -------- -----------------------------------------
$ 5,000 Orange County TRAN, 4.5%, 7/19/95
$20,000 Orange County Teeter Note, 4.2%, 6/30/95
On the date of the Agreement, the Portfolio recorded an unrealized loss of
$3,012,750 for the difference between the market value of the bonds and their
amortized cost and a contribution to capital in the same amount.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded) THE ARBOR FUND
January 31, 1996
On March 13, 1995, PSG extended the date of the Agreement until the maturity
date for each security subject to the Agreement. In connection with this
extension, the Portfolio recorded an unrealized loss of $29,557 and a
contribution to capital in the same amount.
On June 30, 1995, the Orange County Teeter Note matured and the Portfolio
received the full face amount of the note plus accrued interest. On July 19,
1995, the Portfolio exercised its right under the Agreement and put the Orange
County TRAN to PSG for an amount equivalent to the full face amount plus accrued
interest.
The Portfolio then recognized a realized loss of $3,042,307 and a corresponding
reduction in unrealized depreciation in the Statement of Operations. The
realized loss was then reclassified from the Portfolio's accumulated net
realized losses to paid-in-capital. The reclassification had no effect on the
Portfolio's net asset value per share.
6. Investment Transactions:
At January 31, 1996, the following Portfolios had available realized capital
losses to offset future net capital gains through fiscal year ended:
2003 2004
(000) (000)
----- -----
California Tax-Exempt 61 2
Institutional Tax-Free 18 4
7. Concentration of Credit Risk:
The Portfolios invest primarily in municipal money market instruments maturing
in one year or less whose ratings are within the highest ratings category
assigned by a nationally recognized statistical rating organization or, if not
rated, are believed to be of comparable quality. The ability of the issuers of
the securities held by the Portfolios to meet their obligations may be affected
by economic and political developments in a specific industry, state or region.
<PAGE>
THE OVB FAMILY OF FUNDS
Investment Adviser:
ONE VALLEY BANK, NATIONAL ASSOCIATION
O OVB CAPITAL APPRECIATION PORTFOLIO
O OVB EMERGING GROWTH PORTFOLIO
O OVB GOVERNMENT SECURITIES PORTFOLIO
O OVB WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
O OVB PRIME OBLIGATIONS PORTFOLIO
THE OVB FAMILY OF FUNDS IS A GROUP OF PROFESSIONALLY MANAGED MUTUAL FUNDS THAT
OFFERS A CONVENIENT AND ECONOMICAL MEANS OF INVESTING IN ONE OR MORE PORTFOLIOS
OF SECURITIES. THIS PROSPECTUS OFFERS CLASS A AND CLASS B SHARES OF THE OVB
CAPITAL APPRECIATION PORTFOLIO, OVB EMERGING GROWTH PORTFOLIO, OVB GOVERNMENT
SECURITIES PORTFOLIO, OVB WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO AND OVB
PRIME OBLIGATIONS PORTFOLIO (THE 'PORTFOLIOS'), AN ASSORTMENT OF EQUITY, FIXED
INCOME AND MONEY MARKET PORTFOLIOS.
Each Portfolio offers its Class A shares to institutional investors, including
One Valley Bank, National Association ('One Valley'), its affiliates and
correspondents, for the investment of their own funds or funds for which they
act in a fiduciary, agency or custodial capacity. Each Portfolio offers its
Class B shares to individuals and institutional accounts, including accounts for
which One Valley, its affiliates and correspondents, act in an agency or
custodial capacity.
AN INVESTMENT IN THE OVB PRIME OBLIGATIONS PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE UNITED STATES GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE SHARES OFFERED HEREBY ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING ONE VALLEY OR ANY OF ITS AFFILIATES OR
CORRESPONDENTS. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Portfolios that a
prospective investor should know before investing. Each Portfolio is a separate
series of The Arbor Fund. Investors are advised to read this Prospectus and
retain it for future reference. A Statement of Additional Information dated May
31, 1996 has been filed with the Securities and Exchange Commission and is
available without charge by calling 1-800-545-6331. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MAY 31, 1996
<PAGE>
SUMMARY
THE OVB FAMILY OF FUNDS IS A GROUP OF OPEN-END MANAGEMENT INVESTMENT
COMPANIES PROVIDING A CONVENIENT WAY TO INVEST IN PROFESSIONALLY MANAGED
PORTFOLIOS OF SECURITIES. THE FOLLOWING SUMMARY PROVIDES BASIC INFORMATION ABOUT
THE CLASS A AND CLASS B SHARES OF THE OVB CAPITAL APPRECIATION PORTFOLIO, OVB
EMERGING GROWTH PORTFOLIO, OVB GOVERNMENT SECURITIES PORTFOLIO, OVB WEST
VIRGINIA TAX-EXEMPT INCOME PORTFOLIO AND OVB PRIME OBLIGATIONS PORTFOLIO (EACH,
A 'PORTFOLIO'). THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION.
What are the Investment Objectives? The OVB CAPITAL APPRECIATION PORTFOLIO
(the 'Capital Appreciation Portfolio') and the OVB EMERGING GROWTH PORTFOLIO
(the 'Emerging Growth Portfolio') seek long-term growth of capital. The OVB
GOVERNMENT SECURITIES PORTFOLIO (the 'Government Portfolio') seeks current
income consistent with the preservation of capital. The OVB WEST VIRGINIA
TAX-EXEMPT INCOME PORTFOLIO (the 'West Virginia Portfolio') seeks current income
exempt from both federal income taxes and West Virginia personal income taxes
consistent with the preservation of capital. The OVB PRIME OBLIGATIONS PORTFOLIO
(the 'Prime Obligations Portfolio') seeks to preserve principal value and
maintain a high degree of liquidity while providing current income. There can be
no assurance that any Portfolio will achieve its investment objective. See
'Investment Objectives.'
What are the Permitted Investments? The Capital Appreciation Portfolio
invests primarily in equity securities of large and medium sized companies that
have exhibited an established record of growth and that, in the Adviser's
opinion, continue to present significant growth potential. The Emerging Growth
Portfolio invests primarily in equity securities of smaller, emerging growth
companies that, in the Adviser's opinion, have the potential, over time, to
produce above-average long-term rates of return proportionate to their
above-average risk. The Government Portfolio invests primarily in U.S.
Government securities. The West Virginia Portfolio invests primarily in fixed
income securities the interest on which is exempt from federal income taxes and
exempt from West Virginia personal income taxes, and is not included as a
preference item for purposes of the federal alternative minimum tax. The Prime
Obligations Portfolio will invest exclusively in short-term, U.S. dollar
denominated money market instruments that satisfy certain quality, maturity and
diversification criteria, including criteria set by applicable laws and
regulations. The Portfolio may invest in obligations of U.S. issuers,
obligations of foreign issuers sold in the U.S. market, obligations of U.S. and
London branches of foreign banks and obligations of supranational entities. See
'Investment Objectives,' 'Investment Policies and Information,' 'Risk Factors'
and 'Description of Permitted Investments.'
Who is the Adviser? One Valley Bank, National Association, serves as the
investment adviser for each Portfolio. Wellington Management Company serves as
the investment sub-adviser for the Prime Obligations Portfolio. See 'Expense
Summary,' 'The Adviser' and 'The Sub-Adviser.'
Who is the Administrator? SEI Financial Management Corporation serves as
the administrator and shareholder servicing agent for each Portfolio. See
'Expense Summary' and 'The Administrator.'
Who is the Transfer Agent? DST Systems, Inc. serves as the transfer agent
and dividend disbursing agent for each Portfolio. See 'The Transfer Agent.'
Who is the Distributor? SEI Financial Services Company serves as
distributor of each Portfolio's shares. See 'The Distributor.'
<PAGE>
3
Is There A Sales Charge? No. Shares of each Portfolio are offered on a
no-load basis.
How do I Purchase and Redeem Shares? Each Portfolio offers two classes of
shares, Class A and Class B. The minimum initial investment in Class A shares is
$100,000. The minimum initial investment in Class B shares is $1,000, and
subsequent investments must be at least $50; minimum investment requirements are
lower for accounts established under tax-deferred programs (such as IRAs).
Purchases and redemptions of either class may be made through representatives of
One Valley or directly through the Transfer Agent on days when the New York
Stock Exchange and Federal Reserve wire system are open for business ('Business
Days'). Class B shares may be purchased through a systematic investment plan.
The purchase price and redemption price for Class A and Class B shares is their
net asset value determined as of the end of the day the purchase or redemption
order is effective. See 'How to Purchase Shares' and 'How to Redeem Shares.'
How are Distributions Paid? Substantially all of the net investment income
(exclusive of capital gain) for each the Capital Appreciation and Emerging
Growth Portfolios is distributed in the form of periodic dividends and for the
Prime Obligations, Government and West Virginia Portfolios is distributed in the
form of dividends declared daily and distributed monthly to shareholders of
record. Any realized net capital gain is distributed at least annually.
Distributions are paid in additional shares unless the shareholder elects to
take the payment in cash. See 'General Information--Dividends.'
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION FEES ALL PORTFOLIOS
CLASS A CLASS B
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases None None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None None
Redemption Fees None None(1)
Exchange Fee None None
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) There is a $10 fee for wiring Class B redemption proceeds.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES: CLASS A
SHARES Capital Emerging West Prime
(as a percentage of average net assets) Appreciation Growth Government Virginia Obligations
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advisory Fees (after fee waiver)(2) .70% .78% .47% .38% .10%
12b-1 Fees none none none none none
Other Expenses(3) .32% .37% .36% .37% .39%
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after fee waiver)(4) 1.02% 1.15% .83% .75% .49%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(2) The Adviser has agreed to waive, on a voluntary basis, a portion of its fee,
and the advisory fee shown reflects this voluntary waiver. The Adviser
reserves the right to terminate its waiver at any time in its sole
discretion. Absent such waiver, advisory fees for the Capital Appreciation
Portfolio, the Emerging Growth Portfolio, the Government Portfolio, the West
Virginia Portfolio and the Prime Obligations Portfolio would be .95%, .95%,
.75%, .45% and .25%, respectively.
(3) The administration fee is based on a minimum annual fee of $100,000 per
Portfolio. Administration fees as a percentage of average daily net assets
will decline to .20% at net asset levels of $50 million and above. The
Administrator has agreed to waive, on a voluntary basis, a portion of its
fee with respect to the West Virginia Portfolio. The Administrator reserves
the right to terminate its waiver at any time in its sole discretion. Absent
such waiver, the administration fee for the West Virginia Portfolio is
estimated to be .27%.
(4) Absent the Adviser's voluntary fee waiver, total operating expenses for
Class A shares of the Capital Appreciation Portfolio, the Emerging Growth
Portfolio, the Government Portfolio and Prime Obligations Portfolio would be
1.27%, 1.32%, 1.11% and .64%, respectively. Absent the Adviser's and the
Administrator's voluntary fee waivers, total operating expenses for Class A
shares of the West Virginia Portfolio would be .89%.
<PAGE>
5
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES: CLASS B
SHARES Capital Emerging West Prime
(as a percentage of average net assets) Appreciation Growth Government Virginia Obligations
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advisory Fees (after fee waiver and
reimbursement)(5) .70% .78% .47% .38% .10%
12b-1 Fees .25% .25% .25% .25% .25%
Other Expenses(6) .32% .37% .36% .37% .39%
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after fee waiver)(7) 1.27% 1.40% 1.08% 1.00% .74%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(5) The Adviser has agreed to waive, on a voluntary basis, a portion of its fee,
and the advisory fee shown reflects this voluntary waiver. The Adviser
reserves the right to terminate its waiver at any time in its sole
discretion. Absent such waiver, advisory fees for the Capital Appreciation
Portfolio, the Emerging Growth Portfolio, the Government Portfolio, the West
Virginia Portfolio and Prime Obligations Portfolio would be .95%, .95%,
.75%, .45% and .25%, respectively.
(6) The administration fee is based on a minimum annual fee of $100,000 per
Portfolio. Administration fees as a percentage of average daily net assets
will decline to .20% at net asset levels of $50 million and above. The
Administrator has agreed to waive, on a voluntary basis, a portion of its
fee with respect to the West Virginia Portfolio. The Administrator reserves
the right to terminate its waiver at any time in its sole discretion. Absent
such waiver, the administration fee for the West Virginia Portfolio is
estimated to be .27%.
(7) Absent the Adviser's voluntary fee waiver, total operating expenses for
Class B shares of the Capital Appreciation Portfolio, the Emerging Growth
Portfolio, the Government Portfolio and Prime Obligations Portfolio would be
1.52%, 1.57%, 1.36% and .89%, respectively. Absent the Adviser's and the
Administrator's voluntary fee waivers, total operating expenses for Class B
shares of the West Virginia Portfolio would be 1.14%.
EXAMPLE
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption
at the end of each time period:
<TABLE>
<CAPTION>
1 YR. 3 YRS. 5 YRS. 10 YRS.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation Portfolio Class A $ 10 $ 32 $ 56 $ 125
Class B $ 13 $ 40 $ 70 $ 153
Emerging Growth Portfolio Class A $ 12 $ 37 $ 63 $ 140
Class B $ 14 $ 44 $ 77 $ 168
Government Portfolio Class A $ 8 $ 26 $ 46 $ 103
Class B $ 11 $ 34 $ 60 $ 132
West Virginia Portfolio Class A $ 8 $ 24 $ 42 $ 93
Class B $ 10 $ 32 $ 55 $ 122
Prime Obligations Portfolio Class A $ 5 $ 16 $ 27 $ 62
Class B $ 8 $ 24 $ 41 $ 92
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of the
expense table and example is to assist investors in understanding the various
costs and expenses that may be directly or indirectly borne by shareholders of
the Portfolios. A person who purchases shares through a financial institution
may be charged separate fees by that institution.
Long-term Class B shareholders may eventually pay more than the economic
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
<PAGE>
6
FINANCIAL HIGHLIGHTS THE OVB FAMILY OF FUNDS
The following information has been audited by Price Waterhouse LLP, the Fund's
independent accountants, as indicated in their report dated March 8, 1996 on the
Fund's financial statements as of January 31, 1996 included in the Fund's
Statement of Additional Information under 'Financial Statements.' Additional
performance information is set forth in the 1996 Annual Report to Shareholders
and is available upon request and without charge by calling 1-800-545-6331. This
table should be read in conjunction with the Fund's financial statements and
notes thereto.
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
NET REALIZED
AND
UNREALIZED
NET ASSET GAINS DISTRIBUTIONS NET ASSET NET ASSETS, RATIO OF
VALUE, NET (LOSSES) FROM NET VALUE END OF EXPENSES TO
BEGINNING INVESTMENT ON INVESTMENT END OF TOTAL PERIOD AVERAGE
OF PERIOD INCOME INVESTMENTS INCOME PERIOD RETURN (000) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
Prime Obligations Portfolio
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
1996.............. $ 1.00 $ 0.06 $ 0.00 $ (0.06) $ 1.00 5.65% $ 84,660 0.49%
1995.............. 1.00 0.04 0.00 (0.04) 1.00 4.15 77,295 0.49
1994(1)........... 1.00 0.00 0.00 0.00 1.00 2.95 82,477 0.49
CLASS B
1996.............. $ 1.00 $ 0.05 $ 0.00 $ (0.05) $ 1.00 5.39% $ 6,154 0.74%
1995(2)........... 1.00 0.04 0.00 (0.04) 1.00 3.95 669 0.74
- --------------------------------------------------------------------------------------------------------------------------------
West Virginia Tax-Exempt Income Portfolio
- --------------------------------------------------------------------------------------------------------------------------------
CLASS A
1996.............. $ 9.36 $ 0.49 $ 0.76 $ (0.49) $ 10.12 13.66% $ 36,611 0.75%
1995.............. 10.17 0.46 (0.81) (0.46) 9.36 (3.38) 26,096 0.75
1994(9)........... 10.00 0.07 0.17 (0.07) 10.17 2.43 20,477 0.75
CLASS B
1996.............. $ 9.36 $ 0.47 $ 0.75 $ (0.47) $ 10.11 13.26% $ 4,312 1.00%
1995.............. 10.17 0.43 (0.81) (0.43) 9.36 (3.62) 2,263 1.00
1994(10).......... 10.07 0.05 0.10 (0.05) 10.17 1.48 935 1.00
- -------------------------------------------------------------------------------------------------------------------------------
Government Securities Portfolio
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
1996.............. $ 9.09 $ 0.55 $ 1.06 $ (0.55) $ 10.15 18.14% $ 60,228 0.83%
1995.............. 10.06 0.51 (0.97) (0.51) 9.09 (4.48) 61,067 0.83
1994(7) 10.00 0.08 0.06 (0.08) 10.06 1.39 34,654 0.83
CLASS B
1996.............. $ 9.10 $ 0.53 $ 1.05 $ (0.53) $ 10.15 17.72% $ 1,167 1.08%
1995.............. 10.06 0.49 (0.96) (0.49) 9.10 (4.62) 457 1.08
1994(8)........... 10.01 0.04 0.05 (0.04) 10.06 0.89 141 1.08
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF
RATIO OF RATIO OF INVESTMENT
NET EXPENSES TO INCOME TO
INVESTMENT AVERAGE AVERAGE
INCOME NET ASSETS NET ASSETS PORTFOLIO
TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
NET ASSETS WAIVERS) WAIVERS) RATE
- ------------------
Prime Obligations
- ------------------
CLASS A
1996.............. 5.50% 0.64% 5.35% N/A
1995.............. 4.08 0.69 3.88 N/A
1994(1)........... 2.89 0.80 2.58 N/A
CLASS B
1996.............. 5.15% 0.89% 5.00% N/A
1995(2)........... 4.33 0.93 4.14 N/A
- ------------------
West Virginia Tax-
- ------------------
CLASS A
1996.............. 5.02% 0.89% 4.88% 43%
1995.............. 4.88 1.09 4.54 28
1994(9)........... 4.18 1.62 3.31 17
CLASS B
1996.............. 4.78% 1.14% 4.64% 43%
1995.............. 4.68 1.34 4.34 28
1994(10).......... 3.87 2.14 2.73 17
- ------------------
Government Securit
- ------------------
CLASS A
1996.............. 5.68% 1.11% 5.40% 28%
1995.............. 5.61 1.17 5.27 13
1994(7) 4.64 1.49 3.98 5
CLASS B
1996.............. 5.39% 1.36% 5.11% 28%
1995.............. 5.34 1.42 5.00 13
1994(8)........... 4.47 2.00 3.35 5
- ------------------
- ------------------
</TABLE>
(1) Prime Obligations Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(2) Prime Obligations Class B commenced operations on February 7, 1994. All
ratios for the period have been annualized.
(3) Capital Appreciation Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(4) Capital Appreciation Class B commenced operations on December 31, 1993. All
ratios for the period have been annualized.
(5) Emerging Growth Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(6) Emerging Growth Class B commenced operations on December 29, 1993. All
ratios for the period have been annualized.
(7) Government Securities Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(8) Government Securities Class B commenced operations on December 31, 1993.
All ratios for the period have been annualized.
(9) West Virginia Tax-Exempt Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(10) West Virginia Tax-Exempt Class B commenced operations on December 17, 1993.
All ratios for the period have been annualized.
<PAGE>
7
FINANCIAL HIGHLIGHTS (CONTINUED) THE OVB FAMILY OF FUNDS
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
NET ASSET NET NET REALIZED DISTRIBUTIONS DISTRIBUTIONS NET ASSET NET ASSETS,
VALUE, INVESTMENT AND UNREALIZED FROM NET FROM VALUE END OF
BEGINNING INCOME GAINS (LOSSES) INVESTMENT CAPITAL END OF TOTAL PERIOD
OF PERIOD (LOSS) ON INVESTMENTS INCOME GAINS PERIOD RETURN (000)
- ------------------------------------------------------------------------------------------------------------------------
Emerging Growth Portfolio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
1996..... $ 7.86 $ (0.10) $ 3.67 $ 0.00 $ 0.00 $ 11.43 45.42% $ 48,090
1995..... 10.48 (0.06) (2.56) 0.00 0.00 7.86 (25.00) 34,772
1994(5)... 10.00 0.00 0.48 0.00 0.00 10.48 (4.80) 36,670
CLASS B
1996..... $ 7.83 $ (0.12) $ 3.65 $ 0.00 $ 0.00 $ 11.36 45.08% $ 2,320
1995..... 10.48 (0.06) (2.59) 0.00 0.00 7.83 (25.29) 730
1994(6)... 9.77 0.00 0.71 0.00 0.00 10.48 7.27 330
- ------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio
- ------------------------------------------------------------------------------------------------------------------------
CLASS A
1996..... $ 9.57 $ 0.01 $ 3.93 $ (0.01) $ (0.19) $ 13.31 41.31% $ 99,612
1995..... 10.53 0.03 (0.96) (0.03) 0.00 9.57 (8.84) 70,502
1994(3)... 10.00 0.00 0.53 0.00 0.00 10.53 5.30 54,022
CLASS B
1996..... $ 9.55 $ (0.01) $ 3.90 $ 0.00 $ (0.19) $ 13.25 40.88% $ 2,233
1995..... 10.52 0.01 (0.97) (0.01) 0.00 9.55 (9.11) 505
1994(4)... 10.33 0.00 0.19 0.00 0.00 10.52 1.84 171
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO
OF NET
INVESTMENT
RATIO RATIO OF INCOME
OF NET EXPENSES (LOSS) TO
RATIO OF INVESTMENT TO AVERAGE TO AVERAGE
EXPENSES TO INCOME (LOSS) NET ASSETS NET ASSETS PORTFOLIO
AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- -------------------------------------------------------------------------------
Emerging Growth Portfolio
- -------------------------------------------------------------------------------
CLASS A
1996..... 1.15% (0.92)% 1.32% (1.09)% 117%
1995..... 1.15 (0.75) 1.42 (1.02) 126
1994(5).. 1.15 (0.83) 1.70 (1.38) 7
CLASS B
1996..... 1.40% (1.19)% 1.57% (1.36)% 117%
1995..... 1.40 (0.98) 1.67 (1.25) 126
1994(6).. 1.40 (1.08) 2.15 (1.83) 7
- -------------------------------------------------------------------------------
Capital Appreciation Portfolio
- -------------------------------------------------------------------------------
CLASS A
1996..... 1.02% 0.08% 1.27% (0.17)% 119%
1995..... 1.02 0.28 1.33 (0.03) 107
1994(3).. 1.02 0.12 1.51 (0.37) 7
CLASS B
1996..... 1.27% (0.16)% 1.52% (0.41)% 119%
1995..... 1.27 0.02 1.58 (0.29) 107
1994(4).. 1.27 0.19 2.01 (0.55) 7
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Prime Obligations Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(2) Prime Obligations Class B commenced operations on February 7, 1994. All
ratios for the period have been annualized.
(3) Capital Appreciation Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(4) Capital Appreciation Class B commenced operations on December 31, 1993. All
ratios for the period have been annualized.
(5) Emerging Growth Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(6) Emerging Growth Class B commenced operations on December 29, 1993. All
ratios for the period have been annualized.
(7) Government Securities Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(8) Government Securities Class B commenced operations on December 31, 1993.
All ratios for the period have been annualized.
(9) West Virginia Tax-Exempt Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(10) West Virginia Tax-Exempt Class B commenced operations on December 17, 1993.
All ratios for the period have been annualized.
<PAGE>
8
THE FUNDS AND THE TRUST
The OVB Family of Funds (the 'OVB Family') is a group of open-end management
investment companies that are offered together to provide investors with a
number of investment alternatives. Each of the portfolios is a separate series
('portfolios') of shares of The Arbor Fund (the 'Trust'), an open-end management
investment company. Shareholders may purchase units of beneficial interest
('shares') in a portfolio through two separate classes, Class A and Class B,
which provide for variations in distribution costs, related voting rights and
dividends. Except for these differences between classes, each share of each Fund
represents an undivided, proportionate interest in that Fund. This Prospectus
offers only the Class A and Class B shares of the OVB Capital Appreciation
Portfolio (the 'Capital Appreciation Portfolio'), OVB Emerging Growth Portfolio
(the 'Emerging Growth Portfolio'), OVB Government Securities Portfolio (the
'Government Portfolio'), OVB West Virginia Tax-Exempt Income Portfolio (the
'West Virginia Portfolio') and OVB Prime Obligations Portfolio (the 'Prime
Obligations Portfolio'). The Capital Appreciation and the Emerging Growth
Portfolios may be referred to as the 'Equity Portfolios,' the Government and the
West Virginia Portfolios may be referred to as the 'Fixed Income Portfolios,'
the Prime Obligations Portfolio may be referred to as the 'Money Market
Portfolio,' and any one of the five may be referred to as a 'Portfolio.' Each of
the Portfolios is a diversified portfolio, except the West Virginia Portfolio,
which is non-diversified.
INVESTMENT OBJECTIVES
THE CAPITAL APPRECIATION PORTFOLIO AND THE EMERGING GROWTH PORTFOLIO--The
investment objective of each of the Capital Appreciation Portfolio and the
Emerging Growth Portfolio is the long-term growth of capital.
THE GOVERNMENT PORTFOLIO--The investment objective of the Government Portfolio
is current income consistent with the preservation of capital.
THE WEST VIRGINIA PORTFOLIO--The investment objective of the West Virginia
Portfolio is current income, exempt from both federal income taxes and West
Virginia personal income taxes, consistent with the preservation of capital.
THE PRIME OBLIGATIONS PORTFOLIO--The investment objective of the Prime
Obligations Portfolio is to preserve principal value and maintain a high degree
of liquidity while providing current income. The Portfolio also expects to
maintain a constant net asset value of $1.00 per share on a continuous basis.
There can be no assurance that any Portfolio will be able to achieve its
investment objective.
INVESTMENT POLICIES AND INFORMATION
OVB CAPITAL APPRECIATION PORTFOLIO
The CAPITAL APPRECIATION PORTFOLIO will, under normal market conditions, invest
at least 65% of its total assets in common stocks, warrants to purchase common
stocks, debt securities convertible to common stocks and preferred stocks
convertible to common stocks (together, 'equity securities') of U.S. and foreign
issuers. Equity securities of foreign issuers may include American Depositary
Receipts ('ADRs'). Any assets not invested in equity securities may be invested
in Money Market Instruments (as defined under 'General Investment Policies and
Risk Factors').
The Adviser will generally select for the Capital Appreciation Portfolio
securities of large and medium sized companies that have exhibited an
established record of growth and that, in the Adviser's opinion, will continue
to present significant growth potential. Such companies generally have market
capitalizations in excess of $1 billion, and annual revenues in excess of $500
million. The Adviser may also seek to increase potential returns by identifying
'niche' companies in diverse industries and by identifying demographic,
economic, and political trends that will provide future investment
opportunities. The Adviser may consider factors such as an issuer's development
(or potential for development) of new products, any new management, or any
business restructuring, and may also consider the potential for increased
institutional ownership. The Adviser may, but will not
<PAGE>
9
necessarily, consider dividend income when selecting equity securities for the
Portfolio.
All of the equity securities in which the Capital Appreciation Portfolio invests
(including foreign securities) are traded in the United States or Canada either
on registered exchanges or actively in the over-the-counter market.
For the fiscal year ended January 31, 1996, the Portfolio's annual turnover rate
is 119%. Such a turnover rate may result in higher transaction costs and may
result in additional taxes for shareholders. See 'Taxes.'
OVB EMERGING GROWTH PORTFOLIO
The EMERGING GROWTH PORTFOLIO will, under normal market conditions, invest at
least 65% of its total assets in the securities of smaller, emerging growth
companies that in the Adviser's opinion have the potential, over time, to
produce above-average long-term rates of return proportionate to their above-
average risk. The Emerging Growth Portfolio may invest in the types of equity
securities available for purchase by the Capital Appreciation Portfolio. Any
assets not invested in equity securities may be invested in Money Market
Instruments. The Adviser generally considers 'smaller, emerging growth
companies' to be those with market capitalizations under $1 billion, and annual
revenues under $250 million. The Adviser may seek to increase potential returns
by identifying 'niche' companies in diverse industries, particularly those
having a technological or lead-time advantage over their peers. The Adviser will
also seek to identify demographic, economic, and political trends that will
provide future investment opportunities. The Adviser may consider factors such
as an issuer's development (or potential for development) of new products, any
new management, and may also consider the potential for increased institutional
ownership. The Adviser may, but does not expect to, consider dividend income
when selecting equity securities for the Portfolio.
All of the equity securities in which the Emerging Growth Portfolio invests
(including foreign securities) are traded in the United States or Canada either
on registered exchanges or in the over-the-counter market.
For the fiscal year ended January 31, 1996, the Portfolio's annual turnover rate
is 117%. Such a turnover rate may result in higher transaction costs and may
result in additional taxes for shareholders. See 'Taxes.'
OVB GOVERNMENT SECURITIES PORTFOLIO
The GOVERNMENT PORTFOLIO will, under normal market conditions, invest at least
65% of its total assets in obligations issued or guaranteed as to principal and
interest by the United States Government, its agencies or instrumentalities
('U.S. Government securities'). U.S. Government securities comprise U.S.
Treasury obligations, U.S. Government agency obligations and repurchase
agreements involving such securities. For a more detailed description, see
'Description of Permitted Investments.' The remainder of the Portfolio's assets
may be invested in the following securities but only if, at the time of
purchase, the security either has the requisite rating from a nationally
recognized statistical rating organization ('NRSRO') or is of comparable quality
as determined by the Adviser: (i) corporate fixed income obligations rated in
one of the four highest rating categories by an NRSRO; (ii) privately issued
mortgage-backed securities rated in one of the two highest rating categories by
an NRSRO; (iii) asset-backed securities rated in one of the two highest rating
categories by an NRSRO; (iv) receipts evidencing separately traded interest and
principal component parts of U.S. Government securities ('Receipts'); (v)
repurchase agreements involving any of the foregoing securities; (vi) guaranteed
investment contracts determined by the Adviser to be of investment quality at
the time of purchase; (vii) common stocks of utility companies; (viii) preferred
stocks; (ix) taxable municipal securities rated in one of the two highest rating
categories by an NRSRO; and (x) Money Market Instruments.
The Government Portfolio will not invest more than 20% of its total assets in
common and preferred stocks of utility companies. In addition the Government
Portfolio may invest up to 5% of its total assets in preferred stocks of
issuers in other industries.
<PAGE>
10
Normally, the Portfolio will maintain a dollar-weighted average portfolio
maturity of three to ten years, and the Adviser generally expects this maturity
to range from five to ten years; however, under certain circumstances this
weighted average maturity may fall below three years or rise above ten years. In
determining the maturity of mortgage-backed securities, the Adviser will use the
estimated average life of such securities. There are no restrictions on the
maturity of any single instrument.
OVB WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
The WEST VIRGINIA PORTFOLIO will, under normal market conditions, invest at
least 80% of its net assets in fixed income securities the interest on which, in
the opinion of bond counsel for the issuer, is exempt from federal income tax
('Municipal Securities') and is not a preference item for purposes of the
federal alternative minimum tax ('AMT'). Under normal conditions, the Portfolio
will invest at least 65% of its total assets in Municipal Securities the
interest on which is also exempt from West Virginia personal income tax ('West
Virginia Municipal Securities'). The Portfolio reserves the right to invest up
to 20% of its net assets in (i) Municipal Securities the interest on which is an
AMT preference item and (ii) taxable investments consisting of the types of
securities in which the Government Portfolio may invest. For temporary defensive
purposes when, in the opinion of the Adviser, West Virginia Municipal Securities
are not readily available or of sufficient quality, the Portfolio may invest up
to 100% of its assets in securities the interest on which is exempt only from
federal income taxes; other permissible temporary defensive investments, which
are taxable, are discussed in 'Description of Permitted Investments -- Special
Factors Relating to West Virginia Municipal Securities' in the Statement of
Additional Information.
The West Virginia Portfolio may purchase the following types of Municipal
Securities (including West Virginia Municipal Securities) only if such
securities, at the time of purchase, either have the requisite rating from a
NRSRO or are of comparable quality as determined by the Adviser: (i) municipal
bonds in one of the four highest rating categories; (ii) municipal notes and
certificates of participation in one of the two highest rating categories; and
(iii) tax-exempt commercial paper in one of the two highest rating categories.
The Portfolio may also purchase other types of tax-exempt instruments provided
that, at the time of their purchase, the Adviser determines that they are of
quality comparable to the ratings stated above.
The Portfolio reserves the right to engage in transactions involving 'puts' or
standby commitments. There will be no limit to the percentage of portfolio
securities that the West Virginia Portfolio may purchase subject to a put but
the amount paid directly or indirectly for puts which are not integral parts of
the security as originally held in the Portfolio will not exceed 0.5% of the
value of the total assets of the Portfolio calculated immediately after such put
is acquired. When entering into standby commitments, the Portfolio will set
aside sufficient assets invested in cash equivalent securities to pay for all
standby commitments on their scheduled delivery dates.
NON-DIVERSIFICATION--Investment in the West Virginia Portfolio, a
non-diversified investment company, may entail greater risk than would
investment in a diversified investment company because the concentration in
securities of relatively few issuers could result in greater fluctuation in the
total market value of the Portfolio's holdings. Any economic, political, or
regulatory developments affecting the value of the securities the Portfolio
holds could have a greater impact on the total value of the Portfolio's holdings
than would be the case if the portfolio securities were diversified among more
issuers.
The Portfolio intends to comply with the diversification requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the 'Code').
<PAGE>
11
OVB PRIME OBLIGATIONS PORTFOLIO
The PRIME OBLIGATIONS PORTFOLIO intends to comply with regulations of the
Securities and Exchange Commission applicable to money market funds. These
regulations impose certain quality, maturity and diversification restraints on
investments by the Portfolio. Under these regulations, the Portfolio will invest
in only United States dollar denominated securities, will maintain a
dollar-weighted average portfolio maturity of 90 days or less, and will acquire
only 'eligible securities' having a maturity of 397 days or less. As a money
market fund, the Portfolio is subject to additional diversification
requirements. See 'Description of Permitted Investments-- Restraints on
Investments by Money Market Funds.'
The Prime Obligations Portfolio intends to invest exclusively in (i) 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'); (ii) obligations issued
or guaranteed as to principal and interest by the agencies or instrumentalities
of the United States Government; (iii) receipts evidencing separately traded
interest and principal component parts of the U.S. Government obligations; (iv)
commercial paper of United States or foreign issuers rated in the two highest
short-term rating categories at the time of investment or, if not rated, as
determined by the sub-adviser to be of comparable quality; (v) obligations
(certificates of deposit, bank notes, time deposits, bankers' acceptances,
European certificates of deposit, European time deposits, Canadian time
deposits, Eurodollar obligations and Yankee Bank obligations) of U.S. commercial
banks, U.S. savings and loan institutions and U.S. and London branches of
foreign banks that have total assets of $1 billion or more as shown on their
most recently published financial statements (the Portfolio 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); (vi) U.S. dollar denominated
obligations of foreign governments including Canadian and Provincial Government
and Crown Agency obligations; (vii) short-term corporate obligations of United
States issuers with commercial paper of comparable quality and security that
meet the above ratings or, if not rated, determined by the sub-adviser to be of
comparable quality; (viii) repurchase agreements involving any of the foregoing
obligations; (ix) short-term obligations issued by state and local governmental
issuers, which are rated, at the time of investment, by at least two NRSROs in
one of the two highest municipal bond rating categories, and carry yields that
are competitive with those of other types of money market instruments of
comparable quality and security that meet the above ratings or, if not rated,
determined by the sub-adviser to be of comparable quality; (x) obligations of
supranational entities satisfying the credit standards described above or, if
not rated, determined by the Adviser to be of comparable quality; and (xi) to
the extent permitted by applicable law, shares of other investment companies.
Under applicable law, the Portfolio may not invest more than 10% of its total
assets in shares of other investment companies, and investment in such shares
may result in layering of expenses.
The Portfolio may invest up to 10% of its net assets in illiquid securities,
including restricted securities other than Section 4(2) commercial paper. The
Portfolio may invest in Section 4(2) commercial paper. Restricted securities,
including Rule 144A Securities and Section 4(2) commercial paper, that meet the
criteria established by the Board of Trustees of the Trust will be considered
liquid.
The Portfolio may also engage in forward commitments or purchase securities on a
when-issued basis.
For additional information regarding risks and permitted investments of the
Portfolios, see 'General Investment Policies and Risk Factors' and 'Description
of Permitted Investments.'
GENERAL INVESTMENT POLICIES AND RISK FACTORS
The Fixed Income Portfolio may purchase mortgage-backed securities ('MBSs'). The
Portfolio may purchase MBSs that are U.S. Government securities, and the
Government Portfolio may also invest in privately issued collateralized mortgage
obligations
<PAGE>
12
('CMOs'), a type of MBS, and real estate mortgage investment conduits
('REMICs'), a type of CMO, that are rated by an NRSRO in one of its two highest
rating categories. The principal governmental issuers or guarantors of MBSs are
the Government National Mortgage Association ('GNMA'), Federal National Mortgage
Association ('FNMA'), and Federal Home Loan Mortgage Corporation ('FHLMC').
Obligations of GNMA are backed by the full faith and credit of the United States
Government while obligations of FNMA or FHLMC are supported by the respective
issuer only. The Portfolios may purchase MBSs that are backed or collateralized
by fixed, adjustable or floating rate mortgages. For a further description of
mortgage-backed securities and the risks associated with investing in them, see
'Description of Permitted Investments' and the Statement of Additional
Information.
The Fixed Income Portfolios may, in acquiring fixed income securities, seek
opportunities for capital gain as well as income in light of such Portfolios'
investment objectives. Investors in the West Virginia Portfolio should note that
capital gains are taxable income. Appreciation in the value of these securities
could arise from a number of market and economic factors, such as changes in
interest rates generally or in the yield curve, improvement in an issuer's
financial situation or perceptions in the market about the impact of economic
developments on particular issuers or industries. There is no assurance that any
Portfolio will, in fact, realize capital gains.
The Fixed Income and Money Market Portfolios may invest in variable and floating
rate obligations and may purchase securities on a when-issued basis. The Equity
Portfolios and the Government Portfolio may engage in options transactions, and
the Government Portfolio may also engage in futures transactions (including
options on futures), in either case for hedging purposes. The aggregate value of
option positions may not exceed 10% of a Portfolio's net assets as of the time
the Portfolio enters into such options. Each Portfolio except for the Money
Market Portfolio may use short sales 'against the box' for hedging purposes.
Each Portfolio reserves the right to engage in securities lending, although no
Portfolio has the present intent of doing so.
Each Portfolio other than the Money Market Portfolio may invest a portion of its
assets in the following money market instruments ('Money Market Instruments'):
short-term U.S. Government securities; receipts evidencing separately traded
interest and principal component parts of U.S. Government obligations
('Receipts'); time deposits, certificates of deposit and bankers' acceptances
issued by U.S. commercial banks or savings and loan institutions having assets
of at least $500 million as shown on their most recently available audited
financial statements; commercial paper that, at the time of purchase, is either
rated in one of the two highest rating categories by an NRSRO or of comparable
quality as determined by the Adviser; and repurchase agreements involving the
foregoing securities. In addition, each Portfolio may, to the extent permitted
by applicable law, invest in shares of other investment companies. Under
applicable law, no Portfolio may invest more than 10% of its total assets in
shares of other investment companies, and investments in such shares may result
in layering of expenses. Further discussion of a Portfolio's ability to invest
in such shares is set out in the Statement of Additional Information. In
addition, for temporary defensive purposes when the Adviser determines that
market conditions warrant, each Portfolio except the Money Market Portfolio may
invest up to 100% of its assets in Money Market Instruments and cash. To the
extent a Portfolio is investing for temporary defensive purposes, the Portfolio
will not be pursuing its investment objective.
For a further description of these types of obligations or transactions, see
'Description of Permitted Investments' and the Statement of Additional
Information.
Debt rated in the fourth highest category by an NRSRO 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
<PAGE>
13
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Such debt lacks outstanding
investment characteristics and in fact has speculative characteristics as well.
In the event that a security owned by a Portfolio is downgraded below the rating
categories discussed above, the Adviser will review the circumstances and take
action it deems appropriate with respect to such security.
RISK FACTORS
EQUITY SECURITIES--Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
convertible equity securities is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision. Fluctuations in the value
of equity securities in which the Equity Portfolios invest will cause the net
asset value of these Portfolios to fluctuate. An investment in either of these
Portfolios may be more suitable for long-term investors who can bear the risk of
short-term principal fluctuations.
The Capital Appreciation Portfolio will invest primarily in securities of large
and medium sized companies, and the Emerging Growth Portfolio will invest
primarily in securities of smaller companies. While the Adviser intends to
invest each Portfolio's assets in companies that the Adviser's research
indicates should, over the long term, provide significant growth potential, any
investment in smaller or medium capitalization companies involves greater risk
than that customarily associated with investments in larger, more established
companies. This increased risk may be due to the greater business risks of
smaller size, limited markets and financial resources, narrow product lines and
lack of depth of management. The securities of smaller or medium sized companies
are often traded in the over-the-counter market and if listed on a national
securities exchange may not be traded in volumes typical for that exchange.
Thus, the securities of smaller or medium sized companies are likely to be less
liquid, and subject to more abrupt or erratic market movements, than securities
of larger, more established growth companies. As a result, the value of the
shares of either of these Portfolios can be expected to fluctuate more than the
value of shares of an investment company investing solely in larger, more
established companies.
FIXED INCOME SECURITIES--The market value of the fixed income investments in
which the Fixed Income and Money Market Portfolios invest will change in
response to interest rate changes and other factors. During periods of falling
interest rates, the values of outstanding fixed income securities generally
rise. Conversely, during periods of rising interest rates, the values of such
securities generally decline. Moreover, while securities with longer maturities
tend to produce higher yields, the prices of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest rates.
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Changes in the value of these securities will
not necessarily affect cash income derived from these securities but will affect
a Portfolio's net asset value. Each of the Fixed Income Portfolios may invest in
securities rated in the fourth highest category by an NRSRO; such securities,
while still investment grade, are considered to have speculative
characteristics. See the Appendix.
SECURITIES OF FOREIGN ISSUERS--Investments in the securities of foreign issuers
may subject an Equity or Money Market Portfolio to investment risks that differ
in some respects from those related to investments in securities of U.S.
issuers. Such risks include future adverse political and economic developments,
possible imposition of withholding taxes on income, possible seizure,
nationalization or expropriation of foreign deposits, possible establishment of
exchange controls or taxation at the source or greater fluctuation in value due
to changes in exchange rates. Foreign issuers of securities often engage in
business practices different from those of domestic issuers of similar
securities, and there may be less information publicly available about foreign
issuers. In addition, foreign issuers are, generally speaking, subject to less
government supervision and regulation and
<PAGE>
14
different accounting treatment than are those in the United States. American
Depositary Receipts, typically issued by a U.S. financial institution, evidence
ownership of underlying securities of a foreign issuer.
MORTGAGE-BACKED SECURITIES--The MBSs in which the Fixed Income Portfolio may
invest are subject to prepayment of the underlying mortgages. During periods of
declining interest rates, prepayment of mortgages underlying MBSs can be
expected to accelerate. When the MBSs held by a Portfolio are prepaid, the
Portfolio must reinvest the proceeds in securities the yield of which reflects
prevailing interest rates, which may be lower than the yield on the prepaid
MBSs.
GOVERNMENT SECURITIES--Any guaranty by the U.S. Government or its agencies or
instrumentalities of the securities in which any Portfolio invests guarantees
only the payment of principal and interest on the guaranteed security and does
not guarantee the yield or value of that security or the yield or value of
shares of that Portfolio.
INVESTMENT LIMITATIONS AND FUNDAMENTAL POLICIES
The following investment limitations are fundamental policies of each Portfolio.
In addition, each Portfolio's investment objective is a fundamental policy of
that Portfolio, and it is a fundamental policy of the West Virginia Portfolio to
invest at least 80% of its net assets in Municipal Securities the interest on
which is not an AMT preference item. Fundamental policies of a Portfolio cannot
be changed with respect to that Portfolio without the consent of the holders of
a majority of the Portfolio's outstanding shares.
A Portfolio may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States Government, its agencies or instrumentalities and repurchase
agreements involving such securities) if, as a result, more than 5% of the total
assets of the Portfolio would be invested in the securities of such issuer or
the Portfolio would own more than 10% of the outstanding voting securities of
such issuer. This restriction applies to 75% of the assets of the Capital
Appreciation, Emerging Growth, Government and Prime Obligations Portfolios, and
does not apply to the West Virginia Portfolio. For purposes of this limitation,
a security is considered to be issued by the government entity (or entities)
whose assets and revenues back the security; with respect to a private activity
bond that is backed only by the assets and revenues of a non-governmental user,
a security is considered to be issued by such non-governmental user. For
purposes of this limitation, all debt securities of an issuer are each
considered as one class.
2. Purchase any securities that would cause more than 25% of the total assets of
the Portfolio 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 obligations issued or guaranteed by
the United States Government or its agencies and 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
regulations as U.S. banks. For purposes of this limitation, (a) utility
companies will be divided according to their services, for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry; (b) financial service companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; (c)
supranational entities will be considered to be a separate industry; and (d)
asset-backed securities secured by distinct types of assets, such as truck and
auto loan leases, credit card receivables and home equity loans, will each be
considered a separate industry.
3. Make loans, except that each Portfolio may (a) purchase or hold debt
instruments to the extent 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.
<PAGE>
15
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations are set forth in the Statement of Additional
Information.
THE ADVISER
One Valley Bank, National Association ('One Valley' or the 'Adviser'), serves as
investment adviser to each Portfolio pursuant to an investment advisory
agreement (the 'Advisory Agreement') with the Trust. Under the Advisory
Agreement, the Adviser is responsible for the investment decisions for each
Portfolio, and the Adviser continuously reviews, supervises and administers each
Portfolio's investment program. The Adviser is independent of SEI Financial
Management Corporation (the 'Administrator') and discharges its responsibilities
subject to the supervision of, and policies established by, the Trustees of the
Trust. In addition, the Trust has employed Wellington Management Company as an
investment sub-adviser to manage the Prime Obligations Portfolio on a day-to-day
basis, subject to the supervision of the Adviser and the Trustees. See 'The Sub-
Adviser.'
One Valley, a national banking association, is the successor to Kanawha Valley
Bank, N.A., organized in 1867. One Valley has its principal offices at One
Valley Square, Charleston, West Virginia 25301. One Valley is a wholly-owned
subsidiary of One Valley Bancorp of West Virginia, Inc., a multi-bank holding
company. One Valley is the largest single bank headquartered in West Virginia,
and provides a wide variety of financial services in multiple locations
throughout the state. The Adviser has provided investment advisory services to
investment companies since 1993.
J. Randy Valentine, Senior Vice President of the Adviser, has oversight
responsibilities of the portfolio managers of the Capital Appreciation, Emerging
Growth, Government and West Virginia Portfolios. Mr. Valentine has managed
various common trust and collective investment funds since 1976 and prior to
assuming his supervisory duties. He has extensive investment management
experience.
David P. Nolan, Vice President of the Adviser, is the portfolio manager for the
Capital Appreciation Portfolio and the Emerging Growth Portfolio. Since 1984,
Mr. Nolan has managed various equity portfolios and growth-oriented common and
collective funds. Prior to joining the Adviser, Mr. Nolan was an account
executive with Alex. Brown & Sons Incorporated.
James R. Thomas, III, Vice President of the Adviser, is the portfolio manager
for the Government Portfolio and the West Virginia Portfolio. Since 1988, Mr.
Thomas has managed various taxable income portfolios and a current income common
trust fund. Prior to joining the Adviser, Mr. Thomas served as a financial
analyst for RepublicBank Dallas, Texas.
One Valley, together with its predecessor institutions, has provided trust and
asset management services since the early 1920s and has managed common and
collective investment funds since 1968. One Valley's portfolio managers serve
bank common funds, employee benefit funds and personal trust accounts, managing
assets in money market, equity, and fixed income portfolios. As of December 31,
1995, One Valley's Investment Asset Management Group had assets under management
of approximately $1.5 billion, and currently manages $478.2 million of assets in
common trust and mutual funds with diverse investment objectives ranging from
stability of capital to aggressive growth.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate based on the average daily net assets of
each Portfolio as follows: Capital Appreciation Portfolio--.95%, Emerging Growth
Portfolio--.95%, Government Portfolio--.75%, West Virginia Portfolio--.45% and
Prime Obligations Portfolio-- .25%. The advisory fees for the Capital
Appreciation, Emerging Growth, and Government Portfolios are higher than those
paid by most investment companies, but the Adviser believes these fees to be
comparable to those paid by investment companies with similar investment
objectives and policies. The Adviser has voluntarily agreed to waive a portion
of its fees in order to limit the total operating expenses of Class A and Class
B
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16
shares of each Portfolio (exclusive of distribution expenses charged to Class B
shares) to not more than the following (as a percentage of average daily net
assets on an annualized basis): Capital Appreciation Portfolio--1.02%, Emerging
Growth Portfolio--1.15%, Government Portfolio--0.83%, West Virginia
Portfolio--0.75% and Prime Obligations Portfolio--.49%. The Adviser reserves the
right, in its sole discretion, to terminate its voluntary fee waiver and
reimbursement at any time. For the fiscal year ended January 31, 1996, the
Portfolio paid the Adviser an advisory fee as a percentage of average daily net
assets of each Portfolio as follows: Capital Appreciation Portfolio-- .70%,
Emerging Growth Portfolio--.78%, Government Portfolio--.47%, West Virginia
Portfolio--.38% and Prime Obligations Portfolio--.10%.
The Glass-Steagall Act restricts the securities activities of banks such as the
Adviser, 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.
THE SUB-ADVISER
Wellington Management Company ('Wellington Management' or the 'Sub-Adviser')
serves as the investment sub-adviser to the Prime Obligations Portfolio pursuant
to a sub-advisory agreement (the 'Sub-Advisory Agreement') with the Adviser and
the Trust. Under the Sub-Advisory Agreement, the Sub-Adviser manages the
investments of the Portfolio, selects investments, and places all orders for
purchases and sales of the Portfolio's securities, subject to the general
supervision of the Trustees of the Trust and the Adviser.
Wellington Management is a professional investment counseling firm that provides
investment services to investment companies, employee benefit plans, endowments,
foundations, and other institutions and individuals. As of January 31, 1996,
Wellington Management had discretionary management authority with respect to
approximately $111.1 billion of assets. Wellington Management's predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960. Wellington
Management, 75 State Street, Boston, MA 02109, is a Massachusetts general
partnership, of which the following persons are managing partners: Robert W.
Doran, Duncan M. McFarland and John R. Ryan.
For the services provided and expenses incurred pursuant to the Sub-Advisory
Agreement, the Sub-Adviser is entitled to receive a fee, computed daily and paid
monthly, at the annual rate of .075% of the first $500 million of 'managed
assets' (defined below) and .02% of 'managed assets' in excess of $500 million.
'Managed assets' are all of the money market fund assets that Wellington
Management manages for the Trust, including assets of funds other than the
Portfolio. The fee paid by the Portfolio is based on its proportionate share of
'managed assets.' For the fiscal year ended January 31, 1996, the Portfolio paid
the Sub-Adviser an advisory fee, as a percentage of average daily net assets, of
.075%.
THE ADMINISTRATOR
SEI Financial Management Corporation, 680 East Swedesford Road, Wayne,
Pennsylvania 19087, a wholly-owned subsidiary of SEI Corporation ('SEI'),
provides each Portfolio with administrative services, other than investment
advisory services, including all regulatory reporting, necessary office space,
equipment, personnel, and facilities pursuant to an administration agreement
with the Trust (the 'Administration Agreement'). The Administrator also serves
as the shareholder servicing agent of the Trust under the terms of the
Administration Agreement.
For its services, the Administrator is entitled to a fee, which is calculated
daily and paid monthly, at an annual rate of .20% of the average daily net
assets of the Portfolios. There is a minimum annual fee of $100,000 payable to
the Administrator by each Portfolio. The Administrator has voluntarily agreed to
waive a portion of its fee relating to the West Virginia Portfolio in order to
limit that Portfolio's administration fee to .20% of its average daily net
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17
assets on an annualized basis. The Administrator reserves the right, in its sole
discretion, to terminate this voluntary fee waiver at any time. For the fiscal
year ended January 31, 1996, the Portfolios paid the Administrator the following
administration fees (shown as a percentage of average daily net assets): Capital
Appreciation Portfolio, .20%; Emerging Growth Portfolio, .21%; Government
Portfolio, .20%; West Virginia Portfolio, .20%; and Prime Obligations Portfolio,
.20%.
THE TRANSFER AGENT
DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105 (the
'Transfer Agent') serves as the transfer agent and dividend disbursing agent for
the Portfolios under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Financial Services Company (the 'Distributor'), a wholly-owned subsidiary of
SEI, serves as the distributor of each Portfolio's shares pursuant to a
distribution agreement with the Trust (the 'Distribution Agreement'), which
applies to Class A and Class B shares of the Portfolios.
The Class B shares of each Portfolio have a distribution plan (the 'Class B
Plan') pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended (the '1940 Act'). As provided in the Distribution Agreement and the
Class B Plan, the Trust will pay a fee, at an annual rate of .25% of each Class
B Portfolio's average daily net assets to the Distributor as compensation for
its services. From this amount the Distributor may make payments to financial
institutions and intermediaries such as banks (including One Valley), savings
and loan associations, insurance companies, investment counselors,
broker-dealers and the Distributor's affiliates and subsidiaries as compensation
for services, reimbursement of expenses incurred in connection with distribution
assistance or provision of shareholder services. The Class B Plan is
characterized as a compensation plan since the distribution fee will be paid to
the Distributor without regard to the distribution or shareholder service
expenses incurred by the Distributor or the amount of payments made to financial
institutions and intermediaries. The Trust intends to operate the Class B Plan
in accordance with its terms and with the rules concerning sales charges of the
National Association of Securities Dealers, Inc.
Each Portfolio may also execute brokerage or other agency transactions through
an affiliate of the Adviser or through the Distributor for which the affiliate
or the Distributor may receive 'usual and customary' compensation. For further
information, see the Statement of Additional Information.
The Class A shares of each Portfolio are offered without distribution fees to
institutional investors, including One Valley, its affiliates and correspondent
banks, for the investment of funds for which they act in a fiduciary, agency or
custodial capacity. It is possible that an institution may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares. These financial institutions may also
charge separate fees to their customers.
Certain financial institutions offering shares to their customers may be
required to register as dealers pursuant to state laws.
The Distributor may, from time to time and at its own expense, provide
promotional incentives in the form of cash or other compensation to certain
financial institutions and intermediaries whose registered representatives have
sold or are expected to sell significant amounts of the shares of a Portfolio.
Such other compensation may take the form of payments for travel expenses,
including lodging, incurred in connection with trips taken by qualifying
registered representatives to places within or outside of the United States.
HOW TO PURCHASE SHARES
You may purchase shares of any Portfolio through representatives of One Valley
and other financial institutions and through broker-dealers that have
established a dealer agreement with the Distributor. You may also purchase
shares of any Portfolio directly, by contacting the Transfer Agent. Class A
shares may be purchased only by wire transfer. Class B shares may be purchased
by mail, by wire
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18
transfer, or through an automatic investment plan. Shares of the Portfolios are
sold on a continuous basis.
BY MAIL (CLASS B SHARES ONLY)
You may purchase Class B shares of any Portfolio by completing and signing an
Account Application form and mailing it, along with a check (or other negotiable
bank instrument or money order) payable to 'The Arbor Fund--OVB (Name of
Portfolio)', to the Transfer Agent. You may purchase additional shares at any
time by mailing a check (or other negotiable bank draft or money order) to the
Transfer Agent. Orders placed by mail will be executed on receipt of your check
or other negotiable bank draft or money order.
You may obtain Account Application forms by calling 1-800-545-6331.
BY WIRE TRANSFER (CLASS A AND CLASS B SHARES)
If your Account Application has been previously received, you may purchase
shares by wire transfer. To buy shares by wire transfer, call the Transfer Agent
toll-free at 1-800-808-4920.
The liability of the Trust or the Transfer Agent for fraudulent or unauthorized
telephone or wire instructions may be limited, as described below under
'Redemption of Shares--By Telephone.'
AUTOMATIC INVESTMENT PLAN ('AIP') (CLASS B SHARES ONLY)
You may arrange for periodic additional investments in Class B shares of a
Portfolio through automatic deductions by Automated Clearing House ('ACH') from
a checking account by completing an AIP Application Form. The minimum
pre-authorized investment amount is $100 per month. An AIP Application Form may
be obtained by contacting the Transfer Agent at 1-800-808-4920. The AIP is
available only for additional investments for an existing account.
GENERAL INFORMATION REGARDING PURCHASES
You may purchase shares of any Portfolio on any day the New York Stock Exchange
and the Federal Reserve wire system are open for business ('Business Days').
However, shares of the Portfolios cannot be purchased by Federal Reserve wire on
federal holidays restricting wire transfers. The minimum initial investment in
Class A shares of any Portfolio is $100,000 and the minimum initial investment
in Class B shares is $1,000 ($500 minimum for tax-deferred retirement programs
and employees of One Valley or its affiliates). Subsequent purchases of shares
must be at least $50 except for purchases through the AIP, which must be at
least $100. The Trust may waive these minimum investment requirements at its
discretion.
A purchase order for Class A or Class B shares will be effective as of the
Business Day received if the Transfer Agent receives the order and payment in
federal funds before 4:00 p.m., Eastern time or before 12:00 noon Eastern time,
for the Prime Obligations Portfolio. An order to purchase shares by federal
funds wire will be deemed to have been received on the Business Day of the wire,
provided that the shareholder notifies the Transfer Agent prior to 4:00 p.m.,
Eastern time or before 12:00 noon Eastern time, for the Prime Obligations
Portfolio. If the Transfer Agent does not receive notice by 4:00 p.m., Eastern
time or before 12:00 noon Eastern time, for the Prime Obligations Portfolio, on
the Business Day of the wire, the order will be executed on the next Business
Day. The purchase price of shares of any Portfolio is the net asset value per
share next computed after the order is effective. The net asset value per share
of each Portfolio is determined as of the close of business of the New York
Stock Exchange (currently, 4:00 p.m., Eastern time) other than the Prime
Obligations Portfolio. The net asset value of the Prime Obligations Portfolio is
determined as of 12:00 noon, Eastern time. The Prime Obligations Portfolio
expects to maintain its net asset value at $1.00 per share, although there can
be no assurance that it will be able to do so. Pursuant to guidelines adopted
and maintained by the Trustees of the Trust, each Portfolio may use pricing
services to provide market quotations or fair market valuations. A pricing
service may derive
<PAGE>
19
such valuations through the use of a matrix system to value fixed income
securities that considers factors such as securities prices, yield features,
ratings and developments related to a specific security. No certificates
representing shares will be issued. Purchases will be made in full and
fractional shares of a Portfolio calculated to three decimal places. Although
the methodology and procedures for determining net asset value are identical for
both classes of a Portfolio, the net asset value per share of Class A shares may
differ from that of Class B shares because of the distribution expenses paid by
Class B shares.
The Trust reserves the right to reject a purchase order for shares of any
Portfolio when the Distributor or Transfer Agent determines that it is not in
the best interest of the Trust or its shareholders to accept such order. Shares
of each Portfolio are offered only to residents of states in which the shares
are eligible for purchase.
If a check received for a purchase of Class B shares does not clear, the
purchase will be canceled and the investor could be liable for any losses or
fees incurred.
Purchases may be made by direct deposit or Automated Clearing House ('ACH')
transactions.
Shareholders of record who desire to transfer registration of their shares
should contact the Transfer Agent at 1-800-808-4920.
PURCHASES THROUGH FINANCIAL INSTITUTIONS
Shares of any Portfolio may also be purchased through financial institutions,
including the Adviser, that provide distribution assistance or shareholder
services to the Portfolios. Shares purchased by persons ('Customers') through
financial institutions may be held of record by the financial institution.
Financial institutions may impose an earlier cut-off time for receipt of
purchase orders directed through them to allow for processing and transmittal of
these orders to the Transfer Agent for effectiveness the same day. Customers
should contact their financial institution for information as to that
institution's procedures for transmitting purchase, exchange or redemption
orders to the Trust.
Customers who desire to transfer the registration of shares beneficially owned
by them but held of record by a financial institution should contact the
institution to accomplish such change.
Depending upon the terms of a particular Customer account, a financial
institution may charge a Customer account fees. The financial institution will
provide Customers with information concerning these services and any charges.
TAX-DEFERRED RETIREMENT PROGRAMS
The Capital Appreciation, Emerging Growth, Government and Prime Obligations
Portfolios are eligible for investment by tax-deferred retirement programs such
as IRAs, KEOGHs and 401(k) plans. For accounts established under such programs
the minimum initial investment in Class B shares of these Portfolios is $500.
One Valley offers a variety of tax-deferred programs through which investors may
purchase shares of these Portfolios. Accounts established under tax-deferred
retirement programs must have all dividends reinvested in the Portfolios.
HOW TO EXCHANGE SHARES
Once your account has been established, you may exchange your Class A or Class B
shares for the same class of shares of the other Portfolios. Exchanges are made
at net asset value. You must have received a current prospectus of the Portfolio
into which you wish to move your investment (the 'new' fund) before the exchange
will be effected. Exchanges will be made only after the Transfer Agent receives
exchange instructions in writing or by telephone (an 'Exchange Request'). If the
Transfer Agent receives an Exchange Request in good order by 4:00 p.m., Eastern
time or by 12:00 noon, Eastern time, for the Prime Obligations Portfolio, on any
Business Day, the exchange will occur on that day. The exchange privilege may be
exercised only in those states where the class or shares of the new fund may
legally be sold.
If your shares are held of record by a financial institution, you should contact
that institution if you wish to exchange shares. The institution will contact
the Transfer Agent and effect the exchange on your behalf.
<PAGE>
20
The Trust reserves the right to change the terms or conditions of the exchange
privilege discussed herein upon sixty days' notice.
An exchange is considered a sale of shares and will result in a capital gain or
loss for federal income tax purposes.
HOW TO REDEEM SHARES
You may redeem your shares without charge on any Business Day. There is,
however, a charge (currently $10) for wiring redemption proceeds of Class B
shares; this amount will be deducted from your redemption proceeds. Class A
shares may be redeemed by calling the Transfer Agent at 1-800-808-4920. Class B
shares may ordinarily be redeemed by mail, by telephone, or through a systematic
withdrawal plan. If your shares are held of record by a financial institution,
you should contact that financial institution for information on how to redeem
shares.
BY MAIL (CLASS B SHARES ONLY)
A written request for redemption must be received by the Transfer Agent in good
form in order to constitute a valid redemption request. Valid written redemption
requests will be effective on receipt. All shareholders of record must sign the
redemption request.
The Transfer Agent may require that the signatures on the written redemption
request be guaranteed. The signature guarantee requirement will be waived if all
of the following conditions apply: (1) the redemption is for not more than
$5,000 worth of shares, (2) the redemption check is payable to the
shareholder(s) of record, and (3) the redemption check is mailed to the
shareholder(s) at his or her address of record. The Trust and the Transfer Agent
reserve the right to amend these requirements without notice. For information
about the proper form of redemption requests, call 1-800-808-4920.
You may have redemption proceeds mailed to a commercial bank account previously
designated on your Account Application or by written instruction to the Transfer
Agent. There is no charge for having redemption proceeds mailed to a designated
bank account.
BY TELEPHONE (CLASS A SHARES AND PRIME OBLIGATIONS PORTFOLIO CLASS B SHARES)
You may redeem your shares by telephone if you have elected that option on your
Account Application. You must place your telephone redemption order with the
Transfer Agent at 1-800-808-4920 prior to 4:00 p.m., Eastern time or prior to
12:00 noon, Eastern time, for the Prime Obligations Portfolio, on any Business
Day for your order to be effective that day. You may not close your account by
telephone.
You may have the proceeds mailed to your address of record or mailed or wired to
a commercial bank account previously designated on your Account Application.
There is no charge for having redemption proceeds mailed to you or to a
designated bank account.
You may request a wire redemption for redemptions in excess of $500 by calling
the Transfer Agent at 1-800-808-4920, who will deduct a wire charge (currently
$10) from the amount of any wire redemption of Class B shares. There is no
charge for wire redemptions of Class A shares. Shares cannot be redeemed by
Federal Reserve wire on federal holidays restricting wire transfers.
Neither the Trust nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
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, including requiring a form
of personal identification prior to acting upon instructions received by
telephone and recording telephone instructions. If market conditions are
extraordinarily active, or severe weather or other emergencies exist, and you
experience difficulties placing redemption orders by telephone, you may wish to
consider placing your order by other means, such as mail or overnight delivery.
<PAGE>
21
SYSTEMATIC WITHDRAWAL PLAN ('SWP') (CLASS B SHARES ONLY)
You may use this option to receive regular distributions from your account. Upon
commencement of the SWP, your account must have a current value of $10,000 or
more. You may elect to receive automatic payments (via check or ACH) of $50 or
more on a monthly, quarterly, semi-annual or annual basis. You may obtain a SWP
Application form by contacting the Transfer Agent at 1-800-808-4920.
To participate in the SWP, you must have your dividends automatically
reinvested. You should realize that if your automatic withdrawals exceed income
dividends, your invested principal in the account will be depleted. Thus,
depending on the frequency and amounts of the withdrawal payments and/or any
fluctuations in the net asset value per share, your original investment could be
exhausted entirely. If the amount in your account with a Portfolio falls below
the minimum initial purchase amount, the Portfolio has the right to redeem your
shares. See 'Other Information Regarding Redemptions.'
You may change or cancel the SWP at any time on written notice to the Transfer
Agent.
CHECKWRITING SERVICE (PRIME OBLIGATIONS PORTFOLIO--CLASS B SHARES ONLY)
You may redeem your Class B shares of the Prime Obligations Portfolio by writing
checks on your account for $500 or more. Once you have signed and returned a
signature card, you will receive a supply of checks. Checks may be made payable
to any person. When you write a check, your account will continue to earn
dividends until the check clears. These checks are free, but your account will
be charged a fee (currently $15) on stopping payment of a check upon your
request, or if the check cannot be honored because of insufficient funds or
other valid reasons.
Because of the difficulty of determining in advance the exact value of a
Portfolio account, you may not use a check to close your account.
You may obtain signature cards by calling the Transfer Agent at 1-800-808-4920.
OTHER INFORMATION REGARDING REDEMPTIONS
All redemption orders are effected at the net asset value per share next
determined after a valid request for redemption is effective, as described
above. Net asset value per share is determined for all Portfolios other than the
Prime Obligations Portfolio as of the close of business of the New York Stock
Exchange (currently, 4:00 p.m., Eastern time) on each Business Day. Net asset
value for the Prime Obligations Portfolio is determined as of 12:00 noon,
Eastern time, on each Business Day. Because shares of each Portfolio except for
the Prime Obligations Portfolio fluctuate in value, when you redeem your shares,
they may be worth more or less than the amount of your original investment. The
Prime Obligations Portfolio expects to maintain its net asset value at $1.00 per
share.
Payment to shareholders for shares redeemed will be made within seven days after
the Transfer Agent receives the valid redemption request. Under most
circumstances, proceeds of telephone redemptions will be transmitted on the next
Business Day following receipt of a valid request for redemption. At various
times, however, a Portfolio may be requested to redeem Class B shares for which
it has not yet received good payment. In such circumstances, redemption proceeds
will be forwarded upon collection of payment for the shares; collection of
payment may take 10 or more days.
Each Portfolio intends to pay cash for all shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities with a market value equal to the redemption
price. In such cases, you may incur brokerage costs in converting such
securities to cash.
Due to the relatively high costs of handling small investments, each Portfolio
reserves the right to redeem your shares at their net asset value if, because of
redemptions, your account in that Portfolio has a value of less than the
applicable minimum initial purchase amount. Accordingly, if
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22
you purchase shares of a Portfolio in only the minimum investment amount, you
may be subject to involuntary redemption if you redeem any shares. Before a
Portfolio exercises its right to redeem your shares, you will be given notice
that the value of the shares in your account is less than the minimum amount and
will be allowed 60 days to make an additional investment in that Portfolio in an
amount that will increase the value of your account to at least the minimum
amount.
See 'Purchase and Redemption of Shares' in the Statement of Additional
Information for examples of when the right of redemption may be suspended.
PERFORMANCE
From time to time the Prime Obligations Portfolio advertises its 'current yield'
and 'effective yield.' Both yield figures are based on historical earnings and
are not intended to indicate future performance. No representation can be made
concerning actual future yields. The 'current yield' of the Prime Obligations
Portfolio refers to the income generated by an investment in the Portfolio over
a stated 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'
(also called 'effective compound yield') is calculated similarly but, when
annualized, the income earned by an investment in the Portfolio 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.
From time to time, the Equity and Fixed Income Portfolios may advertise yield
and total return. These figures will be based on historical earnings and are not
intended to indicate future performance. No representation can be made
concerning actual future yields or returns. The yield of a Portfolio refers to
the annualized income generated by an investment in the Portfolio over a
specified 30-day period. The yield is calculated by assuming that the same
amount of income generated by the investment during that period is generated in
each 30-day period over one year and is shown as a percentage of the investment.
The West Virginia Portfolio may also advertise a 'tax-equivalent yield,' which
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment to produce the after-tax equivalent of this
Portfolio's yield, assuming certain tax brackets for the shareholder.
The total return of a Portfolio refers to the average compounded rate of return
to a hypothetical investment for designated time periods (including but not
limited to, the period from which the Portfolio commenced operations through the
specified date), assuming that the entire investment is redeemed at the end of
each period and assuming the reinvestment of all dividend and capital gain
distributions.
The performance of Class A shares of each Portfolio will normally be higher than
that of Class B shares because Class A shares are not subject to distribution
expenses charged to Class B shares.
Each Portfolio may periodically compare its performance to the performance of
other mutual funds tracked by mutual fund rating services, broad groups of
comparable mutual funds, or unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
TAXES
The following summary of 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, property and other tax
treatment of any Portfolio or its shareholders. Accordingly, shareholders are
urged to consult their tax advisors regarding specific questions as to federal,
state and local income, property and other taxes.
TAX STATUS OF THE PORTFOLIO
Each Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Trust's other series. Each Portfolio intends
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23
to qualify for the special tax treatment afforded regulated investment companies
as defined under the Code. So long as a Portfolio qualifies for this special tax
treatment, it will be relieved of federal income tax on that part of its net
investment income (including, for this purpose, net short-term capital gain) and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) that it distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS
Each Portfolio will distribute 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. Any net capital gain will be
distributed at least annually and will be taxed to a shareholder as long-term
capital gain, regardless of how long the shareholder has held shares. Each
Portfolio will make annual reports to shareholders of the federal income tax
status of all distributions.
Corporate shareholders should note that distributions of the Government, West
Virginia and Prime Obligations Portfolios are not expected to qualify for the
dividends-received deduction that is generally available to corporate taxpayers.
Dividends paid by the Capital Appreciation and Emerging Growth Portfolios to
corporate shareholders are expected to qualify for this deduction to the extent
these Portfolios' dividends derive from dividends the Portfolios received from
domestic corporations. The full amount of these dividends, however, may be
subject to the federal alternative minimum tax. Distributions of net capital
gain will not qualify for this deduction.
Ordinarily, shareholders will include in income all dividends declared by a
Portfolio in the year those dividends are paid. However, dividends declared by a
Portfolio in October, November or December of any year and payable to
shareholders of record on a date in one of those months will be deemed to have
been paid by the Portfolio and received by the shareholders on December 31 of
that year if paid by the Portfolio any time during the following January.
Interest received on U.S. Treasury obligations is exempt from income tax at the
state level when received directly and may be exempt, depending on the state,
when received by a shareholder from a Portfolio provided certain conditions are
satisfied. Interest received on repurchase agreements collateralized by U.S.
Treasury obligations normally is not exempt from state taxation. Each Portfolio
will inform shareholders annually of the percentage of income and distributions
derived from U.S. Treasury obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
a Portfolio is considered tax exempt in their particular states.
Certain securities each Portfolio may purchase (such as STRIPS, TRs, TIGRs and
CATS, defined under 'Description of Permitted Investments') are sold with
original issue discount and do not make periodic cash interest payments. A
Portfolio will be required to include as part of its current income the accrued
discount on such obligations even though the Portfolio has not received any
interest payments on such obligations during that period. Because each Portfolio
distributes all of its net investment income to its shareholders, a Portfolio
may have to sell portfolio securities to distribute such accrued income, which
may occur at a time when the Adviser would not have chosen to sell such
securities and which may result in a taxable gain or loss.
<PAGE>
24
Each Portfolio intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax.
Income that a Portfolio derives from obligations of foreign issuers may be
subject to foreign withholding taxes. No Portfolio will be able to elect to
treat shareholders as having paid their proportionate share of such foreign
taxes.
A sale, exchange or redemption of any Portfolio's shares is a taxable event to
the shareholder.
ADDITIONAL CONSIDERATIONS FOR THE WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
The West Virginia Tax-Exempt Income Portfolio will distribute all of its net
investment income (including net short-term capital gain) to its shareholders.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the Portfolio's assets consist of obligations the interest on which is
excludable from gross income, the Portfolio may pay 'exempt-interest dividends'
to its shareholders. Those dividends constitute the portion of the aggregate
dividends as designated by the Portfolio, equal to the excess of the excludable
interest over certain amounts disallowed as deductions. Exempt-interest
dividends are excludable from a shareholder's gross income for federal income
tax purposes, but may have alternative minimum tax and other collateral
consequences. See the Statement of Additional Information.
Current Federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolio to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of 'exempt-interest
dividends.'
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the West Virginia Tax-Exempt Income Portfolio is not
deductible for federal income tax purposes. Furthermore, the Portfolio may not
be an appropriate investment for persons (including corporations and other
business entities) who are 'substantial users' (or persons related to
'substantial users') of facilities financed by industrial development private
activity bonds. Such persons should consult their tax advisers before purchasing
shares. A 'substantial user' is defined generally to include 'certain persons'
who regularly use in their trade or business a part of a facility financed from
the proceeds of such bonds.
WEST VIRGINIA INCOME TAXES
The determination of liability for West Virginia Personal Income Tax (the 'West
Virginia income tax') begins with a taxpayer's federal adjusted gross income.
Unlike the federal income tax, the West Virginia income tax does not allow
reduction of a taxpayer's adjusted gross income for itemized deductions.
Calculation of a taxpayer's West Virginia taxable income, however, is subject to
various modifications which either increase or reduce federal adjusted gross
income.
In 1993, the West Virginia Department of Tax and Revenue issued Technical
Assistance Advisory 93-002 (the 'Advisory'). The Advisory addresses the
modifications which affect the determination of West Virginia income tax
liability for interest or dividend income received by a shareholder from a
'regulated investment company,' such as the Portfolio intends to be. The
Department has declared that the Advisory is of precedential value to taxpayers.
As long as the Portfolio qualifies as a 'regulated investment company' under the
Code, a modification reducing adjusted gross income is allowed for that portion
of the interest or dividends received by shareholders which represents interest
or dividends of the Portfolio on obligations or securities of any authority,
commission or instrumentality of West Virginia that is exempt from the West
Virginia income tax by federal or West Virginia law. No such reduction is
allowed for any portion of interest income on obligations of any state, or
political subdivision thereof, other than West Virginia, regardless of any
exemption provided under federal law, such as that accorded 'exempt-interest
dividends'; and such portion must be
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added back as a modification increasing adjusted gross income.
The Advisory also addresses the taxability of interest on federal obligations
under the West Virginia income tax. Again, as long as the Portfolio qualifies as
a 'regulated investment company,' a modification reducing adjusted gross income
is allowed for interest or dividends received by shareholders from the Portfolio
which it derived from obligations of the United States and from obligations or
securities of some authorities, commissions or instrumentalities thereof. The
Advisory contains a nonexclusive list showing the taxability for West Virginia
income tax purposes of income derived from various obligations or securities of
the United States and its authorities, commissions or instrumentalities.
The Advisory also confirms that interest on indebtedness incurred (directly or
indirectly) by a shareholder of the Portfolio to purchase or hold shares of the
Portfolio must be added back to adjusted gross income as an increasing
modification to the extent such interest was deductible in determining the
taxpayer's federal adjusted gross income.
In the event the Portfolio fails to qualify as a 'regulated investment company'
under federal income tax law, the modifications reducing West Virginia income
tax liability set forth in the Advisory may be unavailable or substantially
limited, even though a shareholder would be entitled to such modifications if
the shareholder directly owned the obligations and securities held by the
Portfolio.
The sale, exchange, or redemption of Portfolio shares is subject to the West
Virginia income tax to the extent the gain or loss therefrom affects the
determination of the shareholder's federal adjusted gross income.
GENERAL INFORMATION
THE TRUST
The Trust is an open-end management investment company that has diversified and
non-diversified portfolios. The Trust is organized as a Massachusetts business
trust under a Declaration of Trust dated July 24, 1992. The Declaration of Trust
permits the Trust to offer separate portfolios of shares and different classes
of shares within each portfolio.
All consideration received by the Trust for shares of any portfolio and all
assets of such portfolio belong to that portfolio and are subject to liabilities
related thereto. The Trust reserves the right to create and issue shares of
additional portfolios.
The Trust pays its operating 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 and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
Please refer to 'Financial Highlights' in this Prospectus for more information
regarding the Portfolios' expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of 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 the shareholder of record to one vote. 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
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26
shareholders but shareholders' 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.
REPORTING
The Trust issues unaudited financial information semiannually 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 OVB Family of Funds, c/o DST
Systems, Inc., P.O. Box 419240, Kansas City, Missouri 64141-6240.
DIVIDENDS
The net investment income (not including capital gain) of each Fixed Income
Portfolio is declared daily and paid monthly. The net investment income (not
including capital gain) of each Equity Portfolio is declared quarterly and paid
quarterly. The net investment income (not including capital gain) of the Money
Market Portfolio is determined and declared on each Business Day as a dividend
for shareholders of record as of the close of business on that day. Shareholders
of record on the date each dividend is declared will be entitled to receive the
dividend. Currently, capital gains of each Portfolio, if any, will be
distributed at least annually. Shares of the Equity and Fixed Income Portfolios
are eligible to begin earning dividends that are declared on the Business Day
after the purchase order is effective and continue to be eligible for dividends
through and including the day the redemption order is effective.
Dividends and distributions of the Portfolios are paid on a per share basis. The
value of each share will be reduced by the amount of the payment. If you
purchase shares shortly before the record date for a dividend or distribution of
capital gain, you will pay the full price for the shares and receive some
portion of the price back as a taxable dividend or capital gain distribution.
You will automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless you have elected to take such payment in cash.
You may change your election by providing written notice to the Transfer Agent
at least 15 days prior to the distribution.
The amount of dividends payable on Class A shares will be more than those
payable on Class B shares because of the distribution fees paid by Class B
shares.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Morgan, Lewis & Bockius LLP serve as counsel to the Trust. Price Waterhouse LLP
serve as the independent accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
PA 19101 (the 'Custodian'), acts as custodian of the Trust. The Custodian holds
cash, securities and other assets of the Trust as required by the 1940 Act.
DESCRIPTION OF PERMITTED INVESTMENTS
The following is a description of permitted investments for one or more of the
Portfolios:
AMERICAN DEPOSITARY RECEIPTS ('ADRs')-- ADRs are securities, typically issued by
a U.S. financial institution (a 'depositary'), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs may be available through 'sponsored' or 'unsponsored'
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas an unsponsored
facility may be established by a depositary without participation
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27
by the issuer of the receipt's underlying security. Holders of an unsponsored
depositary receipt generally bear all the costs of the unsponsored facility. The
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through, to the holders of the receipts, voting rights with
respect to the deposited securities.
ASSET-BACKED SECURITIES--Asset-backed securities are securities secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as pass-
through certificates, which represent undivided fractional ownership interests
in the underlying pools of assets. Such securities also may be debt instruments,
which are also known as collateralized obligations and are generally issued as
the debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain 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. The purchase of asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. For example, 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. There also is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on those
securities. 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. In addition, credit card receivables
are unsecured obligations of the card holder.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
BANKERS' ACCEPTANCE--Bankers' acceptances are bills of exchange or time drafts
drawn on and accepted by a commercial bank. Bankers' acceptances are used by
corporations to finance the shipment and storage of goods and to furnish dollar
exchange. Maturities are generally six months or less.
CERTIFICATE OF DEPOSIT--Certificates of deposit are interest-bearing instrument
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 a term used to describe unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from a few to 270 days.
CONVERTIBLE SECURITIES--Convertible securities are corporate securities that are
exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar to both
fixed-income and equity securities. Because of the conversion feature, the
market value of a convertible security tends to move with the market value of
the underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
FUTURES AND OPTIONS ON FUTURES--Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during the
term of the option. A Portfolio may use futures
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contracts and related options for bona fide hedging purposes, to offset changes
in the value of securities held or expected to be acquired or be disposed of, to
minimize fluctuations in foreign currencies, or to gain exposure to a particular
market or instrument. A Portfolio will minimize the risk that it will be unable
to close out a futures contract by only entering into futures contracts which
are traded on national futures exchanges.
Stock index futures are futures contracts for various stock indices that are
traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates, (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Portfolio and the prices
of futures and options on futures, (3) there may not be a liquid secondary
market for a futures contract or option, (4) trading restrictions or limitations
may be imposed by an exchange, and (5) government regulations may restrict
trading in futures contracts and futures options.
A Portfolio may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
('CFTC'), so long as, to the extent that such transactions are not for 'bona
fide hedging purposes,' the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do not
exceed 5% of the Portfolio's net assets. A Portfolio may buy and sell futures
contracts and related options to manage its exposure to changing interest rates
and securities prices. Some strategies reduce a Portfolio's exposure to price
fluctuations, while others tend to increase its market exposure. Futures and
options on futures can be volatile instruments and involve certain risks that
could negatively impact a Portfolio's return.
GUARANTEED INVESTMENT CONTRACTS ('GICs')--GICs are contracts issued by U.S.
insurance companies. Pursuant to such contracts, a Portfolio makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Portfolio on a monthly basis guaranteed
interest at either a fixed, variable or floating rate. A GIC provides that this
guaranteed interest will not be less than a certain minimum rate. A GIC is a
general obligation of the issuing insurance company and not a separate account.
The purchase price paid for a GIC becomes part of the general assets of the
issuer, and the contract is paid at maturity from the general assets of the
issuer.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance companies. For this reason, an active secondary market in GICs
does not currently exist and GICs are considered to be illiquid investments.
ILLIQUID SECURITIES--Illiquid securities are securities that a Portfolio cannot
dispose of within 7 days at approximately the price at which they are being
carried on the Portfolio's books. An illiquid security includes a demand
instrument with a demand notice period exceeding seven days, where there is no
secondary market for such security, and repurchase agreements with maturities
over seven days in length.
INVESTMENT COMPANIES--Because of restrictions on direct investment by U.S.
entities in certain countries, investment in other investment companies may be
the most practical or only manner in which an international and global fund can
invest in the securities markets of those countries. A Portfolio does not intend
to invest in other investment companies unless, in the judgment of its advisers,
the potential benefits of such investments exceed the associated costs relative
to the benefits and costs associated with direct investments in the underlying
securities.
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Investments in closed-end investment companies may involve the payment of
substantial premiums above the net asset value of such issuer's portfolio
securities, and are subject to limitations under the 1940 Act. As a shareholder
in an investment company, a Portfolio would bear its ratable share of that
investment company's expenses, including its advisory and administration fees. A
Portfolio may also incur tax liability to the extent it invests in the stock of
a foreign issuer that constitutes a 'passive foreign investment company.'
MORTGAGE-BACKED SECURITIES--Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional thirty-year fixed-rate mortgages, graduated payment
mortgages, and adjustable rate mortgages. During periods of declining interest
rates, prepayment of mortgages underlying mortgage-backed securities can be
expected to accelerate. Prepayment of mortgages which underlie securities
purchased at a premium often results in capital losses, while prepayment of
mortgages purchased at a discount often results in capital gains. Because of
these unpredictable prepayment characteristics, it is often not possible to
predict accurately the average life or realized yield of a particular issue.
Government Pass-Through Securities: These securities that are issued or
guaranteed by a U.S. Government agency represent an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are GNMA, FNMA and FHLMC. FNMA and FHLMC obligations are not backed
by the full faith and credit of the U.S. Government as GNMA certificates are,
but FNMA and FHLMC securities are supported by the instrumentalities' right to
borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely
distributions of interest to certificate holders. GNMA and FNMA also each
guarantees timely distributions of scheduled principal. FHLMC has in the past
guaranteed only the ultimate collection of principal of the underlying mortgage
loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold PCs)
which also guarantee timely payment of monthly principal reductions. Government
and private guarantees do not extend to the securities' value, which is likely
to vary inversely with fluctuations in interest rates.
Private Pass-Through Securities: These are mortgage-backed securities issued by
a nongovernmental entity, such as a trust. These securities include
collateralized mortgage obligations ('CMOs') and real estate mortgage investment
conduits ('REMICs') that are rated in one of the top two rating categories.
While they are generally structured with one or more types of credit
enhancement, private pass-through securities typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality.
Collateralized Mortgage Obligations ('CMOs'): CMOs are debt obligations or
multiclass pass-through certificates issued by agencies or instrumentalities of
the U.S. Government or by private originators or investors in mortgage loans. In
a CMO, series of bonds or certificates are usually issued in multiple classes.
Principal and interest paid on the underlying mortgage assets may be allocated
among the several classes of a series of a CMO in a variety of ways. Each class
of a CMO, often referred to as a 'tranche,' is issued with a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal payments on the underlying mortgage assets may cause CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates, resulting in a loss of all or part of any premium paid.
REMICs: A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial interests in
REMICs, which are known as 'regular' interests, or 'residual' interests.
Guaranteed REMIC pass-through certificates ('REMIC Certificates') issued by FNMA
or FHLMC represent beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or
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FNMA, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC
REMIC Certificates, FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC Certificates are
issued and guaranteed as to timely distribution of principal and interest by
FNMA.
Parallel Pay Securities; PAC Bonds: Parallel pay CMOs and REMICs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which must be retired by
its stated maturity date or final distribution date, but may be retired earlier.
Planned Amortization Class CMOs ('PAC Bonds') generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
REITs: REITs are trusts that invest primarily in commercial real estate or real
estate-related loans. The value of interests in REITs may be affected by the
value of the property owned or the quality of the mortgages held by the trust.
Stripped Mortgage-Backed Securities ('SMBs'): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments and is thus termed an interest-only class ('IO'), while
the other class may receive all of the principal payments and is thus termed the
principal-only class ('PO'). The value of IOs tends to increase as rates rise
and decrease as rates fall; the opposite is true of POs. SMBs are extremely
sensitive to changes in interest rates because of the impact thereon of
prepayment of principal on the underlying mortgage securities can experience
wide swings in value in response to changes in interest rates and associated
mortgage prepayment rates. During times when interest rates are experiencing
fluctuations, such securities can be difficult to price on a consistent basis.
The market for SMBs is not as fully developed as other markets; SMBs therefore
may be illiquid.
Risk Factors: Due to the possibility of prepayments of the underlying mortgage
instruments, mortgage-backed securities generally do not have a known maturity.
In the absence of a known maturity, market participants generally refer to an
estimated average life. An average life estimate is a function of an assumption
regarding anticipated prepayment patterns, 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 can
produce different average life estimates with regard to the same security. There
can be no assurance that estimated average life will be a security's actual
average life.
MUNICIPAL SECURITIES--Municipal securities consists of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses, and for lending such funds to other public institutions and
facilities, and (ii) certain private activity and industrial development bonds
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair, or improvement of privately operated
facilities.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
(tolls from a toll bridge, for example). Certificates of participation represent
an interest in an underlying obligation or commitment such as an obligation
issued in connection with a leasing arrangement. The payment of principal and
interest on private activity and industrial development bonds generally is
dependent solely on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment.
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Municipal securities include both municipal notes and municipal bonds. Municipal
notes include general obligation notes, tax anticipation notes, revenue
anticipation notes, bond anticipation notes, certificates of indebtedness,
demand notes, and construction loan notes. Municipal bonds include general
obligation bonds, revenue or special obligation bonds, private activity and
industrial development bonds, and participation interests in municipal bonds.
OPTIONS--A put option gives the purchaser of the option the right to sell, and
the writer the obligation to buy, the underlying security at any time during the
option period. A call option gives the purchaser of the option the right to buy,
and the writer of the option the obligation to sell, the underlying security at
any time during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. The
initial purchase (sale) of an option contract is an 'opening transaction.' In
order to close out an option position, a Portfolio may enter into a 'closing
transaction'--the sale (purchase) of an option contract on the same security
with the same exercise price and expiration date as the option contract
originally opened.
A Portfolio may purchase put and call options to protect against a decline in
the market value of the securities in its portfolio or to anticipate an increase
in the market value of securities that the Portfolio may seek to purchase in the
future. A Portfolio purchasing put and call options pays a premium therefor. If
price movements in the underlying securities are such that exercise of the
options would not be profitable for the Portfolio, loss of the premium paid may
be offset by an increase in the value of the Portfolio's securities or by a
decrease in the cost of acquisition of securities by the Portfolio.
A Portfolio may write covered call options as a means of increasing the yield on
its portfolio and as a means of providing limited protection against decreases
in its market value. When a Portfolio sells an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and the Portfolio will realize as profit the
premium received for such option. When a call option of which a Portfolio is the
writer is exercised, the Portfolio will be required to sell the underlying
securities to the option holder at the strike price, and will not participate in
any increase in the price of such securities above the strike price. When a put
option of which a Portfolio is the writer is exercised, the Portfolio will be
required to purchase the underlying securities at the strike price, which may be
in excess of the market value of such securities.
A Portfolio may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ('OTC options') differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the Securities and Exchange Commission that OTC options are
generally illiquid.
A Portfolio may purchase and write put and call options on foreign currencies
(traded on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by a
Portfolio will be 'covered,' which means that the Portfolio will own an equal
amount of the underlying foreign currency. With respect to put options on
foreign currency written by a Portfolio, the Portfolio will establish a
segregated account with its custodian bank consisting of cash or liquid, high
grade debt securities in an amount equal to the amount the Portfolio would be
required to pay upon exercise of the put.
A Portfolio may purchase and write put and call options on indices and enter
into related closing transactions. Put and call options on indices are
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similar to options on securities except that options on an index give the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying index is greater than (or less than, in the case
of puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
options on individual securities, all settlements are in cash, and gain or loss
depends on price movements in the particular market represented by the index
generally, rather than the price movements in individual securities. A Portfolio
may choose to terminate an option position by entering into a closing
transaction. The ability of a Portfolio to enter into closing transactions
depends upon the existence of a liquid secondary market for such transactions.
A Portfolio may engage in writing covered call options. Under a call option, the
purchaser has the right to purchase and the writer (the Portfolio) the
obligation to sell the underlying security at the exercise price during the
option period. Options purchased by the Portfolio will be listed on a national
securities exchange. In order to close out an option position, the Portfolio may
enter into a 'closing purchase transaction,' which involves the purchase of an
option on the same security at the same exercise price and expiration date. If
the Portfolio is unable to effect a closing purchase transaction with respect to
an option it has written, it will not be able to sell the underlying security
until the option expires or the Portfolio delivers the security upon exercise.
Permissible options include options on stock indices.
Even where used only for hedging purposes, options involve risks, including the
following: (i) the success of any hedging strategy utilizing options will depend
on an ability to predict movements in the prices of individual securities and
interest rates, (ii) there may be an imperfect correlation between the movement
in prices of securities held by the Portfolio and the price of options, (iii)
there may not be a liquid secondary market for options, and (iv) while the
Portfolio will receive a premium when it writes covered call options, it may not
participate fully in any rise in the market value of the underlying security.
All options written on indices must be covered. When a Portfolio writes an
option on an index, it will establish a segregated account containing cash or
liquid high grade debt securities with its Custodian in an amount at least equal
to the market value of the option and will maintain the account while the option
is open or will otherwise cover the transaction.
RISK FACTORS--Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while a Portfolio will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
RECEIPTS--Receipts are sold as zero coupon securities which means that they are
sold at a substantial discount and redeemed at face value at their maturity date
without interim cash payments of interest or principal. This discount is
accreted over the life of the security, and such accretion will constitute the
income earned on the security for both accounting and tax purposes. Because of
these features, such securities may be subject to greater interest rate
volatility than interest paying investments.
REPURCHASE AGREEMENTS--Repurchase agreements are agreements by which a Portfolio
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 Portfolio will have actual or constructive
possession of the security as collateral for the repurchase agreement. The
Portfolio bears a risk of loss in the event the other party defaults on its
obligations and the Portfolio is delayed or prevented from its right to dispose
of the collateral securities or if the Portfolio
<PAGE>
33
realizes a loss on the sale of the collateral securities. The Portfolio 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
Securities and Exchange Commission. 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 nationally recognized statistical rating
organizations (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 (a '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.
In the case of taxable money market funds, investments in second tier securities
are subject to the further constraints that (i) no more than 5% of the
Portfolio's assets may be invested in such securities in the aggregate, and (ii)
any investment in such securities of one issuer is limited to the greater of 1%
of the Portfolio's total assets or $1 million. A taxable money market fund may
also hold more than 5% of its assets in the first tier securities of a single
issuer for three Business Days.
RESTRICTED SECURITIES--Restricted securities are securities that may not be sold
freely to the public absent registration under the Securities Act of 1933, as
amended, or an exemption from registration.
SECURITIES LENDING--In order to generate additional income, a Portfolio may lend
the securities in 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 100% of the market value of the
securities lent. A Portfolio 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.
SECURITIES OF FOREIGN ISSUERS--There are certain risks connected with investing
in foreign securities. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting requirements, the
possibility that there will be less information on such securities and their
issuers available to the public, the difficulty of obtaining or enforcing court
judgments abroad, restrictions on foreign investments in other jurisdictions,
difficulties in effecting repatriation of capital invested abroad, and
difficulties in transaction settlements and the effect of delay on shareholder
equity. Foreign securities may be subject to foreign taxes, and may be less
marketable than comparable U.S. securities. The value of a Portfolio's
investments denominated in foreign currencies will depend on the relative
strengths of those currencies and the U.S. dollar, and a Portfolio may be
affected favorably or unfavorably by changes in the exchange rates or exchange
control regulations between foreign currencies and the U.S. dollar. Changes in
foreign currency exchange rates also may affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains if any, to be distributed to shareholders by a
Portfolio.
SHORT SALES--Selling securities short involves selling securities the seller
does not own (but has borrowed) in anticipation of a decline in the market price
of such securities. To deliver the securities to the buyer, the seller must
arrange through a broker to borrow the securities and, in so doing, the seller
becomes obligated to replace the securities borrowed at their market price at
the time of replacement. In a short sale, the proceeds the seller
<PAGE>
34
receives from the sale are retained by a broker until the seller replaces the
borrowed securities. The seller may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on securities until
they are replaced.
A Portfolio may only sell securities short 'against the box.' A short sale is
'against the box' if, at all times during which the short position is open, the
Portfolio owns at least an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issuer as the securities that are sold short.
A Portfolio may also maintain short positions in forward currency exchange
transactions, which involve the Portfolio's agreement to exchange currency that
it does not own at that time for another currency at a future date and specified
price in anticipation of a decline in the value of the currency sold short
relative to the currency that the Fund.
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 Portfolio 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 of reducing the yield otherwise payable on the underlying
security. A Portfolio will limit standby commitment or put transactions to
institutions believed to present minimal credit risk.
TIME DEPOSIT--Time deposits are non-negotiable receipt 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 with a withdrawal penalty 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 Portfolio'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 rate
on these securities may be reset daily, weekly, quarterly or by 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 actually 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.
<PAGE>
35
WARRANTS--Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
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.
A Portfolio will maintain with the Custodian a separate account with liquid high
grade debt securities or cash in an amount at least equal to these commitments.
The interest rate realized on these securities is fixed as of the purchase date
and no interest accrues to a Portfolio before settlement. These securities are
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 a Portfolio generally purchases securities on a when-issued or
forward commitment basis with the intention of actually acquiring securities, a
Fund may dispose of a when-issued security or forward commitment prior to
settlement if it deems appropriate.
ZERO COUPON SECURITIES--STRIPS and Receipts (TRs, TIGRs and CATS) are sold as
zero coupon securities, that is, fixed income securities that have been stripped
of their unmatured interest coupons. Zero coupon securities are sold at a
(usually substantial) discount and redeemed at face value at their maturity date
without interim cash payments of interest or principal. The amount of this
discount is accredited over the life of the security, and the accretion
constitutes the income earned on the security for both accounting and tax
purposes. Because of these features, these market prices of zero coupon
securities are generally more volatile than the market prices of securities that
have similar maturity but that pay interest periodically. Zero coupon securities
are likely to respond to a greater degree to interest rate changes than are
non-zero coupon securities with similar maturity and credit qualities. See also
'Taxes.'
<PAGE>
36
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C> <C>
Summary............................................. 2 The Administrator................................... 16
Expense Summary..................................... 4 The Transfer Agent.................................. 17
Financial Highlights................................ 6 The Distributor..................................... 17
The Funds and the Trust............................. 8 How to Purchase Shares.............................. 18
Investment Objectives............................... 8 How to Exchange Shares.............................. 19
Investment Policies and Information................. 8 How to Redeem Shares................................ 20
General Investment Policies and Risk Factors........ 12 Performance......................................... 22
Investment Limitations and Fundamental Policies..... 14 Taxes............................................... 23
The Adviser......................................... 15 General Information................................. 25
The Sub-Adviser..................................... 16 Description of Permitted Investments................ 26
</TABLE>
<PAGE>
OVB FAMILY OF FUNDS
Trust: The Arbor Fund
Portfolios: OVB Prime Obligations Portfolio
OVB Capital Appreciation Portfolio
OVB Emerging Growth Portfolio
OVB Government Securities Portfolio
OVB West Virginia Tax-Exempt Income Portfolio
Investment Adviser: One Valley Bank, National Association
Statement of Additional Information
This Statement of Additional Information is not a prospectus; it provides
information about the activities and operations of the OVB Family of Funds (the
"Funds"), a group of mutual funds consisting of separate series of The Arbor
Fund (the "Trust"). This Statement of Additional Information should be read in
conjunction with the Funds' Prospectus dated May 31, 1996. A Prospectus may be
obtained by calling 1-800-545-6331.
TABLE OF CONTENTS
THE FUNDS AND THE TRUST......................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS.........................................S-2
DESCRIPTION OF RATINGS......................................................S-14
INVESTMENT LIMITATIONS......................................................S-18
NON-FUNDAMENTAL POLICIES....................................................S-19
THE ADVISER.................................................................S-20
THE SUB-ADVISER.............................................................S-20
THE ADMINISTRATOR...........................................................S-21
THE DISTRIBUTOR.............................................................S-22
TRUSTEES AND OFFICERS OF THE TRUST..........................................S-23
COMPUTATION OF YIELD........................................................S-25
CALCULATION OF TOTAL RETURN.................................................S-27
PURCHASE AND REDEMPTION OF SHARES...........................................S-28
DETERMINATION OF NET ASSET VALUE............................................S-28
TAXES.......................................................................S-29
PORTFOLIO TRANSACTIONS......................................................S-33
TRADING PRACTICES AND BROKERAGE.............................................S-33
DESCRIPTION OF SHARES.......................................................S-37
SHAREHOLDER LIABILITY.......................................................S-37
LIMITATION OF TRUSTEES' LIABILITY...........................................S-37
5% SHAREHOLDERS.............................................................S-38
EXPERTS.....................................................................S-38
FINANCIAL STATEMENTS........................................................S-38
May 31, 1996
OVB-F-003-03
<PAGE>
THE FUNDS AND THE TRUST
This Statement of Additional Information relates to the OVB Family of Funds (the
"Funds"), a group of mutual funds. The Funds consist of: the OVB Prime
Obligations Portfolio (the "Money Market Portfolio"), the OVB Capital
Appreciation Portfolio (the "Capital Appreciation Portfolio"), the OVB Emerging
Growth Portfolio (the "Emerging Growth Portfolio"), the OVB Government
Securities Portfolio (the "Government Portfolio"), and the OVB West Virginia
Tax-Exempt Income Portfolio (the "West Virginia Portfolio") (each, a
"Portfolio"). Each Portfolio is a separate series of The Arbor Fund (the
"Trust"). The Trust is an open-end management investment company established
under Massachusetts law as a "Massachusetts business trust" under an Agreement
and Declaration of Trust dated as of July 24, 1992 (the "Declaration of Trust").
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.
Each series is a separate mutual fund. Except for differences between the Class
A and Class B shares of the Portfolios pertaining to dividends, voting rights
and distribution plans, each share of each Portfolio represents an equal
proportionate interest in that Portfolio. See "Description of Shares."
Capitalized terms not defined herein are defined in the Prospectus. No
investment in shares of a Portfolio should be made without first reading the
Prospectus.
DESCRIPTION OF PERMITTED INVESTMENTS
Asset-Backed Securities
The Fixed Income Portfolios may invest in non-mortgage 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-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
owed 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.
S-2
<PAGE>
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 instrumentalities. The Adviser
intends to limit purchases of non-mortgage asset-backed securities to securities
that are readily marketable at the time of purchase.
Bank Obligations
The Portfolios are not prohibited from investing in obligations of banks that
are clients of SEI Corporation ("SEI"). However, the purchase of shares of the
Portfolios by such banks or by their customers will not be a consideration in
determining which bank obligations the Portfolios will purchase.
The Portfolios will not purchase obligations of the Adviser.
Foreign Securities
The Money Market, Capital Appreciation and Emerging Growth Portfolios may invest
in certain U.S. dollar denominated obligations or securities of foreign issuers.
Permissible investments for the Money Market Portfolio may consist of
obligations of foreign branches of U.S. banks and U.S. and London branches of
foreign banks, including European certificates of deposit, European time
deposits, Canadian time deposits and Yankee certificates of deposit, and
investments in foreign commercial paper, foreign securities and Europaper.
Foreign securities may subject a Portfolio 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 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 commissions 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.
Government National Mortgage Association ("GNMA") Certificates
All Portfolios may invest in securities issued by GNMA, a wholly-owned U.S.
Government corporation that guarantees the timely payment of principal and
interest. The market value and interest yield of these instruments 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. GNMA certificates consist of underlying mortgages with a maximum
maturity of 30 years. However, due to scheduled and unscheduled principal
payments, GNMA certificates 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 GNMA pool. The scheduled monthly interest and principal payments
relating to mortgages in the pool will be "passed through" to investors. GNMA
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 GNMA certificates may offer yields
S-3
<PAGE>
higher than those available from other types of U.S. Government securities, GNMA
certificates 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 a GNMA certificate 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 GNMA
certificate originally purchased at a premium to decline in price to its par
value, which may result in a loss.
Investment Company Shares
Each Portfolio may invest in shares of other investment companies, to the extent
permitted by applicable law and subject to certain restrictions. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Portfolio. A Portfolio's purchase of such investment
company securities results in the layering of expenses, such that shareholders
would indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees, in addition to paying Portfolio
expenses. Under applicable regulations, a Portfolio is prohibited from acquiring
the securities of another investment company if, as a result of such
acquisition: (1) the Portfolio owns more than 3% of the total voting stock of
the other company; (2) securities issued by any one investment company represent
more than 5% of the Portfolio's total assets; or (3) securities (other than
treasury stock) issued by all investment companies represent more than 10% of
the total assets of the Portfolio. See also "Investment Limitations."
It is the position of the staff of the Securities and Exchange Commission that
certain nongovernmental issuers of CMOs and REMICs constitute investment
companies pursuant to the Investment Company Act of 1940, as amended (the "1940
Act"), and either (a) investments in such instruments are subject to the
limitations set forth above or (b) the issuers of such instruments have received
orders from the Securities and Exchange Commission exempting such instruments
from the definition of investment company.
Mortgage-Backed Securities
The Fixed Income Portfolios may, in addition to investing in GNMA securities,
invest in other mortgage-backed securities, principally collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
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 properties).
Many CMOs are issued with a number of classes or series that 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
generally are not guaranteed.
S-4
<PAGE>
REMICs, which were authorized under the Internal Revenue Code of 1986, as
amended (the "Code"), are private entities formed for the purpose of holding a
fixed pool of mortgages secured by an interest in real property. REMICs are a
form of CMO, and issue multiple classes of securities.
Municipal Securities
Municipal Securities -- The two principal classifications of Municipal
Securities are "general obligation" and "revenue" issues. General obligation
issues are issues involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues, although the
characteristics and method of enforcement of general obligation issues may vary
according to the law applicable to the particular issuer. Revenue issues are
payable only from the revenues derived from a particular facility or class of
facilities or other specific revenue source. The West Virginia Portfolio may
also invest in "moral obligation" issues, which are normally issued by special
purpose authorities. Moral obligation issues are not backed by the full faith
and credit of the state and are generally backed by the agreement of the issuing
authority to request appropriations from the state legislative body. Municipal
Securities include debt obligations issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Certain private activity bonds that are issued by
or on behalf of public authorities to finance various privately-owned or
operated facilities are included within the term "Municipal Securities." Private
activity bonds and industrial development bonds are generally revenue bonds, the
credit and quality of which are directly related to the credit of the private
user of the facilities.
Municipal Securities may also include general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, project notes,
certificates of indebtedness, demand notes, tax-exempt commercial paper,
construction loan notes and other forms of short-term, tax-exempt loans. Such
instruments are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements or other revenues. Project notes
are issued by a state or local housing agency and are sold by the Department of
Housing and Urban Development. While the issuing agency has the primary
obligation with respect to its project notes, they are also secured by the full
faith and credit of the United States through agreements with the issuing
authority which provide that, if required, the federal government will lend the
issuer an amount equal to the principal of and interest on the project notes.
The quality of Municipal Securities, both within a particular classification and
between classifications, will vary, and the yields on Municipal Securities
depend upon a variety of factors, including general money market conditions, the
financial condition of the issuer (or other entity whose financial resources are
supporting the securities), general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating(s)
of the issue. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality. Municipal
Securities with the same maturity, interest rate and rating(s) may have
different yields, while Municipal Securities of the same maturity and interest
rate with different rating(s) may have the same yield.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability
S-5
<PAGE>
of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions.
Under certain circumstances, the West Virginia Portfolio may invest in Municipal
Securities, such as certain private activity or industrial revenue bonds, the
interest on which is not tax-exempt for federal income tax purposes but which
otherwise meet the Portfolio's investment criteria.
Special Factors Relating to West Virginia Municipal Securities - Because the
West Virginia Portfolio invests primarily in West Virginia Municipal Securities,
the Portfolio is more susceptible to factors adversely affecting issuers of West
Virginia Municipal Securities than a mutual fund that does not invest as heavily
in such securities. Investors should consider carefully the special risks
inherent in the Portfolio's investment in West Virginia Municipal Securities.
West Virginia's economy is dependent upon the coal mining industry. A reduction
in the demand for certain types of coal and increasing governmental regulation
has had an adverse impact upon the industry and upon the economy of the state.
Notwithstanding the importance of the coal mining industry on the West Virginia
economy, over the course of the past few years, West Virginia's economy has
benefitted from a developing tourism industry. Tourism directly and indirectly
accounts for a material portion of the West Virginia economy.
In 1989, taxes were substantially increased by applying sales, service and use
taxes to a vast number of consumer and industrial products and services that
were previously exempt from such tax. In 1993, the state's gasoline tax was
substantially increased. In 1994, full implementation of a reappraisal of real
property for ad valorem tax purposes took effect.
The increase in taxes in recent years and other measures have helped to bring
governmental expenses in line with income. However, as in many other states, the
state, local governments and school boards continue to struggle to produce
sufficient revenues to fund their operations and their support of the public
education system.
West Virginia led the nation in unemployment from July 1991 through August 1993.
Since then West Virginia's unemployment rate has dropped significantly, but the
state still has one of the highest unemployment rates in the nation. Although
the seasonally adjusted unemployment rate in West Virginia declined from 8.4% in
February 1995 to 7.4% in February 1996, West Virginia's unemployment rate is
still well above the 5.5% seasonally adjusted national rate for February 1996.
High unemployment continues to reflect the weakness of the West Virginia
economy.
Municipal Leases -- The West Virginia Portfolio may invest in instruments, or
participations in instruments, issued in connection with lease obligations or
installment purchase contract obligations of municipalities ("municipal lease
obligations"). Although municipal lease obligations do not constitute general
obligations of the issuing municipality, a lease obligation is ordinarily backed
by the municipality's covenant to budget for, appropriate funds for, and make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses, which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose in the relevant years. Municipal lease
obligations are a relatively new form of financing, and the market for such
obligations is still developing. Municipal leases will be treated as liquid only
if they satisfy criteria set forth in guidelines established by the Board of
Trustees, and there can be no assurance that a market will exist or continue to
exist for any municipal lease obligation.
Put Transactions (Standby Commitments) - The West Virginia Portfolio reserves
the right to engage in put transactions. The Adviser has the authority to
purchase securities at a price that would result in a yield to maturity lower
than that generally offered by the seller at the time of purchase when the
S-6
<PAGE>
Portfolio 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 "put" or "standby commitment." The purpose of engaging in
transactions involving puts is to maintain flexibility and liquidity so as to
permit the Portfolio to meet redemptions and remain as fully invested as
possible in Municipal Securities. The Portfolio's ability to put the securities
depends on the writer's ability to pay for the securities at the time the
Portfolio exercises the put. The Portfolio will engage in put transactions only
with institutions that the Adviser believes present minimal credit risks, and
the Adviser will use its best efforts to determine initially and continue to
monitor the financial strength of the sellers of the options in accordance with
credit guidelines adopted by the Trust's Board of Trustees. In the event that
any writer is unable to honor a put for financial reasons, the Portfolio 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
Portfolio and the writer may excuse the writer from repurchasing the securities;
for example, a change in the published rating of the underlying 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 Portfolio
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.
The 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 Portfolio.
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 Portfolio could seek to negotiate terms for
the extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Portfolio, the Portfolio could, of course, sell the
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 the Portfolio may purchase subject to a put or a standby
commitment but the amount paid directly or indirectly for premiums on all puts
and standby commitments outstanding will not exceed 0.5% of the Portfolio's
total assets calculated immediately after any such put is acquired.
The Portfolio will consider the maturity of a security subject to a put to be
the first date on which the Portfolio has the right to demand payment from the
writer, even though the final maturity of the security will ordinarily be later
than such date.
Options and Futures
Options on Securities and Indices -- The Equity and Government Portfolios may
trade put and call options on permitted investments and related indices to a
limited extent. Among the strategies the Adviser may use for these Portfolios
are: buying protective puts on securities owned by the Portfolio, buying
fiduciary calls on securities the Portfolio is attempting to buy, and writing
covered calls on securities the Portfolio owns. These Portfolios may also buy
puts and calls, and write covered calls, on securities indices.
These Portfolios may buy protective put options. A Portfolio may benefit from
buying the protective put if the price of the security already held by the
Portfolio falls during the option period, because the Portfolio may exercise the
put and receive the higher exercise price for its security. However, if the
security rises in value, the Portfolio will have paid a premium for the put
which will expire unexercised.
Each of these Portfolios may buy fiduciary call options on securities that the
Portfolio is trying to buy. The Portfolio may benefit from buying the fiduciary
call if the price of the underlying security rises
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during the option period, because the Portfolio may exercise the call and buy
the security for the lower exercise price. If, however, the security falls in
value, the Portfolio will have paid a premium for the call which will expire
worthless, but will be able to buy the security at a lower price.
These Portfolios may write covered call options. The advantage to a Portfolio of
writing covered call options is that the Portfolio receives additional income in
the form of the premium. However, if the optioned security rises in value, the
Portfolio may not fully participate in that market appreciation. To "cover" a
call option it writes on a securities index (or indices), the Portfolio must
hold securities whose price changes are expected by the Adviser to replicate the
price changes of that index or indices.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing
transaction. A closing transaction cannot be effected with respect to an option
once the option writer has received an exercise notice for such option.
The market value of an option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the pricing volatility of the underlying
security and the time remaining until the expiration date.
Risks of Transactions in Options on Securities and Indices -- The successful use
of a Portfolio's options strategies depends on, among other things, the
Adviser's ability to forecast interest rate and market movements correctly.
When it purchases an option, a Portfolio runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Portfolio exercises the option or enters into a closing transaction with respect
to the option during the life of the option. If the price of the underlying
security or index does not rise (in the case of a call) or fall (in the case of
a put) to an extent sufficient to cover the option premium and transaction
costs, the Portfolio will lose part or all of its investment in the option. This
risk differs from the risk involved with an investment by the Portfolio in the
underlying securities, since the Portfolio may continue to hold its investment
in those securities notwithstanding the lack of a change in price of those
securities. In addition, the Portfolio incurs the risk in writing covered calls
on indices that changes in the prices of the securities being used to "cover"
will not duplicate precisely the movements of the indices.
The effective use of options also depends on the Portfolio's ability to
terminate option positions at times when the Adviser deems it desirable to do
so. Although the Portfolio will take an option position only if the Adviser
believes a liquid secondary market exists for the option, there is no assurance
that such a market does or will continue to exist. If a secondary trading market
in options were to become unavailable, the Portfolio could no longer engage in
closing transactions; even when a liquid secondary market does generally exist,
there can be no assurance that the Portfolio will be able to effect a closing
transaction on a given option at any particular time or at an acceptable price.
Lack of investor interest might adversely affect the liquidity of the market for
particular options or series of options. A marketplace may discontinue trading
of a particular option or options generally. In addition, a market could become
temporarily unavailable if unusual events, such as volume in excess of trading
or clearing capability, were to interrupt normal market operations. A
marketplace may at times find it necessary to impose restrictions on particular
types of options transactions, which may limit the Portfolio's ability to
realize its profits or limit its losses.
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Disruptions in the markets for the securities underlying options (or underlying
indices on which options are based) purchased or sold by a Portfolio could
result in losses on the options. If trading is interrupted in an underlying
security, the trading of options on that security is normally halted as well. As
a result, the Portfolio as purchaser or writer of an option will be unable to
close out its position until options trading resumes, and it may be faced with
losses if trading in the security reopens at a substantially different price. In
addition, the Options Clearing Corporation (OCC) or other options markets may
impose exercise restrictions. If a prohibition on exercise is imposed at the
time when trading in the option has also been halted, the Portfolio as purchaser
or writer of an option will be locked into its position until one of the two
restrictions has been lifted. If a prohibition on exercise remains in effect
until an option owned by the Portfolio has expired, the Portfolio could lose the
entire value of its option.
Special risks are presented by internationally-traded options. Because of time
differences between the United States and the various foreign countries, and
because different holidays are observed in different countries, foreign options
markets may be open for trading during hours or on days when U.S. markets are
closed. As a result, option premiums may not reflect the current prices of the
underlying interest in the United States.
Securities Futures Contracts -- The Government Portfolio may enter into futures
contracts on securities. A futures contract sale creates an obligation by the
seller to deliver the type of instrument called for in the contract in a
specified delivery month for a stated price. A futures contract purchase creates
an obligation by the purchaser to take delivery of the type of instrument called
for in the contract in a specified delivery month at a stated price. Futures
contracts are traded in the United States only on commodities exchanges or
boards of trade, known as "contract markets," approved for such trading by the
CFTC, and must be executed through a futures commission merchant, or brokerage
firm, that is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or acceptance
of securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. The Portfolio may elect to close some
or all of its futures positions at any time prior to their expiration. The
purpose of making such a move would be to reduce or eliminate the hedge position
then currently held by the Portfolio. Closing out a futures contract sale
(purchase) is effected by purchasing (selling) a futures contract for the same
aggregate amount of the specific type of financial instrument with the same
delivery date. If the price of the initial sale of the futures contract exceeds
the price of the offsetting purchase, the seller is paid the difference and
realizes a gain; if the offsetting purchase price exceeds the initial sale
price, the seller realizes a loss. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain; if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss.
When the Portfolio purchases or sells a futures contract, it does not pay or
receive the purchase price; instead, the Portfolio is required to deposit an
"initial margin" in the form of cash and/or U.S. Government securities with its
custodian in a segregated account in the name of the futures broker. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the Portfolio to finance the transactions. Rather, initial
margin is in the nature of a performance bond or good faith deposit on the
contract that is returned to the Portfolio upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Futures
contracts also involve brokerage costs, and closing transactions involve
additional commission costs.
Subsequent payments, called "variation margin," to and from the broker are made
on a daily basis as the price of the underlying security fluctuates, making the
long and short positions in the futures
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contract more or less valuable, a process known as "marking to market." Final
determinations of variation margin are made when the Portfolio enters into a
closing transaction.
Options on Securities Futures Contracts -- The Government Portfolio may enter
into written options on securities futures contracts. The Portfolio may purchase
and write call and put options on the futures contracts it may buy or sell, and
may enter into closing transactions with respect to such options to terminate
existing positions. The Portfolio may use such options on futures contracts in
lieu of writing options directly on the underlying securities or purchasing and
selling the underlying futures contracts. Such options generally operate in the
same manner as options purchased or written directly on the underlying
investments. See the section titled "Options on Securities and Indices" above.
The Portfolio holding or writing an option on futures may terminate its position
by selling or purchasing an offsetting option. There can be no guarantee that
such closing transactions will be available.
The Portfolio will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts pursuant to brokers'
requirements similar to those described above.
Risks of Transactions in Futures Contracts and Futures Options -- Successful use
of securities futures contracts by the Government Portfolio is subject to the
Adviser's ability to predict correctly movements in the direction of interest
rates and other factors affecting securities markets.
The purchase of options on futures contracts involves less risk to the Portfolio
than does the purchase or sale of futures contracts, because the maximum amount
at risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the purchase of an option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of the futures
contract would not, such as when there is no movement in the price of the hedged
investments. The writing of an option on a futures contract involves risks
similar to those risks, described above under "Options on Securities," involved
in the writing of options on securities.
There can be no assurance that higher-than-anticipated trading activity or other
unforeseen events will not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future contract or option thereon can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing the liquidation
of unfavorable positions.
If the Portfolio was unable to liquidate a futures contract or option thereon
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Portfolio would be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the futures contract or option or to maintain cash or securities in a
segregated account.
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To reduce or eliminate a hedge position it holds, the Portfolio may seek to
close out that position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market.
There can be no assurance that such a market does or will continue to exist for
a particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options; (ii)
restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
contracts or options, or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of contracts or options (or a particular class or series of contracts or
options), in which event the secondary market on that exchange (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Cover for Options and Futures Contract Positions -- Transactions using futures
contracts and options (other than options that the Portfolio has purchased)
expose the Government Portfolio to an obligation to another party. The Portfolio
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts or (2) cash, receivables and short-term debt securities with a value
sufficient at all times to cover its potential obligations not covered as
provided in (1) above. To "cover" a call option it writes on a securities index
(or indices), the Capital Appreciation, Emerging Growth or Government Portfolio
must hold securities whose price changes are expected by the Adviser to
replicate the price changes of that index or indices. These Portfolios will
comply with Securities and Exchange Commission guidelines regarding cover for
these instruments and, if the guidelines so require, set aside cash, U.S.
Government securities or other liquid, high-grade debt securities in a
segregated account with the Custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding futures contract or option is open, unless they
are replaced with similar assets. As a result, the commitment of a large portion
of a Portfolio's assets to cover or to segregated accounts could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
Repurchase Agreements
Each Portfolio may enter into repurchase agreements with financial institutions
deemed to present minimal risk of bankruptcy during the term of the agreement
based on established guidelines. The repurchase agreement will have an
agreed-upon price (including principal and interest) and an agreed-upon
repurchase 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.
The repurchase agreements entered into by the Portfolios 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 Adviser or the Sub-Adviser
monitors compliance with this requirement. Under all repurchase agreements
entered into by a Portfolio, the Portfolio must take actual or constructive
possession of the underlying collateral. However, if the seller defaults, the
Portfolio 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 Bankruptcy Code provides protection for proceedings, the Portfolio
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if the Portfolio is treated as an unsecured
creditor and required to return the underlying security to the seller's estate.
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Restricted Securities
The Money Market Portfolio may invest in restricted securities. Restricted
securities are securities that may not be sold freely to the public absent
registration under the Securities Act of 1933, as amended (the "Act"), or an
exemption from registration. The Portfolio may invest up to 10% of its net
assets in illiquid securities, including restricted securities other than
Section 4(2) commercial paper. The Portfolio may invest in Section 4(2)
commercial paper. Section 4(2) commercial paper is issued in reliance on an
exemption from registration under Section 4(2) of the Act and is generally sold
to institutional investors who purchase for investment. Any resale of such
commercial paper must be in an exempt transaction, usually to an institutional
investor through the issuer or investment dealers who make a market in such
commercial paper. The Trust believes that Section 4(2) commercial paper is
liquid to the extent it meets the criteria established by the Board of Trustees
of the Trust. The Trust intends to treat such commercial paper as liquid and not
subject to the investment limitations applicable to illiquid securities or
restricted securities.
Securities Lending
A Portfolio will normally pay lending fees to broker/dealers in connection with
securities loans, and related expenses from the interest earned on invested
collateral. Investments made with this collateral are considered to be assets of
the Portfolio and must comply with the Portfolio's investment limitations. Any
securities loan may be terminated by either party upon reasonable notice to the
other party. The Portfolios may use the Distributor or a broker/dealer affiliate
of the Adviser as a broker in these transactions.
Separately Traded Interest and Principal Securities ("STRIPS")
Each Portfolio may invest in STRIPS, which are component parts of U.S. Treasury
Securities traded through the Federal Book-Entry System. The Adviser or the
Sub-Adviser will purchase only STRIPS that it determines are liquid or, if
illiquid, do not violate the Portfolio's investment policy concerning
investments in illiquid securities. Consistent with Rule 2a-7, the Adviser or
the Sub-Adviser will purchase for the Money Market Portfolio only those STRIPS
that have a remaining maturity of 397 days or less; therefore, the Money Market
Portfolio currently may purchase only interest component parts of U.S. Treasury
Securities. While there is no limitation on the percentage of a Portfolio's
assets that may be comprised of STRIPS, the Adviser or the Sub-Adviser will
monitor the level of such holdings to avoid the risk of impairing shareholders'
redemption rights and of deviations in the value of shares of the Money Market
Portfolio.
Short-Term Obligations of State and Local Governmental Issuers
In addition, the Money Market Portfolio may, when deemed appropriate by its
investment adviser in light of the Portfolio's investment objective, invest in
high quality, short-term obligations issued by state and local governmental
issuers which, as a result of the Tax Reform Act of 1986, carry yields that are
competitive with those of other types of money market instruments of comparable
quality.
Variable and Floating Rate Obligations
All Portfolios investing in debt obligations may invest in variable rate
obligations and floating rate obligations (together, "adjustable interest rate
obligations"). Adjustable interest rate obligations issued by or on behalf of
states (including the District of Columbia), territories and possessions of the
United States and their respective authorities, agencies, instrumentalities and
political subdivisions constitute a form of Municipal Security. A variable rate
obligation is one whose terms provide for the adjustment
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of its interest rate on set dates and which, upon such adjustment, can
reasonably be expected to have a market value that approximates its par value;
the degree to which a variable rate obligation's market value approximates its
par value will depend on the frequency of the readjustment of the obligation's
interest rate and the length of time that must elapse before the next
readjustment. A floating rate obligation is one whose terms provide for the
adjustment of its interest rate whenever a specified interest rate changes and
which, at any time, can reasonably be expected to have a market value that
approximates its par value. Although there may be no active secondary market
with respect to a particular variable or floating rate obligation purchased by a
Portfolio, the Portfolio may seek to resell the obligation at any time to a
third party. The absence of an active secondary market, however, could make it
difficult for the Portfolio to dispose of a variable or floating rate obligation
in the event the issuer of the obligation defaulted on its payment obligations,
and the Portfolio could, as a result or for other reasons, suffer a loss to the
extent of the default. In addition, a variable or floating rate demand
obligation with a demand notice exceeding seven days may be considered illiquid
if there is no secondary market for such securities. Variable or floating rate
obligations may be secured by bank letters of credit.
For the Money Market Portfolio only, variable and floating rate obligations will
be deemed to have maturities as follows:
1. A variable rate obligation, the principal amount of which
is scheduled on the face of the instrument to be paid in thirteen
months or less, will be deemed by a Portfolio to have a maturity
equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate obligation that is subject to a demand
feature will be deemed by a Portfolio to have a maturity equal to
the longer of the period remaining until the next readjustment of
the interest rate or the period remaining until the principal
amount can be recovered through demand.
3. A floating rate obligation that is subject to a demand
feature will be deemed by a Portfolio to have a maturity equal to
the period remaining until the principal amount can be recovered
through demand.
As used above, an obligation is "subject to a demand feature" where the
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than thirty days' notice or at specified intervals not
exceeding thirteen months and upon no more than thirty days notice.
The Government Portfolio, West Virginia Portfolio and Money Market Portfolio may
invest in variable amount master demand notes, which may or may not be backed by
bank letters of credit. These variable rate obligations 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.
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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.
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 Limited ("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 are
supported by a strong 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 BankWatch ("Thomson") indicates a very high
likelihood that principal and interest will be paid on a timely basis.
Description of Municipal Note Ratings
Moody's highest rating for state and municipal and other short-term notes is
MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of
the best quality. They have strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing or both. Short-term municipal securities rated MIG-2 or
VMIG-2 are of high quality. Margins of protection are ample although not so
large as in the preceding group.
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
o Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
S&P note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a
plus(+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
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Description of Corporate Bond Ratings
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 and B is regarded as having predominantly 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 has less near-term vulnerability to default than other speculative
grade debt. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating. Debt rate 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 capacity
or willingness to pay interest and repay principal. The B rating category also
is used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
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 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.
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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 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 by Fitch are judged by Fitch to be strictly high grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions,
sensitive to but slight market fluctuation other than through changes in the
money rate. The prime feature of an AAA bond is a showing of earnings several
times or many times interest requirements, with such stability of applicable
earnings that safety is beyond reasonable question, whatever changes occur in
conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety
virtually beyond question and are readily salable; their merits are not unlike
those of the AAA class, but their margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured but influenced
as to rating by the lesser financial power of the enterprise and more local type
market.
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 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.
S-16
<PAGE>
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality with
negligible risk factors; only slightly more than U.S. Treasury debt. Bonds rated
Duff-2, 3 and 4 are judged by Duff to be of high credit quality with strong
protection factors. Risk is modest but may vary slightly from time to time
because of economic conditions. Bonds rated BBB+, BBB, or BBB- are considered
below average protection factors but still considered sufficient for prudent
investment. Considerable BBB variability in risk during economic cycles. Bonds
rated BB+, BB or BB- are considered 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 or B- are considered below investment grade and possessing
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.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. 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 a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
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 AAA by Thomson BankWatch 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.
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.
S-17
<PAGE>
INVESTMENT LIMITATIONS
Each Portfolio is subject to a number of fundamental investment restrictions
that may be changed only by a vote of a majority of the outstanding shares of
that Portfolio. A "majority of the outstanding shares" of the Trust or a
particular Portfolio means the affirmative vote, at a meeting of shareholders
duly called, of the lesser of (a) 67% or more of the votes of shareholders of
the Trust or such Portfolio present at a meeting at which the holders of more
than 50% of the votes attributable to shareholders of record of the Trust or
such Portfolio are represented in person or by proxy, or (b) the holders of more
than 50% of the outstanding votes of shareholders of the Trust or such
Portfolio. The following investment limitations are in addition to those set
forth in the Funds' Prospectus.
Pursuant to these investment restrictions, no Portfolio will:
1. Invest in companies for the purpose of exercising control.
2. Borrow money except for temporary or emergency purposes and then only in
an amount not exceeding one-third 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 Portfolio'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 Portfolio shall, within three days thereafter or
such longer period as the Securities and Exchange Commission ("SEC") 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 solely to facilitate the orderly
sale of portfolio securities to accommodate heavy redemption requests if
they should occur and is not for investment purposes. All borrowings will be
repaid before making additional investments and any interest paid on such
borrowings will reduce income.
3. Pledge, mortgage or hypothecate assets except to secure temporary borrowings
permitted by (2) above in aggregate amounts not to exceed 10% of total
assets taken at current value at the time of the incurrence of such loan,
except as permitted with respect to securities lending.
4. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts (except that the Fixed Income
Portfolios may invest in futures contracts and options on futures contracts
as disclosed in their Prospectus and this Statement of Additional
Information). However, subject to its permitted investments, any Portfolio
may invest in companies that invest in real estate, commodities or
commodities contracts.
5. 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; this limitation shall
not prohibit short sales "against the box".
6. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter under federal securities laws in selling a Portfolio
security.
7. Purchase securities of other investment companies except as permitted by
the 1940 Act, and the rules and regulations thereunder.
8. 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 SEC.
S-18
<PAGE>
NON-FUNDAMENTAL POLICIES
The following investment limitations of the Portfolios are non-fundamental and
may be changed by the Trust's Board of Trustees without shareholder approval.
No Portfolio may invest in warrants, except that each of the Capital
Appreciation and Emerging Growth Portfolios may invest in warrants in an amount
not exceeding 5% of that Portfolio's net assets as valued at the lower of cost
or market value. Included in that amount, but not to exceed 2% of the
Portfolio's net assets, may be warrants not listed on the New York Stock
Exchange or the American Stock Exchange.
None of the Capital Appreciation, Emerging Growth, Government, or West Virginia
Portfolios may invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of that Portfolio's net assets, and the Money Market Portfolio
may not invest in illiquid securities in an amount exceeding, in the aggregate,
10% of its net assets.
No Portfolio may 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 adviser of the Trust owns beneficially more than 0.5% of the shares
or securities of such issuer and all such officers, trustees, partners and
directors owning more than 0.5% of such shares or securities together own more
than 5% of such shares or securities.
No Portfolio may invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
No Portfolio may purchase securities of any company which has (with
predecessors) a record of less than three years continuing operations if, as a
result more than 5% of total assets (taken at fair market value) of the
Portfolio would be invested in such securities, except obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
municipal securities which are rated by at least two nationally recognized bond
rating services. This restriction shall not apply to investments a Portfolio may
make in asset-backed securities and in other investment companies, as described
in the Prospectus.
A Portfolio may purchase shares of money market mutual funds, and in the event a
Portfolio is registered in the state of California, the Portfolio's investment
adviser and any sub-adviser will waive their fees on any portion of the
Portfolio's assets invested in such shares. Each Portfolio other than the Money
Market Portfolio may also purchase shares of non-money market mutual funds to
the extent permitted by applicable state and federal laws and regulations.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security.
THE ADVISER
The Trust and One Valley Bank, National Association ("One Valley" or the
"Adviser") have entered into an advisory agreement (the "Advisory Agreement").
The Advisory Agreement provides that the Adviser 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.
S-19
<PAGE>
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any Portfolio (including amounts payable to the Adviser but
excluding interest, taxes, brokerage, litigation, and other extraordinary
expenses) exceeds limitations established by any jurisdiction in which shares of
the Portfolios are qualified for offer and sale, the Adviser will bear the
amount of such excess.
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 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 Portfolios by a majority of the outstanding shares of the
Portfolios, on not less than 30 days' nor more than 60 days' written notice to
the Adviser, or by the Adviser on 90 days' written notice to the Trust.
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolios paid the following advisory fee:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fee Waivers (000)
--------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio $0 $45 $92 $32 $160 $138
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio $38 $414 $632 $41 $202 $231
- -----------------------------------------------------------------------------------------------------------------------------------
Emerging Growth Portfolio $22 $240 $367 $31 $105 $79
- -----------------------------------------------------------------------------------------------------------------------------------
Government Portfolio $4 $187 $277 $36 $154 $165
- -----------------------------------------------------------------------------------------------------------------------------------
West Virginia Portfolio $0 $77 $139 $14 $41 $27
===================================================================================================================================
</TABLE>
THE SUB-ADVISER
Wellington Management Company ("Wellington Management") serves as investment
sub-adviser to the OVB Prime Obligations Portfolio pursuant to a sub-advisory
agreement by and among Wellington Management, One Valley and the Trust (the
"Sub-Advisory Agreement").
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolio paid the Sub-Adviser the following sub-advisory fee:
<TABLE>
<CAPTION>
===================================================================================================================================
Portfolio Fees Paid (000) Fee Waivers (000)
--------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio $9 $61 $69 $0 $0 $0
===================================================================================================================================
</TABLE>
S-20
<PAGE>
THE ADMINISTRATOR
SEI Financial Management Corporation serves as administrator (the
"Administrator") to the Trust pursuant to an Administration Agreement (the
"Administration Agreement"). 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 five years and
thereafter shall continue in effect for successive two-year periods subject to
annual review by the Trustees.
The Administrator, a wholly owned subsidiary of SEI Corporation ("SEI"), was
organized as a Delaware corporation in 1969 and has its principal business
offices at 680 East Swedesford Road, Wayne, PA 19087-1658. Alfred P. West, Jr.,
Henry H. Greer and Carmen V. Romeo constitute the Board of Directors of the
Administrator. Mr. West is the Chairman of the Board and Chief Executive Officer
of the Administrator and of SEI. Mr. Greer is the President and Chief Operating
Officer of the Administrator and of SEI. SEI and its subsidiaries 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 also serves 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, Conestoga Family of Funds,
CoreFunds, Inc., CrestFunds, Inc., CUFUND, First American Funds, Inc., First
American Investment Funds, Inc., Insurance Investment Products Trust, Inventor
Funds, Inc., Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust,
The PBHG Funds, Inc., The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI
Daily Income Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone
Funds, STI Classic Funds and STI Classic Variable Trust.
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Portfolios paid the following administrative fee:
<TABLE>
<CAPTION>
==================================================================================================================================
Portfolio Fees Paid (000) Fee Waivers (000)
-------------------------------------------------------------------------------------------
1994 1995 1996 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio $25 $163 $184 $0 $0 $0
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio $17 $130 $181 $0 $0 $0
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging Growth Portfolio $17 $100 $100 $0 $0 $0
- ----------------------------------------------------------------------------------------------------------------------------------
Government Portfolio $17 $100 $118 $0 $0 $0
- ----------------------------------------------------------------------------------------------------------------------------------
West Virginia Portfolio $17 $53 $74 $11 $47 $26
==================================================================================================================================
</TABLE>
THE DISTRIBUTOR
SEI Financial Services Company serves as distributor to the Trust pursuant to a
distribution agreement (the "Distribution Agreement") which applies to both
Class A and Class B shares of the Portfolios. The Distribution Agreement shall
be reviewed and ratified at least annually (i) by the Trust's Trustees or by the
vote of a majority of the outstanding shares of the Trust, and (ii) by the vote
of a majority of the Trustees of the Trust who are not parties to the
Distribution Agreement or interested persons (as defined in the 1940 Act) of any
party to the Distribution Agreement, cast in person at a meeting called
S-21
<PAGE>
for the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of any assignment, as defined in the 1940 Act, and is
terminable with respect to a particular Portfolio on not less than sixty days'
notice by the Trust's Trustees, by vote of a majority of the outstanding shares
of such Portfolio or by the Distributor.
The Trust has adopted a distribution plan for the Class B shares of each
Portfolio (the "Class B 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 the Class B Plan must be approved annually by a
majority of the Trustees of the Trust and by a majority of the Trustees who are
not "interested persons" of the Trust or SEI Financial Services, as that term is
defined in the 1940 Act ("Disinterested Trustees"). The Class B Plan requires
that quarterly written reports of amounts spent under the Plan and the purposes
of such expenditures be furnished to and reviewed by the Trustees. In accordance
with Rule 12b-1 under the 1940 Act, the Class B Plan may be terminated with
respect to any Portfolio by a vote of a majority of the Disinterested Trustees,
or by a vote of a majority of the outstanding shares of that Portfolio. The
Class B Plan may be amended by vote of the Trust's Board of Trustees, including
a majority of the Disinterested Trustees, cast in person at a meeting called for
such purpose, except that any change that would effect a material increase in
any distribution fee with respect to a Portfolio requires the approval of that
Portfolio's shareholders.
The Class B Distribution Plan provides that the Class B shares of each Portfolio
will pay the Distributor a fee of .25% of the average daily net assets which the
Distributor can use to compensate/broker dealers and service providers,
including the Adviser and its affiliates which provide administrative and/or
distribution services to the Class B Shareholders or their customers who
beneficially own Class B Shares.
For the fiscal years ended January 31, 1994, January 31, 1995 and January 31,
1996, the Class B Portfolios paid the Distributor the following distribution
fees:
<TABLE>
<CAPTION>
=====================================================================================================================
Portfolio Distribution Fees Paid
-----------------------------------------------------------
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Portfolio $0 $889 $5,967
- ---------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio $28 $919 $2,530
- ---------------------------------------------------------------------------------------------------------------------
Emerging Growth Portfolio $57 $1,644 $3,638
- ---------------------------------------------------------------------------------------------------------------------
Government Portfolio $25 $958 $1,181
- ---------------------------------------------------------------------------------------------------------------------
West Virginia Portfolio $146 $4,335 $7,842
=====================================================================================================================
</TABLE>
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees and executive officers
of the Trust 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
executive officer is SEI Financial Management Corporation, 680 East Swedesford
Road, Wayne, PA 19087-1658. Certain officers of the Trust also serve as Trustees
and/or officers of The
S-22
<PAGE>
Achievement Funds Trust, The Advisors' Inner Circle Fund, ARK Funds, Bishop
Street Funds, Conestoga Family of Funds, CoreFunds, Inc., CrestFunds, Inc.,
CUFUND, First American Funds, Inc., First American Investment Funds, Inc.,
Insurance Investment Products Trust, Inventor Funds, Inc., Marquis Funds(R),
Monitor Funds, Morgan Grenfell Investment Trust, The PBHG Funds, Inc., The
Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional Managed Trust, SEI International Trust, SEI Liquid
Asset Trust, SEI Tax Exempt Trust, Stepstone Funds, STI Classic Funds and STI
Classic Variable Trust, each of which is an open-end management investment
company.
ROBERT A. NESHER - Trustee* - Date of Birth: 8/17/46. 8 South Street,
Kennebunkport, ME 04046. Retired since 1994. Director, Executive Vice President
of SEI Corporation (1986-1994). Director and Executive Vice President of SEI and
the Administrator and the Distributor (1981-1994).
JOHN T. COONEY - Trustee** - Date of Birth: 1/20/27. 569 N. Post Oak Lane,
Houston, TX 77024. Retired since 1992. Formerly Vice Chairman of Ameritrust
Texas N.A. (1989-1992), and MTrust Corp. (1985-1989).
WILLIAM M. DORAN - Trustee* - Date of Birth: 5/26/40. 2000 One Logan Square,
Philadelphia, PA 19103. Partner of Morgan, Lewis & Bockius LLP(law firm).
Counsel to the Trust, Administrator and Distributor (1990-present). Director and
Secretary of SEI.
FRANK E. MORRIS - Trustee** - Date of Birth: 12/30/23. 105 Walpole Street,
Dover, MA 02030. Retired since 1990. Peter Drucker Professor of Management,
Boston College since 1989. President, Federal Reserve Bank of Boston
(1968-1988).
ROBERT A. PATTERSON - Trustee** - Date of Birth: 11/5/17. 208 Old Main,
University Park, PA 16802. Pennsylvania State University, Senior Vice President,
Treasurer (Emeritus). Financial and Investment Consultant, Professor of
Transportation (1984-present). Vice President-Investments, Treasurer, Senior
Vice President (Emeritus) (1982-1984). Director, Pennsylvania Research Corp.
Member and Treasurer, Board of Trustees of Grove City College.
GENE PETERS - Trustee** - Date of Birth: 6/3/29. 943 Oblong Road, Williamstown,
MA 01267. Private investor from 1987 to present. Vice President and Chief
Financial Officer, Western Company of North America (petroleum service company)
(1980-1986). President of Gene Peters and Associates (import company)
(1978-1980). President and Chief Executive Officer of Jos. Schlitz Brewing
Company before 1978.
JAMES M. STOREY - Trustee** - Date of Birth: 4/12/31. Ten Post Office Square
South, Boston, MA 02109. Retired since 1993. Formerly Partner of Dechert Price &
Rhoads (law firm).
DAVID G. LEE - President, Chief Executive Officer - Date of Birth: 4/16/52.
Senior Vice President of the Administrator and Distributor since 1993. Vice
President of the Administrator and Distributor (1991- 1993). President, GW
Sierra Trust Funds before 1991.
SANDRA K. ORLOW - Vice President, Assistant Secretary - Date of Birth: 10/18/53.
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1983.
KEVIN P. ROBINS - Vice President, Assistant Secretary - Date of Birth: 4/15/61.
Senior Vice President, General Counsel and Assistant Secretary of SEI, the
Administrator and the Distributor since 1994. Vice President and Assistant
Secretary of the SEI, Administrator and the Distributor (1992- 1994). Associate,
Morgan, Lewis & Bockius (law firm) prior to 1992.
S-23
<PAGE>
JEFFREY A. COHEN, CPA - Controller, Chief Financial Officer - Date of Birth:
4/22/61. Vice President, International and Domestic Funds Accounting, SEI
Corporation since 1991. Audit Manager, Price Waterhouse prior to 1991.
KATHRYN L. STANTON - Vice President, Assistant Secretary - Date of Birth:
11/18/58. Vice President and Assistant Secretary of SEI, the Administrator and
the Distributor since 1994. Associate, Morgan, Lewis & Bockius (law firm)
1989-1994.
JOSEPH M. LYDON - Vice President, Assistant Secretary - Date of Birth: 9/27/59.
Director of Business Administration of Fund Resources, SEI Corporation since
1995. Vice President of Fund Group and Vice President of the Advisor, Dreman
Value Management and President of Dreman Financial Services, Inc. prior to 1995.
TODD 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).
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 SEI, the Trust, Administrator and the Distributor (1990-present).
- ---------------
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Trust as the term is defined in the 1940 Act.
** Messrs. Cooney, Morris, Patterson, Peters and Storey serve on the Audit
Committee of the Trust.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees. For the
fiscal year ended January 31, 1996, the Trust paid the unaffiliated Trustees
aggregate fees of approximately $61,924.25.
<TABLE>
<CAPTION>
================================================================================================================================
Name of Person, Aggregate Pension or Estimated Annual Total Compensation
Position Compensation From Retirement Benefits Benefits Upon From Registrant and
Registrant Accrued as Part of Retirement Fund Complex Paid
Fund Expenses to Trustees for the
Fiscal Year Ended
January 31, 19961
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Frank E. Morris, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Patterson, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Gene Peters, Trustee $12,384.82 N/A N/A $12,384.82
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, $0 N/A N/A $0
Trustee*
- --------------------------------------------------------------------------------------------------------------------------------
William M. Doran, $0 N/A N/A $0
Trustee*
- --------------------------------------------------------------------------------------------------------------------------------
James M. Storey, $12,384.82 N/A N/A $12,384.82
Trustee
================================================================================================================================
</TABLE>
1 Total Compensation for service on one board.
* A Trustee who is an "interested person" as defined in the 1940 Act.
S-24
<PAGE>
COMPUTATION OF YIELD
Money Market Portfolio -- From time to time the Money Market Portfolio may
advertise its "current yield" and "effective compound yield." Both yield figures
are based on historical earnings and are not intended to indicate future
performance. The "yield" of the Portfolio refers to the income generated by an
investment in the Portfolio over a stated seven-day period. 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
Portfolio 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 Money Market Portfolio 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
reflecting deductions from shareholder accounts, and dividing such net change by
the value of the account at the beginning of the some 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 Portfolio 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, 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 yield of the Money Market Portfolio fluctuates, and the annualization of a
week's dividend is not a representation by the Trust as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as asset quality, average asset maturity, the type of instruments
the Portfolio invests in, changes in interest rates on money market instruments,
changes in the expenses of the Portfolio and other factors.
Yields are one basis upon which investors may compare the Money Market Portfolio
with other money market funds; however, yields of other money market 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.
For the seven-day period ended January 31, 1996, the Money Market Portfolio had
a current yield of 5.16% and an effective yield of 5.30% for Class A and a
current yield of 4.91% and an effective yield of 5.03% for Class B.
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<PAGE>
Capital Appreciation, Emerging Growth, Government, and West Virginia Portfolios
- -- These Portfolios 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 Portfolios refers to the annualized income generated by an
investment in the Portfolios over a specified 30-day period. The yield is
calculated by assuming that the income generated by the investment during that
30-day period is generated over one year 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 current daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period.
For the 30-day period ended January 31, 1996, the Class A Portfolios' yields
were 0.26% for the Capital Appreciation Portfolio, 0.00% for the Emerging Growth
Portfolio, 5.26% for the Government Portfolio and 4.76% for the West Virginia
Portfolio.
For the same 30-day period, the Class B Portfolios' yields were 0.07% for the
Capital Appreciation Portfolio, 0.00% for the Emerging Growth Portfolio, 5.01%
for the Government Portfolio and 4.51% for the West Virginia Portfolio.
The West Virginia Portfolio may also advertise a "tax-equivalent yield", which
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment to produce the after-tax equivalent of the
Portfolio's yield, assuming certain tax brackets for a shareholder. The
tax-equivalent yield of the Portfolio will be calculated by adding (a) the
portion of the Portfolio's yield that is not tax-exempt and (b) the result
obtained by dividing the portion of the Portfolio's yield that is tax-exempt by
the difference of one minus a stated income tax rate.
For the 30-day period ended January 31, 1996, the West Virginia Portfolio's
tax-equivalent yield was 7.88% for Class A and 7.47% for Class B.
CALCULATION OF TOTAL RETURN
From time to time, the Capital Appreciation, Emerging Growth, Government, and
West Virginia Portfolios may advertise total return. The total return of a
Portfolio refers to the average compounded rate of return to a hypothetical
investment for designated time periods (including but not limited to, the period
from which the Portfolio commenced operations through the specified date),
assuming that the entire investment is redeemed at the end of each period. In
particular, total return will be calculated according to the following formula:
P (1 + T)/n/ = ERV
where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
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.
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<PAGE>
Based on the foregoing, the average annual total return for the Portfolios from
inception through January 31, 1996 and for the one, five and ten year periods
ended January 31, 1996 were as follows:
<TABLE>
<CAPTION>
=================================================================================================================
Portfolio Class Average Annual Total Return
---------------------------------------------------------------
One Year Five Ten Since
Year Year Inception
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market Class A 5.65% N/A N/A 4.75%
Portfolio
-----------------------------------------------------------------------------------------
Class B (with 5.39% N/A N/A 4.67%
12b-1)
- -----------------------------------------------------------------------------------------------------------------
Capital Class A 41.31% N/A N/A 15.11%
Appreciation
Portfolio
-----------------------------------------------------------------------------------------
Class B (with 40.88% N/A N/A 13.66%
12b-1)
- -----------------------------------------------------------------------------------------------------------------
Emerging Class A 45.42% N/A N/A 6.36%
Growth Portfolio
-----------------------------------------------------------------------------------------
Class B (with 45.08% N/A N/A 6.80%
12b-1)
- -----------------------------------------------------------------------------------------------------------------
Government Class A 18.14% N/A N/A 6.41%
Portfolio
-----------------------------------------------------------------------------------------
Class B (with 17.72% N/A N/A 6.21%
12b-1)
- -----------------------------------------------------------------------------------------------------------------
West Virginia Class A 13.66% N/A N/A 5.58%
Portfolio
-----------------------------------------------------------------------------------------
Class B (with 13.26% N/A N/A 4.94%
12b-1)
=================================================================================================================
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
Each Portfolio intends to pay cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, payment may be made wholly or
partly 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.
It is currently the Trust's policy to pay for all 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 Portfolios
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 Portfolios
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 Portfolio'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 the
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<PAGE>
Portfolio for any period during which the New York Stock Exchange, the Adviser,
the Administrator and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
Money Market Portfolio -- The net asset value per share of the Money Market
Portfolio 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 the Portfolio would
receive if it sold the instrument. During periods of declining interest rates,
the daily yield of the Portfolio 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 the Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio 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 Portfolio would experience a lower yield. The converse would
apply in a period of rising interest rates.
The Money Market Portfolio's use of amortized cost and the maintenance of the
Portfolio'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
Portfolio. Such procedures include the determination of the extent of deviation,
if any, of the Portfolio's current net asset value per share calculated using
available market quotations from the Portfolio's 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 0.5%, 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 Portfolio incurs a significant loss or liability, the
Trustees have the authority to reduce pro rata the number of shares of the
Portfolio 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 Portfolio must annually
distribute at least 90% of its investment company taxable income.
Capital Appreciation, Emerging Growth, Government, and West Virginia Portfolios
- -- The securities of these Portfolios are valued by the Administrator pursuant
to valuations provided by independent pricing services. The pricing services
rely primarily on prices of actual market transactions as well as trader
quotations. However, a 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 a
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
S-28
<PAGE>
TAXES
The information set forth in the Prospectus and the following is only a summary
of certain tax considerations generally affecting a Portfolio and its
shareholders, and is not intended as a substitute for careful tax planning. No
attempt has been made to present a detailed explanation of the income tax
treatment of any Portfolio or its shareholders. Shareholders and potential
purchasers of shares are urged to consult their tax advisors with specific
reference to their own tax situations, including their state and local tax
liabilities.
All Portfolios
The following discussion of federal income tax consequences is based on the Code
and the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, certain administrative changes or
court decisions may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein. Shareholders will be advised annually as to certain federal income tax
consequences of distributions made during the year.
It is the policy of each of the Trust's Portfolios to qualify for the favorable
tax treatment accorded regulated investment companies under Subchapter M of the
Code. By following such policy, each of the Trust's Portfolios expects to
eliminate or reduce to a nominal amount the federal taxes to which such
Portfolio may be subject.
In order to qualify as a regulated investment company each Portfolio must, among
other things, (1) derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities or foreign currencies; or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in stock, securities or
currencies; (2) derive less than 30% of its gross income each taxable year from
the sale or other disposition of certain assets held for less than three months
(the "Short-Short Limitation"), including stock and securities; options, futures
or forward contracts (other than on foreign currencies); or foreign currencies
(including options, futures or forward contracts) if not directly related to the
Portfolio's principal business of investing in stocks and securities; and (3)
diversify its holdings so that at the end of each quarter of each taxable year
(i) at least 50% of the market value of the Portfolio's total assets is
represented by cash or cash items, United States Government securities,
securities of other regulated investment companies, and other securities
limited, in respect of any one issuer, to a value not greater than 5% of the
value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than United States
Government securities or securities of any other regulated investment company)
or of two or more issuers that the Portfolio controls and that are engaged in
the same, similar, or related trades or businesses. These requirements may
restrict the degree to which the Portfolios may engage in short-term trading and
in certain hedging transactions and may limit the range of the Portfolio's
investments. If a Portfolio qualifies as a regulated investment company, it will
not be subject to federal income tax on the part of its net investment income
and net realized capital gains, if any, which it distributes each year to
shareholders, provided the Portfolio distributes at least (a) 90% of its
"investment company taxable income" (generally, net investment income plus net
short-term capital gain) and (b) 90% of its net interest exempt income (the
excess of (i) its tax-exempt interest income over (ii) certain deductions
attributable to that income).
If for any taxable year a Portfolio does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular
S-29
<PAGE>
corporated tax rates without any deduction for distributions to its shareholders
and all such distributions will be taxable to shareholders as ordinary dividends
to the extent of the Portfolio's current and accumulated earnings and profits.
Such distributions generally will be eligible for the 70% dividend received
deduction for corporate shareholders.
The Portfolio will be subject to a nondeductible 4% federal excise tax to the
extent that it fails to distribute in a calendar year at least the sum of 98% of
its ordinary income for the year and 98% of its capital gain net income (the
excess of short and long term capital gain over short and long term capital
losses) for the one-year period ending October 31 of the year (and any retained
amount from the prior calendar year).
Distributions declared in October, November, or December to shareholders of
record during those months and paid during the following January are treated as
if they were received by each shareholder on December 31 of the prior year for
tax purposes.
In certain cases, a Portfolio will be required to withhold and remit to the U.S.
Treasury, 31% of any taxable dividends, capital gain distributions and
redemption proceeds (other than from redemption of shares of the Money Market
Portfolio) paid to an individual or certain other non-corporate shareholder (1)
who has failed to provide a correct taxpayer identification number, (2) who is
subject to backup withholding by the Internal Revenue Service, or (3) who has
not certified to the Portfolio that such shareholder is not subject to backup
withholding. This backup withholding is not an additional tax, and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
A Portfolio's transactions in certain futures contracts, options, forward
contracts, foreign currencies, foreign debt securities, and certain other
investment and hedging activities will be subject to special tax rules. In a
given case, these rules may accelerate income to the Portfolio, defer losses to
the Portfolio, cause adjustments in the holding periods of the Portfolio's
assets, convert short-term capital losses into long-term capital losses, or
otherwise affect the character of the Portfolio's income. These rules could
therefore affect the amount, timing, and character of distributions to
shareholders. Each Portfolio will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Portfolio.
Income from the disposition of options and futures contracts will be subject to
the Short-Short Limitation if they were held for less than three months. If a
Portfolio satisfies certain requirements, then any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. To the
extent this treatment is not available, the Portfolio may be forced to defer the
closing out of certain options and futures contracts beyond the time when it
otherwise would be advantageous to do so.
Generally, gain or loss on the sale or exchange 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 net capital gains of a Portfolio 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 a Portfolio 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
S-30
<PAGE>
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.
Additional Information for All Portfolios Concerning State Taxes
A Portfolio is not liable for any income or franchise tax in Massachusetts if it
qualifies as a regulated investment company for federal income tax purposes.
Distributions by the Portfolios to shareholders and the ownership of shares may
be subject to state and local taxes. Therefore, shareholders are urged to
consult with their tax advisors concerning the application of state and local
taxes to investments in the Portfolios, which may differ from the federal income
tax consequences. For example, under certain specified circumstances, state
income tax laws may exempt from taxation distributions of a regulated investment
company to the extent that such distributions are derived from interest on
federal obligations. Shareholders are urged to consult with their tax advisors
regarding whether, and under what conditions such exemption is available.
Additional Tax Information Concerning the West Virginia Portfolio
As indicated in the Prospectus, the West Virginia Portfolio is designed to
provide shareholders with interest income exempt from federal income tax and is
not intended to constitute a balanced investment program. Certain recipients of
Social Security and railroad retirement benefits may be required to take into
account income from the West Virginia Portfolio in determining the taxability of
their benefits. In addition, the West Virginia Portfolio may not be an
appropriate investment for shareholders that are "substantial users" or persons
related to such users of facilities financed by private activity bonds or
industrial revenue bonds. A "substantial user" is defined generally to include
certain persons who regularly use a facility in their trade or business. All
shareholders should consult their tax advisors to determine the potential effect
of investing in the West Virginia Portfolio, if any, on their liability for
federal, state, and local taxes.
If, at the close of each quarter of its taxable year, at least 50% of the value
of a Portfolio's total assets consists of securities the interest on which is
excludable from gross income, the Portfolio may pay "exempt-interest dividends"
to its shareholders. The policy of the West Virginia Portfolio is to pay each
year as dividends substantially all of its interest income, net of certain
deductions. An exempt-interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by the West Virginia Portfolio, and
designated by the Portfolio as an exempt-interest dividend in a written notice
mailed to shareholders within 60 days after the close of such Portfolio's
taxable year. However, aggregate exempt-interest dividends for the taxable year
may not exceed the net interest from Municipal Securities and other securities
exempt from the regular federal income tax received by the Portfolio during the
taxable year. The percentage of the total dividends paid for any taxable year
which qualifies as federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the West Virginia Portfolio during such
year, regardless of the period for which the shares were held.
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 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
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<PAGE>
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they were 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.
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 the 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.
Issuers of bonds purchased by the West Virginia Portfolio (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 the covenants.
Under the Code, if a shareholder receives an exempt-interest dividend with
respect to any share and such share is held for six months or less, any loss on
the sale or exchange of such share will be disallowed to the extent of the
amount of such exempt-interest dividend.
Any net realized long-term capital gains of the Portfolio will be distributed at
least annually. The Portfolio will have no tax liability with respect to such
gains and the distributions will be taxable to shareholders as long-term capital
gains, regardless of how long a shareholder has held the Portfolio's shares.
Such distributions will be designated as a capital gains dividend in a written
notice mailed to shareholders after the close of the Portfolio's taxable year.
If a shareholder disposes of shares in the Portfolio at a loss before having
held those shares for more than six months, such loss will be treated as a
long-term capital loss to the extent the shareholder has received a long-term
capital gain distribution on the shares.
Although the West Virginia Portfolio does not expect to earn any investment
company taxable income (as defined by the Code), any income earned on taxable
investments will be distributed and will be taxable to shareholders as ordinary
income. In general, "investment company taxable income" comprises taxable net
investment income and net short-term capital gains. The West Virginia Portfolio
would be taxed on any undistributed investment company taxable income. Since any
such income will be distributed, it is anticipated that no such tax will be paid
by the Portfolio.
As indicated in the Prospectus, the West Virginia Portfolio may acquire puts
with respect to Municipal Securities held in its portfolio. See "Additional
Description Of Permitted Investments -- Puts on Municipal Securities" in this
Statement of Additional Information. The policy of the Portfolio is to limit
acquisitions of puts to those under which an acquiring Portfolio will be treated
for federal income tax purposes as the owner of the Municipal Securities
acquired subject to the put and the interest on the Municipal Securities will be
tax-exempt to such Portfolio. Although the Internal Revenue Service has issued a
published ruling that provides some guidance regarding the tax consequences of
the purchase of puts, there is currently no guidance available from the Internal
Revenue Service that definitively establishes the tax consequences of many of
the types of puts that this Portfolio could acquire under the 1940 Act.
Therefore, although the West Virginia Portfolio will only acquire a put after
concluding
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<PAGE>
that it will have the tax consequences described above, the Internal Revenue
Service could reach a different conclusion. If the West Virginia Portfolio were
not treated as the owner of the Municipal Securities, income from such
securities would probably not be tax-exempt.
Although the West Virginia Portfolio expects to qualify as a regulated
investment company and to be relieved of all or substantially all federal income
taxes, depending upon the extent of its activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located, or in which it is otherwise deemed to be conducting business, the
Portfolio may be subject to the tax laws of such states or localities. In
addition, in those states and localities which have income tax laws, the
treatment of the West Virginia Portfolio and its shareholders under such laws
may differ from its treatment under federal income tax laws.
If for any taxable year the West Virginia Portfolio does not qualify for the
special tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). Moreover, upon
distribution to shareholders, the Portfolio's income, including Municipal
Securities interest income, will be taxable to shareholders to the extent of the
Portfolio's current and/or accumulated earnings and profits. For information
regarding the risks of investing in West Virginia Securities, see the
Prospectus.
PORTFOLIO TRANSACTIONS
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 Adviser or Sub-Adviser is responsible for
placing the orders to execute transactions for a Portfolio. 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 Adviser 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 Portfolios 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 Adviser
or Sub-Adviser 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 Adviser or Sub-Adviser 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 affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry. In
some instances, the Trust pays a minimal share
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<PAGE>
transaction cost when the transaction presents no difficulty. Some trades are
made on a net basis where the Trust either buys securities directly from the
dealer or sells them to the dealer. In these instances, there is no direct
commission charged but there is a spread (the difference between the buy and
sell price), which is the equivalent of a commission.
The Trust may allocate, out of all commission business generated by all of the
funds and accounts under management by the Adviser, 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 Adviser 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, as amended, higher
commissions may be paid to broker/dealers who provide brokerage and research
services than to broker/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 broker/dealers
who provide such brokerage and research services, the Trust believes that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/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 broker/dealers who
provide daily portfolio pricing services to the Trust. Subject to best price and
execution, commissions used for pricing may or may not be generated by the funds
receiving the pricing service. During the fiscal year ended January 31, 1994, no
Portfolio directed transactions to broker-dealers for research services for
which commissions were paid.
The Adviser 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 Adviser and the Trust's Board of Trustees that the advantages of combined
orders outweigh the possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Portfolio may place orders with broker/dealers which have agreed to defray
certain Trust expenses such as custodian fees, and 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 a registered broker/dealer affiliate of the Adviser
for a commission in conformity with the 1940 Act, the Securities Exchange Act of
1934 and rules promulgated by the SEC. Under these provisions, the Distributor
or an affiliate of the Adviser is permitted to receive and retain compensation
S-34
<PAGE>
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 an affiliate of the Adviser to receive and retain such
compensation. These rules further require that commissions paid to the
Distributor or affiliate of the Adviser 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." In addition, the Trust may direct commission business to one or
more designated broker/dealers in connection with such broker/dealer's provision
of services to the Trust or payment of certain Trust expenses (e.g., custody,
pricing and professional fees). 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 year ended January 31, 1994, the Portfolios paid the following
brokerage commissions:
<TABLE>
<CAPTION>
=============================================================================================================================
Portfolio Total Brokerage Amount Paid to Amount Paid to
Commissions Distributor Affiliates
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $0 $0 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation $16,825 $0 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Emerging Growth $9,705 $0 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Government Portfolio $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
West Virginia $0 $0 $0
Portfolio
=============================================================================================================================
</TABLE>
For the fiscal year ended January 31, 1995, the Portfolios paid the following
brokerage commissions:
<TABLE>
<CAPTION>
=============================================================================================================================
Portfolio Total Brokerage Amount Paid to Amount Paid to
Commissions Distributor Affiliates
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $0 $0 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation $218,217 $0 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Emerging Growth $81,507 $0 $2,660
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Government Portfolio $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------
West Virginia $0 $0 $0
Portfolio
=============================================================================================================================
</TABLE>
S-35
<PAGE>
For the fiscal year ended January 31, 1996, the Portfolios paid the following
brokerage commissions:
<TABLE>
<CAPTION>
=============================================================================================================================
Portfolio Total Brokerage Amount Paid to Amount Paid to
Commissions Distributor Affiliates
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $0 $16,878 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation $279,453 $1,206 $89,877
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Emerging Growth $59,915 $712 $0
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Government Portfolio $2,000 $1,314 $0
- -----------------------------------------------------------------------------------------------------------------------------
West Virginia $0 $0 $0
Portfolio
=============================================================================================================================
</TABLE>
For the fiscal year ended January 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:
<TABLE>
<CAPTION>
=============================================================================================================================
Portfolio Brokerage Total Amount of % of Directed
Commissions for Transactions involving Brokerage
Research Brokerage Commissions to Total
Commissions for Brokerage
Research
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market N/A N/A N/A
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Capital Appreciation $188,960 $107,397,598 67.6%
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Emerging Growth $17,263 $6,275,934 28.8%
Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
Government Portfolio N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
West Virginia N/A N/A N/A
Portfolio
=============================================================================================================================
</TABLE>
"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 amount of the Trust's shares. At January 31,
1996, the following Portfolios held securities of the Trust's "regular brokers
or dealers" as follows: the Capital Appreciation Portfolio held $1,665,625 in
equity securities issued by J.P. Morgan, $1,062,405 in repurchase agreements
issued by J.P. Morgan and $1,791,563 in equity securities issued by Merrill
Lynch, the Emerging Growth Portfolio held $3,535,931 in repurchase agreements
issued by Lehman Brothers, the Government Portfolio held $2,002,762 in
repurchase agreements issued
S-36
<PAGE>
by Lehman Brothers and the Money Market Portfolio held $3,986,000 in repurchase
agreements issued by Aubrey Lanston, 3,000,000 in certificates of deposits
issued by Chase Manhattan, $998,733 in commercial paper issued by General
Electric Capital, $994,107 in commercial paper issued by Goldman Sachs,
$2,000,000 in certificates of deposit issued by National Westminster, $989,539
in commercial paper issued by National Westminster, $2,935,990 in commercial
paper issued by NationsBank, $3,982,930 in commercial paper issued by Norwest
Financial and $3,992,373 in commercial paper issued by Sears Roebuck.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of the Portfolios, and to divide or redivide any unissued
shares of the Trust into one or more additional series.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this Statement of
Additional Information, the Trust's shares will be fully paid and
non-assessable, subject only to the possibility of shareholder liability
described in the following section. 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. In the event of a liquidation or dissolution of the Trust,
shareholders of a Portfolio are entitled to receive the assets available for
distribution belonging to that Portfolio, and a proportionate distribution,
based upon the relative asset values of the respective Portfolios, of any
general assets not belonging to any particular Portfolio which are available for
distribution. Certificates representing shares will not be issued.
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 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
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, 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 liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
S-37
<PAGE>
5% SHAREHOLDERS
As of March 1, 1996, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% or more of
the shares of the Portfolios. The Trust believe that most of the shares referred
to below were held by the below persons in account for their fiduciary, agency
or custodial customers.
MONEY MARKET PORTFOLIO CLASS-A: Kaw & Co, P.O. Box 1793, Attn: Securities Cage,
Charleston, WV 25326, 100%.
MONEY MARKET PORTFOLIO CLASS-B: One Valley Bank, P.O. Box 1793, Attn: P. Taylor,
Charleston, WV 25326, 28.80%; Stuart Calwell, 854 Edgewood Drive, Charleston,
WV 25302, 14.87%; Paul G. Taylor, 403 East Rd., Apt. 10, Martinsburg, WV
25401-4976, 9.78%; Thomas G. McMillan, 1717 Louden Heights Rd., Charleston, WV
25314-1505, 8.62%.
CAPITAL APPRECIATION PORTFOLIO CLASS-A: Kaw & Co, P.O. Box 1793, Attn:
Securities Cage, Charleston, WV 25326, 100%.
CAPITAL APPRECIATION PORTFOLIO CLASS-B: Stephan R. Maxwell, Attn: Teresa
Lightner, P.O. Box 1793, Charleston, WV 25326-1793, 12.76%.
S-38
<PAGE>
EMERGING GROWTH PORTFOLIO CLASS-A: Kaw & Co, P.O. Box 1793, Attn: Securities
Cage, Charleston, WV 25326, 100%.
EMERGING GROWTH PORTFOLIO CLASS-B: Stephan R. Maxwell, Attn: Teresa Lightner,
P.O. Box 1793, Charleston, WV 25326-1793, 6.17%; John T. Chambers, c/o Susan
Singletary, One Valley Bank, P.O. Box 1793, Charleston, WV 25326, 5.19%.
GOVERNMENT PORTFOLIO CLASS-A: Kaw & Co, P.O. Box 1793, Attn: Securities Cage,
Charleston, WV 25326, 100%.
GOVERNMENT PORTFOLIO CLASS-B: Eagle Trust Company, Custodian for IRA of Darwin
E. Titchenell, Rt.2, Box 394, Albright, WV 26519, 16.93%; Claudia L. & Jack L.
Workman TTEE. FBO Workman Developments Inc. MPP, c/o Susan Singletary, One
Valley Bank, P.O. Box 1793, Charleston, WV 25326, 16.15%; Donald P. Krisher, Jr.
& C. Ann Krisher JTTEN, c/o Susan Singletary, One Valley Bank, P.O. Box 1793,
Charleston, WV 25326, 6.75%.
WEST VIRGINIA PORTFOLIO CLASS-A: Kaw & Co, P.O. Box 1793, Attn: Securities Cage,
Charleston, WV 25326, 100%.
WEST VIRGINIA PORTFOLIO CLASS-B: William A. Rice, Jr. & Ellen Crites Rice JTTEN,
c/o One Valley Bank, Attn: Teresa Lightner, P.O. Box 1793, Charleston, WV 25326,
6.66%; Edward Cassab, c/o Susan Singletary, One Valley Bank, P.O. Box 1793,
Charleston, WV 25326, 5.00%.
EXPERTS
The financial statements in this Statement of Additional Information have been
examined by Price Waterhouse LLP, independent accountants, as indicated in their
report, with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
FINANCIAL STATEMENTS
Following are the audited financial statements of the Portfolios for the fiscal
year ended January 31, 1996, and the Report of Independent Accountants of Price
Waterhouse LLP dated March 8, 1996, relating to the financial statements,
including the financial highlights of the Portfolios.
S-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OVB PRIME OBLIGATIONS,
OVB WEST VIRGINIA TAX-EXEMPT INCOME,
OVB GOVERNMENT SECURITIES,
OVB EMERGING GROWTH AND
OVB CAPITAL APPRECIATION PORTFOLIOS OF THE ARBOR FUND
In our opinion, the accompanying statements of net assets and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of the OVB Prime Obligations, OVB West Virginia
Tax-Exempt Income, OVB Government Securities, OVB Emerging Growth and
OVB Capital Appreciation Portfolios of The Arbor Fund (hereafter
referred to as the "Fund") at January 31, 1996, the results of each of
their operations, the changes in each of their net assets and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at January 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 8, 1996
1
<PAGE>
[LOGO]
JANUARY 31, 1996
STATEMENT OF NET ASSETS
THE OVB FUNDS PRIME
OBLIGATIONS PORTFOLIO
[GRAPHIC OMITTED]
A pie chart depicting the percent of total portfolio investments for the
following investment classifications:
Commercial Paper 48%
U.S. Government Agency Obligations 9%
Floating Rate Instruments 15%
Banker's Acceptances 3%
Certificates of Deposit/Bank Notes 21%
Repurchase Agreement 4%
% of Total Portfolio Investments
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
COMMERCIAL PAPER--49.8%
BCI Funding
5.710%, 02/16/96 $3,000 $ 2,993
Banque National de Paris
5.510%, 05/21/96 3,000 2,949
Canadian Wheat Board
5.670%, 03/04/96 3,000 2,985
Chevron Transport
5.520%, 04/17/96 4,400 4,349
Ciesco
5.580%, 03/08/96 1,000 994
ESC Securitization
5.720%, 02/02/96 3,000 2,999
General Electric Capital
5.700%, 02/09/96 1,000 999
Goldman Sachs Group
5.440%, 03/11/96 1,000 994
Kredietbank
5.740%, 02/05/96 2,000 1,999
National Westminster Bank
5.380%, 04/11/96 1,000 989
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
NationsBank
5.190%, 06/28/96 $3,000 $ 2,936
Norwest
5.690%, 02/28/96 4,000 3,983
Quebec Province
5.080%, 07/17/96 3,200 3,125
Sears Roebuck Acceptance
5.720%, 02/13/96 4,000 3,992
Toshiba America
5.400%, 04/02/96 3,000 2,973
Westpac Banking
5.530%, 04/30/96 3,000 2,959
Zeneca Wilmington
5.350%, 04/17/96 3,000 2,966
- -------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST $45,184,000) 45,184
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--9.3%
FNMA
5.530%, 05/10/96 2,500 2,463
5.340%, 02/06/96 (A) 6,000 6,000
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $8,463,000) 8,463
- -------------------------------------------------------------------------------
FLOATING RATE INSTRUMENTS --15.4%
First Bank of South Dakota
5.605%, 02/21/96 (A) 3,000 3,000
General Electric
5.867%, 02/22/96 (A) 2,000 2,001
People's Security Funding Agreement
6.090%, 04/30/96 (A) 3,000 3,000
PNC Bank
5.549%, 02/06/96 (A) 3,000 2,998
SMM Trust 1995-N
5.925%, 02/15/96 (A) 1,000 1,000
SMM Trust 1995-1
5.582%, 02/29/96 (A) 2,000 2,000
- -------------------------------------------------------------------------------
TOTAL FLOATING RATE INSTRUMENTS
(COST $13,999,000) 13,999
- -------------------------------------------------------------------------------
BANKER'S ACCEPTANCES--2.7%
First National Bank of Boston
5.310%, 03/29/96 1,500 1,488
5.200%, 06/10/96 1,000 981
- -------------------------------------------------------------------------------
TOTAL BANKER'S ACCEPTANCES (COST $2,469,000) 2,469
- -------------------------------------------------------------------------------
(CONTINUED)
2
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS PRIME
OBLIGATIONS PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT/BANK NOTES--22.0%
BankAmerica
5.270%, 06/25/96 $3,000 $ 3,000
Bank of Hawaii
5.570%, 11/06/96 3,000 3,003
Bank of New York
5.520%, 05/22/96 3,000 2,999
Bank of Tokyo Limited
5.590%, 03/12/96 3,000 3,000
Chase Manhattan
5.770%, 04/15/96 3,000 3,000
First of America Bank
5.375%, 05/17/96 3,000 3,000
National Westminster Bank
5.760%, 02/22/96 2,000 2,000
- -------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT/BANK NOTES
(COST $20,002,000) 20,002
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT--4.4%
Aubrey Lanston 5.90%, dated
01/31/96, matures 02/01/96,
repurchase price $3,986,653
(collateralized by U.S.
Treasury Note, par value
$3,950,000, 6.875%, matures
10/31/96, market value
$4,069,117) 3,986 3,986
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $3,986,000) 3,986
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS--103.6%
(COST $94,103,000) 94,103
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION (000)
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--(3.6%)
Other Assets and Liabilities, Net $(3,289)
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND LIABILITIES (3,289)
- -------------------------------------------------------------------------------
NET ASSETS 90,814
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A
(unlimited authorization--no
par value) based on 84,667,179
outstanding shares of beneficial
interest 84,667
Portfolio shares of Class B
(unlimited authorization--no
par value) based on 6,154,655
outstanding shares of beneficial
interest 6,155
Accumulated net realized loss on
investments (8)
- -------------------------------------------------------------------------------
TOTAL NET ASSETS--100.0% $90,814
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS A $1.00
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS B $1.00
- -------------------------------------------------------------------------------
(A) Floating Rate Instrument. Rate reflected on the Statement of Net Assets is
the rate in effect on January 31, 1996.
FNMA Federal National Mortgage Association
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS WEST VIRGINIA
TAX-EXEMPT INCOME PORTFOLIO
[GRAPHIC OMITTED]
A pie chart depicting the percent of total portfolio investments for the
following investment classifications:
Municipal Bonds 96%
Money Markets 4%
% of Total Portfolio Investments
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS--94.7%
West Virginia--91.3%
Beckley, Industrial Development,
Beckley Water Project, RB
7.000%, 10/01/17 $ 400 $ 436
Beckley, Sewage System
Refunding, RB
6.750%, 10/01/25 400 424
Berkeley County, Board of
Education, GO, BIG
7.375%, 04/01/03 75 89
Berkeley County, Board of
Education, GO, FGIC
4.500%, 06/01/09 180 171
Berkeley County, GO, FGIC
4.125%, 06/01/10 600 539
Bluefield, Sewer, RB, MBIA
5.600%, 10/01/97 10 10
Brooke County, Board of
Education, GO, AMBAC
8.800%, 08/01/97 45 48
9.000%, 08/01/98 15 17
8.500%, 08/01/99 75 86
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
Brooke Pleasant, Tyler Wetzel
County, Single Family
Mortgage, RB
5.000%, 08/15/10 $ 700 $ 692
Cabell County, Board of
Education, GO, MBIA
6.500%, 05/01/03 150 169
6.600%, 05/01/04 150 172
Cabell, Putnam & Wayne, Single
Family Residence Mortgage,
RB, FGIC
7.375%, 04/01/11 320 388
Charleston, GO
5.700%, 06/01/96 15 15
Charleston, New Public Housing
Authority, RB
5.000%, 02/01/99 15 15
Charleston, Parking Facility
Improvements, RB
6.000%, 06/01/13 880 901
Charleston, Parking Facility
Improvements, Ser A
7.000%, 06/01/16 1,080 1,195
Clarksburg, Water Refunding
Improvement, RB
6.100%, 09/01/04 75 82
6.200%, 09/01/05 75 82
Fayette County, Board of
Education, GO
5.500%, 12/01/01 20 21
Fayette County, Pollution Control,
Union Carbide Project, RB
5.200%, 02/01/98 40 40
Grant County, Grant Memorial
Hospital Project, RB, Ser C
7.300%, 10/01/19 200 216
Harrison County, Board of
Education, GO, FGIC
6.200%, 05/01/04 150 166
6.400%, 05/01/07 175 198
Harrison County, Solid Waste
Disposal, Monongahela Power
Company, RB, Ser A
6.875%, 04/15/22 1,500 1,650
Harrison County, Solid Waste
Disposal, Potomac Edison
Project, Ser B, AMBAC
6.250%, 05/01/23 400 416
(CONTINUED)
4
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS WEST VIRGINIA
TAX-EXEMPT INCOME PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
Harrison County, Solid Waste
Disposal, RB, MBIA
6.300%, 05/01/23 $ 200 $ 210
Harrison County, Solid Waste
Disposal, West Penn Power
Harrison Project, Ser B, AMT
6.300%, 05/01/23 300 313
Harrison County, Special
Obligation Refunding,
Ser A, GO
6.350%, 05/15/04 95 107
Harrison County, United Hospital
Center, AMBAC
4.550%, 04/01/02 500 503
Jackson County, Residential
Mortgage, RB, FGIC
7.375%, 06/01/10 55 65
Kanawha County, Building
Commission, Charleston Area
Medical Center Project,
Ser A, RB, AMBAC
7.500%, 11/01/08 150 171
Kanawha County, Building
Commission, Charleston Area
Medical Center Project,
Ser A, RB, MBIA
7.100%, 06/01/13 30 32
Kanawha County, Building
Commission, Charleston Area
Medical Center Project, RB
6.250%, 12/01/98 70 73
Kanawha County, Residential
Mortgage, RB, FGIC
7.375%, 09/01/10 305 360
7.375%, 09/01/11 45 54
Kanawha County, Single Family
Mortgage, RB, FGIC
7.100%, 12/01/99 15 17
7.300%, 12/01/04 120 142
7.400%, 12/01/10 30 36
Kanawha, Mercer & Nicholas
Counties, Single Family
Mortgage, RB, Prerefunded
02/01/14 @ 89.8452
Zero Coupon, 02/01/15 2,000 638
Kanawha, Putnam County
Huntington/Charleston,
Single Family Mortgage,
Ser A Zero Coupon, 12/01/16 800 243
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
Logan County, Logan County
Health Care
8.000%, 12/01/16 $ 690 $ 876
Marion County, Single Family
Mortgage, RB, FGIC
7.100%, 08/01/99 20 22
7.375%, 08/01/11 25 30
Marshall County, Pollution
Control, Ohio Power Project,
Ser B, RB, MBIA
5.450%, 07/01/14 500 503
Marshall County, Pollution
Control, Ohio Power Project,
Ser C, RB, MBIA
6.850%, 06/01/22 600 656
Marshall County, Special
Obligation Refunding, GO
6.500%, 05/15/10 205 221
Mason County, Pollution Control,
Ohio Power Project, Ser B,
RB, AMBAC
5.450%, 12/01/16 1,220 1,222
Mason County, Single Family
Mortgage, Principal Custody
Receipts, RB, FGIC
5.000%, 08/01/11 335 326
Mason County, Single Family
Mortgage, RB, FGIC
7.400%, 08/01/11 608 730
Mercer County, Single Family
Mortgage, RB
6.700%, 08/01/96 10 10
Mingo County, Board of
Education, GO, AMBAC
9.700%, 10/01/97 60 66
Monongalia County, Board o
Education, GO, MBIA
7.000%, 04/01/03 150 173
Monongalia County, Single
Family Mortgage, RB
7.200%, 03/01/11 150 150
Morgantown, Building Commission
Municipal Lease, RB, MBIA
5.750%, 01/01/19 250 257
Morgantown, Water RB
5.750%, 08/01/96 30 30
Morgantown, Waterworks Project,
RB, BIG
8.100%, 10/01/97 45 48
5
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS WEST VIRGINIA
TAX-EXEMPT INCOME (CONTINUED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
Ohio County, Board of
Education, GO, MBIA
5.250%, 06/01/16 $ 160 $ 161
5.250%, 06/01/17 125 126
Parkersburg, Sewer Authority,
RB, MBIA
5.750%, 06/01/00 115 118
Parkersburg, Water Refunding,
RB, MBIA
7.375%, 09/01/06 35 36
Pea Ridge, Public Service
District Sewer, Ser 1994,
AMBAC
7.000%, 05/01/20 210 236
Pleasants County, Pollution
Control, Monongahela Power,
Ser C, RB, AMBAC
6.150%, 05/01/15 500 530
Pleasants County, Pollution
Control, Potomac Edison,
RB, AMBAC
6.150%, 05/01/15 500 530
Pleasants County, Pollution
Control, West Penn Power,
RB, AMBAC
6.150%, 05/01/15 500 530
Putnam County, Pollution
Control Revenue, Appalachian
Power Project, Ser D,
RB, AMBAC
5.450%, 06/01/19 800 801
Raleigh County, Board of
Education, GO, MBIA
8.000%, 04/01/97 15 16
8.200%, 04/01/97 30 32
8.375%, 04/01/98 75 82
Raleigh County, Commercial
Development
6.850%, 06/01/10 1,045 1,057
Raleigh County, Parkway
Economic Development &
Tourism Authority,
Tamarach Project, Ser 1994
6.600%, 06/01/05 480 532
Raleigh, Fayette & Nicholas
Counties, Special Obligation
Bonds
6.150%, 08/01/03 100 111
6.250%, 08/01/11 195 220
South Charleston, GO
5.700%, 09/01/97 20 21
South Charleston, Herbert J.
Thomas Memorial Hospital
Project, RB
8.000%, 10/01/04 75 84
South Charleston, Herbert J.
Thomas Memorial Hospital
Project, Ser A, MBIA
5.500%, 10/01/09 80 81
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
Wayne County, Board of
Education, GO
3.700%, 06/01/96 $ 150 $ 150
Wayne County, GO, AMBAC
8.000%, 06/01/99 75 84
Webster County, Multifamily
Housing, Circlebrook
Project, Ser A
6.500%, 04/01/18 800 835
Weirton, Medical Center Project,
Ser A, RB, AMBAC
5.750%, 12/01/04 150 158
West Virginia State Board of
Regents, RB, MBIA
5.900%, 04/01/04 60 66
6.000%, 04/01/04 115 124
West Virginia State Board of
Regents, RB, Ser A
5.750%, 04/01/96 20 20
7.750%, 04/01/03 30 31
West Virginia State Board of
Regents, RB, Ser B, MBIA
7.250%, 04/01/03 50 56
West Virginia State College,
RB, AMBAC
5.875%, 04/01/05 150 162
6.000%, 04/01/06 75 81
6.000%, 04/01/07 75 81
6.000%, 04/01/12 640 671
West Virginia State Economic
Development Tourism Authority,
Ser B, FGIC
4.625%, 07/01/19 300 311
West Virginia State Hospital
Finance Authority, Charleston
Area Medical Center Project,
Ser A, Prerefunded 06/01/96
@ 102
6.500%, 09/01/23 2,025 2,136
West Virginia State Hospital
Finance Authority, West
Virginia University
Hospital Project, MBIA
7.125%, 06/01/06 95 98
7.200%, 06/01/16 75 77
West Virginia State Hospital
Finance Authority, Cabell
County Project
7.875%, 01/01/19 200 224
West Virginia State Housing
Development Fund, Ser E
6.250%, 11/01/12 150 156
(CONTINUED)
6
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS WEST VIRGINIA
TAX-EXEMPT INCOME PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
West Virginia State Parkways,
Economic Development &
Tourism Authority, FGIC
4.800%, 05/15/00 $ 150 $ 152
Zero Coupon, 07/01/03 250 178
Zero Coupon, 05/15/07 500 284
5.800%, 05/15/13 140 145
West Virginia State School
Building Authority, Capital
Improvement, RB, Ser B, MBIA
5.750%, 07/01/15 300 306
6.750%, 07/01/17 475 507
West Virginia State School
Building Authority, RB, MBIA
5.250%, 07/01/99 200 208
6.250%, 07/01/01 500 548
6.950%, 07/01/03 200 222
7.250%, 07/01/15 560 640
West Virginia State University
Revenue Project, RB, AMBAC
6.000%, 04/01/12 200 211
West Virginia State Water
Development Authority, Ser A
7.000%, 11/01/26 270 277
7.700%, 11/01/29 225 263
West Virginia State Water
Development Authority
Ser A-I, FSA
5.250%, 11/01/21 795 767
West Virginia State Water
Development Authority Loan
Program, Ser A
7.000%, 11/01/11 150 165
West Virginia State Water
Development Authority Loan
Program II, Ser A
7.300%, 11/01/11 70 82
7.400%, 11/01/19 70 82
West Virginia State Water
Development Authority Loan
Program II, Ser A, FSA
5.500%, 11/01/23 625 623
West Virginia State Water
Development Authority Loan
Program II, Ser A-II
5.000%, 11/01/18 550 518
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
West Virginia State Water
Development Authority Loan
Program II, Ser A-II, FSA
6.050%, 11/01/13 $ 150 $ 154
West Virginia State Water
Development Authority Loan
Program, Capital Guaranty
Custodial Receipts
7.500%, 11/01/29 500 569
West Virginia State Water
Development Authority, Sewer
System Loan Program
7.100%, 11/01/09 200 240
West Virginia State, Building
Commission Lease, Regional
Jail & Correction Facility
Project, Ser A, RB, MBIA
6.300%, 07/01/98 200 211
West Virginia State, Building
Commission Lease, West Virginia
Regional Jail & Correction
Project, Ser A, MBIA
6.500%, 07/01/00 105 114
West Virginia State, GO
5.750%, 11/01/96 15 15
5.250%, 06/01/97 20 20
5.700%, 06/01/98 75 76
6.000%, 06/01/98 15 15
4.000%, 02/01/99 15 15
6.000%, 06/01/02 180 183
West Virginia State, GO, Ser A
5.400%, 02/01/01 300 316
West Virginia State, Housing
Development Authority, Ser A
5.450%, 11/01/21 150 143
West Virginia State, Housing
Development Fund
6.600%, 07/01/96 20 20
6.100%, 11/01/99 15 15
6.000%, 12/15/08 90 93
6.000%, 12/15/09 90 92
West Virginia State, Housing
Development Fund, BIG
7.375%, 11/01/05 75 78
7
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS WEST VIRGINIA
TAX-EXEMPT INCOME PORTFOLIO (CONCLUDED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
West Virginia (continued)
West Virginia State, Housing
Development Fund, Ser A
6.700%, 05/01/08 $ 30 $ 32
6.700%, 11/01/08 40 42
6.700%, 05/01/09 40 42
6.700%, 11/01/09 45 47
West Virginia State, Housing
Development Fund, Ser A,
AMBAC
5.500%, 11/01/11 80 79
West Virginia State, Housing
Development Fund, Ser E
6.350%, 05/01/24 205 211
West Virginia State, Resource
Recovery, BIG, Prerefunded
06/01/96 @ 102
8.250%, 06/01/09 50 52
West Virginia Water Development
Authority, RB, Ser A
7.000%, 11/01/26 200 205
West Virginia Water Development
Loan Program II, Ser A, FSA
5.750%, 11/01/29 150 153
Wetzel County, Board of
Education, GO, MBIA
7.000%, 05/01/04 75 88
Wheeling, Waterworks & Sewage
System, Ser B, FGIC
6.450%, 12/01/07 150 165
6.650%, 12/01/15 300 320
Wood County, Saint Josephs
Hospital, Parkesburg Project,
RB, AMBAC
6.500%, 01/01/98 50 51
- -------------------------------------------------------------------------------
TOTAL WEST VIRGINIA 37,381
- -------------------------------------------------------------------------------
Puerto Rico--3.4%
Commonwealth of Puerto Rico,
GO, AMBAC
5.850%, 07/01/15 830 858
Commonwealth of Puerto Rico,
GO, MBIA
5.500%, 07/01/09 500 520
- -------------------------------------------------------------------------------
TOTAL PUERTO RICO 1,378
- -------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (COST $37,556,000) 38,759
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
MONEY MARKET--4.3%
SEI Tax Exempt Trust Tax
Free Portfolio 1,742$ 1,742
- -------------------------------------------------------------------------------
TOTAL MONEY MARKET (COST $1,742,000) 1,742
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.0%
(COST $39,298,000) 40,501
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--1.0%
Other Assets and Liabilities, Net 422
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND LIABILITIES 422
- -------------------------------------------------------------------------------
NET ASSETS 40,923
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A
(unlimited authorization--no par
value) based on 3,618,960 outstanding
shares of beneficial interest 35,703
Portfolio shares of Class B (unlimited
authorization--no par value) based on
426,442 outstanding shares of
beneficial interest 4,181
Accumulated net realized loss on
investments (164)
Net unrealized appreciation on
investments 1,203
- -------------------------------------------------------------------------------
TOTAL NET ASSETS--100.0% $40,923
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS A $10.12
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS B $10.11
- -------------------------------------------------------------------------------
AMT Alternative Minimum Tax
AMBAC American Municipal Bond Assurance Company
BIG Bond Investors Guaranty
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GO General Obligation
MBIA Municipal Bond Insurance Association
RB Revenue Bond
Ser Series
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS GOVERNMENT
SECURITIES PORTFOLIO
[GRAPHIC OMITTED]
A pie chart depicting the percent of total portfolio investments for the
following investment classifications:
U.S. Government Agency Obligations 57%
U.S. Treasury Obligations 29%
Municipal Bonds 6%
Corporate Obligations 1%
Common Stocks 4%
Repurchase Agreement 3%
% of Total Portfolio Investments
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--56.5%
FFCB
5.690%, 03/03/00 $ 831 $ 838
7.950%, 04/01/02 416 426
8.400%, 12/01/05 623 739
FFCB MTN
5.800%, 12/18/00 400 400
6.150%, 03/03/03 416 429
6.900%, 09/08/15 500 534
FHLB
8.100%, 03/25/96 850 854
7.810%, 07/17/96 500 506
8.000%, 07/25/96 625 634
7.700%, 08/26/96 175 177
7.915%, 01/17/97 500 513
6.520%, 05/23/97 400 407
8.030%, 12/19/97 300 315
8.020%, 08/14/98 415 442
7.040%, 05/24/99 500 526
8.375%, 10/25/99 310 341
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (CONTINUED)
FHLB (continued)
7.780%, 10/19/01 $ 500 $ 552
7.540%, 02/07/02 100 100
6.380%, 04/29/03 1,660 1,663
5.440%, 10/15/03 415 405
6.410%, 12/29/03 500 500
7.310%, 06/16/04 400 438
8.090%, 12/28/04 400 460
8.125%, 03/07/05 1,000 1,076
6.345%, 11/01/05 500 517
7.760%, 11/21/06 500 571
7.930%, 02/12/10 1,000 1,185
8.000%, 08/16/10 1,000 1,010
FHLB MTN
6.880%, 04/26/00 500 525
5.990%, 10/01/03 500 495
8.160%, 10/01/04 450 482
FHLMC
6.485%, 10/03/05 500 523
6.590%, 12/09/08 1,000 997
8.640%, 10/14/09 400 433
8.000%, 03/24/10 500 536
Financing Corporation
8.600%, 09/26/19 500 629
Financing Corporation STRIPS
Zero Coupon, 04/05/11 2000 758
FLB
7.950%, 10/21/96 83 85
FNMA
8.875%, 07/10/01 415 421
7.900%, 04/10/02 400 409
6.200%, 07/10/03 500 500
6.320%, 12/23/03 400 403
8.250%, 10/12/04 500 536
6.350%, 06/10/05 1,000 1,036
Housing Urban Development 94a
Abilene, Taxable, Callable
08/01/03 @ 100
7.180%, 08/01/13 160 168
Housing Urban Development 94a
Barberton, Taxable, Callable
08/01/03 @ 100
7.180%, 08/01/13 520 543
Housing Urban Development 94a
Egg Harbor, Taxable, Callable
08/01/03 @ 100
6.930%, 08/01/08 160 167
7.180%, 08/01/13 220 230
Housing Urban Development 94a-I
Montgomery County, Taxable,
Callable 08/01/03 @ 100
6.930%, 08/01/08 55 58
9
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS GOVERNMENT
SECURITIES PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (CONTINUED)
Housing Urban Development 94a
Ocean Shores, Taxable, Callable
08/01/03 @ 100
6.930%, 08/01/08 $ 225 $ 233
Housing Urban Development 94a
Pohatcong, Taxable, Callable
08/01/03 @ 100
6.930%, 08/01/08 240 249
Housing Urban Development 94a
Providence, Taxable, Callable
08/01/03 @ 100
6.930%, 08/01/08 130 135
Housing Urban Development 94a
Roanoke, Taxable, Callable
08/01/03 @ 100
7.180%, 08/01/13 100 104
Housing Urban Development 92a
Scranton, Taxable, Callable
08/01/02 @ 100
7.800%, 08/01/10 400 439
Housing Urban Development 94a
Tacoma, Taxable, Callable
08/01/03 @ 100
7.080%, 08/01/11 365 374
Private Export Funding
7.300%, 01/31/02 2,100 2,278
7.950%, 11/01/06 1,500 1,699
TVA
6.250%, 08/01/99 416 425
8.375%, 10/01/99 831 915
7.450%, 10/15/01 831 884
6.875%, 01/15/02 500 516
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $33,257,000) 34,743
- -------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--28.4%
U.S.Treasury Bonds
8.250%, 05/15/05 83 92
9.375%, 02/15/06 125 161
8.375%, 08/15/08 950 1,111
8.750%, 11/15/08 125 149
9.125%, 05/15/09 125 153
7.250%, 05/15/16 1,000 1,133
7.500%, 11/15/16 750 873
6.250%, 08/15/23 300 305
7.500%, 11/15/24 500 595
U.S.Treasury Notes
6.875%, 03/31/97 416 425
8.500%, 07/15/97 416 437
7.000%, 04/15/99 831 877
7.750%, 01/31/00 800 873
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (CONTINUED)
U.S. Treasury Notes (continued)
5.500%, 04/15/00 $ 831 $ 842
8.750%, 08/15/00 416 474
8.000%, 05/15/01 831 934
7.500%, 11/15/01 623 689
7.500%, 05/15/02 831 924
6.375%, 08/15/02 831 875
6.250%, 02/15/03 416 435
7.875%, 11/15/04 1,000 1,156
7.625%, 02/15/07 2,000 2,203
U.S.Treasury STRIPS
Zero Coupon, 08/15/05 1,000 583
Zero Coupon, 11/15/18 2,500 604
Zero Coupon, 02/15/25 3,000 518
- -------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $16,384,000) 17,421
- -------------------------------------------------------------------------------
MUNICIPAL BONDS--5.6%
Berkeley County, WV Lease Revenue
Bond for IRS Computer Center
Facility Project, Series 1994,
Taxable
7.900%, 07/15/03 640 700
Chicago Heights, IL Series B,
Taxable GO, Callable 12/01/12
@ 100
7.550%, 12/01/13 1,000 1,087
Fairview, MN Hospital & Health
Care Services, Series B,
Refunding Taxable, MBIA
7.000%, 11/15/15 300 319
Henry County, GA Water & Sewer
Authority, Series B, Revenue
Refunding Taxable, AMBAC
6.000%, 02/01/04 250 246
6.000%, 02/01/05 220 215
Las Vegas, NV Taxable GO-Taxable
Fremont Street Project, Callable
07/01/03 @ 101, FGIC
7.200%, 07/01/15 500 538
San Bernardino County, CA COP,
Taxable, Prerefunded 03/01/04
@ 102
8.500%, 03/01/14 275 319
- -------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (COST $3,266,000) 3,424
- -------------------------------------------------------------------------------
(CONTINUED)
10
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS GOVERNMENT
SECURITIES PORTFOLIO (CONCLUDED)
- -------------------------------------------------------------------------------
FACE AMT./
SHARES VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--0.8%
General Electric Capital MTN
6.020%, 12/15/03 500 $ 503
- -------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(COST $500,000) 503
- -------------------------------------------------------------------------------
COMMON STOCK--4.2%
Electric Services--3.9%
Allegheny Power System 8,300 251
American Electric Power 6,200 274
CMS Energy 10,000 311
Dominion Resources of Virginia 6,200 266
Duke Power 5,000 249
FPL Group 4,200 195
LG&E 10,000 431
Public Service of Colorado 6,200 223
Union Electric Power 4,200 179
- -------------------------------------------------------------------------------
TOTAL ELECTRIC SERVICES 2,379
- -------------------------------------------------------------------------------
Telephone Communications--0.3%
SBC Telecommunications 3,300 187
- -------------------------------------------------------------------------------
TOTAL TELEPHONE COMMUNICATIONS 187
- -------------------------------------------------------------------------------
TOTAL COMMON STOCK (COST $2,293,000) 2,566
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT--3.3%
Lehman Brothers
5.93%, dated 01/31/96, matures
02/01/96, repurchase price
$2,003,123 (collateralized by
U.S. Treasury Note, par value
$2,005,000, 5.50%, matures
11/15/98, market value
$2,045,651) $ 2,003 2,003
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $2,003,000) 2,003
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.8%
(COST $57,703,000) 60,660
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--1.2%
Other Assets and Liabilities, Net 735
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND LIABILITIES 735
- -------------------------------------------------------------------------------
NET ASSETS 61,395
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION (000)
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A
(unlimited authorization--no par
value) based on 5,935,452 outstanding
shares of beneficial interest $57,395
Portfolio shares of Class B (unlimited
authorization--no par value) based on
114,903 outstanding shares of beneficial
interest 1,121
Accumulated net realized loss on
investments (78)
Net unrealized appreciation on
investments 2,957
- -------------------------------------------------------------------------------
TOTAL NET ASSETS--100.0% $61,395
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS A $10.15
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS B $10.15
- -------------------------------------------------------------------------------
AMBAC American Municipal Bond Assurance Company
COP Certificate of Participation
FFCB Federal Farm Credit Bank
FGIC Financial Guaranty Insurance Company
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FLB Federal Land Bank
FNMA Federal National Mortgage Association
GO General Obligation
MBIA Municipal Bond Insurance Association
MTN Medium-Term Note
STRIPS Separate Trading of Registered Interest and Principal of Securities
TVA Tennessee Valley Authority
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS EMERGING
GROWTH PORTFOLIO
[GRAPHIC OMITTED]
A pie chart depicting the percent of total portfolio investments for the
following investment classifications:
Common Stocks 93%
Repurchase Agreement 7%
% of Total Portfolio Investments
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS--91.8%
Apparel/Textiles--3.8%
Authentic Fitness 39,000 $ 941
St. John Knits 21,000 969
- -------------------------------------------------------------------------------
TOTAL APPAREL/TEXTILES 1,910
- -------------------------------------------------------------------------------
Broadcasting, Newspapers and
Advertising--3.5%
New World Communications,
Class A* 50,000 775
United Video Satellite Group,
Series A* 27,600 969
- -------------------------------------------------------------------------------
TOTAL BROADCASTING, NEWSPAPERS
AND ADVERTISING 1,744
- -------------------------------------------------------------------------------
Communications Equipment--3.1%
Lo Jack* 30,800 306
Microcom* 50,000 1,244
- -------------------------------------------------------------------------------
TOTAL COMMUNICATIONS EQUIPMENT 1,550
- -------------------------------------------------------------------------------
Computer Software--20.7%
Applix* 56,200 1,560
Aspen Technology* 15,300 581
Borland International* 51,400 957
Global Village Communication* 26,000 416
Harbinger* 33,100 604
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
Computer Software (continued)
Macromedia* 41,800 $ 1,672
McAfee Associates* 11,400 570
Open Environment* 38,000 532
Quarterdeck Office Systems* 56,500 904
Shiva Corporation* 7,800 560
Smith Micro Software* 92,000 644
Transaction Systems Architects* 18,800 651
Veritas Software* 21,600 805
- -------------------------------------------------------------------------------
TOTAL COMPUTER SOFTWARE 10,456
- -------------------------------------------------------------------------------
Computers and Services--2.4%
Madge, NV* 10,500 415
Radisys * 71,300 802
- -------------------------------------------------------------------------------
TOTAL COMPUTERS AND SERVICES 1,217
- -------------------------------------------------------------------------------
Drugs--6.6%
Genzyme* 38,300 1,034
Idexx Labs* 35,000 1,758
Martek Biosciences* 15,000 525
- -------------------------------------------------------------------------------
TOTAL DRUGS 3,317
- -------------------------------------------------------------------------------
Entertainment--2.0%
Dove Audio* 88,000 990
- -------------------------------------------------------------------------------
TOTAL ENTERTAINMENT 990
- -------------------------------------------------------------------------------
Financial Services--3.5%
Americredit* 63,300 839
Data Broadcasting* 80,000 930
- -------------------------------------------------------------------------------
TOTAL FINANCIAL SERVICES 1,769
- -------------------------------------------------------------------------------
Insurance--2.9%
CMAC Investment 18,000 1,035
Compdent* 12,800 451
- -------------------------------------------------------------------------------
TOTAL INSURANCE 1,486
- -------------------------------------------------------------------------------
Machinery--1.6%
Zoltek* 36,400 828
- -------------------------------------------------------------------------------
TOTAL MACHINERY 828
- -------------------------------------------------------------------------------
Measuring Devices--4.9%
Cognex* 29,000 645
Fore Systems* 22,000 1,205
Input/Output* 25,000 606
- -------------------------------------------------------------------------------
TOTAL MEASURING DEVICES 2,456
- -------------------------------------------------------------------------------
(CONTINUED)
12
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS EMERGING
GROWTH PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
Medical Products & Services--13.4%
Chad Therapeutics* 78,900 $ 907
De Rigo S.P.A. ADR* 46,200 1,155
Healthdyne Technology* 72,700 845
Medpartners/Mullikin* 32,300 1,163
Physicians Reliance* 38,000 1,729
Staar Surgical* 79,000 958
- -------------------------------------------------------------------------------
TOTAL MEDICAL PRODUCTS & SERVICES 6,757
- -------------------------------------------------------------------------------
Miscellaneous Business Services--3.1%
Alternative Resources* 29,000 834
Medaphis* 18,000 720
- -------------------------------------------------------------------------------
TOTAL MISCELLANEOUS BUSINESS SERVICES 1,554
- -------------------------------------------------------------------------------
Miscellaneous Manufacturing--3.2%
Oakley * 32,100 1,180
Vista 2000 * 44,700 458
- -------------------------------------------------------------------------------
TOTAL MISCELLANEOUS MANUFACTURING 1,638
- -------------------------------------------------------------------------------
Petroleum & Fuel Products--3.0%
Barrett Resources* 39,000 994
Sonat Offshore Drilling 10,800 498
- -------------------------------------------------------------------------------
TOTAL PETROLEUM & FUEL PRODUCTS 1,492
- -------------------------------------------------------------------------------
Retail--10.6%
Department 56* 25,000 991
Garden Ridge* 14,300 472
Just For Feet* 15,150 471
MSC Industrial Direct* 42,500 1,094
Renters' Choice* 66,400 1,087
Sunglass Hut International* 45,000 1,252
- -------------------------------------------------------------------------------
TOTAL RETAIL 5,367
- -------------------------------------------------------------------------------
Steel & Steel Works--1.9%
Imco Recycling 46,000 966
- -------------------------------------------------------------------------------
TOTAL STEEL & STEEL WORKS 966
- -------------------------------------------------------------------------------
Wholesale--1.6%
Physician Sales and Services* 27,500 784
- -------------------------------------------------------------------------------
TOTAL WHOLESALE 784
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $34,046,000) 46,281
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT--7.0%
Lehman Brothers
5.93%, dated 01/31/96, matures
02/01/96, repurchase price
$3,536,485 (collateralized
by U.S. Treasury Bill, par
value $95,000, 0.00%, matures
03/07/96, market value $94,514;
U.S. Treasury Note, par value
$3,213,000, 7.75%, matures
12/31/99, market value
$3,513,352; with total
market value of $3,607,866) $3,536 $ 3,536
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $3,536,000) 3,536
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.8%
(COST $37,582,000) 49,817
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--1.2%
Other Assets and Liabilities, Net 593
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND LIABILITIES 593
- -------------------------------------------------------------------------------
NET ASSETS 50,410
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A
(unlimited authorization--no par
value) based on 4,207,846
outstanding shares of beneficial
interest 40,282
Portfolio shares of Class B (unlimited
authorization--no par value) based on
204,192 outstanding shares of
beneficial interest 2,062
Accumulated net realized loss on
investments (4,169)
Net unrealized appreciation on
investments 12,235
- -------------------------------------------------------------------------------
TOTAL NET ASSETS--100.0% $50,410
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS A $11.43
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS B $11.36
- -------------------------------------------------------------------------------
* Non-income producing securities
ADR American Depository Receipt
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS CAPITAL
APPRECIATION PORTFOLIO
[GRAPHIC OMITTED]
A pie chart depicting the percent of total portfolio investments for the
following investment classifications:
Common Stocks 99%
Repurchase Agreement 1%
% of Total Portfolio Investments
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS--99.0%
Agriculture--3.8%
Dole Food 54,000 $ 2,011
Pioneer Hi Bred International 35,800 1,826
- -------------------------------------------------------------------------------
TOTAL AGRICULTURE 3,837
- -------------------------------------------------------------------------------
Aircraft--2.0%
Boeing 26,200 2,034
- -------------------------------------------------------------------------------
TOTAL AIRCRAFT 2,034
- -------------------------------------------------------------------------------
Apparel/Textiles--2.3%
Fila Holdings ADR 48,000 2,328
- -------------------------------------------------------------------------------
TOTAL APPAREL/TEXTILES 2,328
- -------------------------------------------------------------------------------
Banks--5.8%
Citicorp 25,000 1,847
J P Morgan 20,500 1,666
Wells Fargo 10,000 2,346
- -------------------------------------------------------------------------------
TOTAL BANKS 5,859
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
Communications Equipment--3.2%
L.M. Ericsson Telephone ADR 62,900 $ 1,297
Sony ADR 31,000 1,922
- -------------------------------------------------------------------------------
TOTAL COMMUNICATIONS EQUIPMENT 3,219
- -------------------------------------------------------------------------------
Computer Networking Products--9.0%
3Com* 20,000 918
Bay Networks* 41,850 1,779
Cisco Systems* 23,900 1,990
Computer Sciences* 29,500 2,249
Sun Microsystems 49,400 2,272
- -------------------------------------------------------------------------------
TOTAL COMPUTER NETWORKING PRODUCTS 9,208
- -------------------------------------------------------------------------------
Computer Peripherals--2.9%
Digital Equipment* 26,000 1,882
Hewlett Packard 12,700 1,076
- -------------------------------------------------------------------------------
TOTAL COMPUTER PERIPHERALS 2,958
- -------------------------------------------------------------------------------
Computer Software--3.6%
Computer Associates
International 30,600 2,092
Oracle Systems* 34,000 1,624
- -------------------------------------------------------------------------------
TOTAL COMPUTER SOFTWARE 3,716
- -------------------------------------------------------------------------------
Drugs--20.1%
American Home Products 20,000 2,040
Amgen* 31,500 1,894
Biogen* 15,000 1,054
Boston Scientific* 22,700 1,163
Genzyme Warrants* 10,000 420
Genzyme* 34,000 2,580
Johnson & Johnson 24,000 2,304
Merck 30,500 2,143
Pfizer 37,400 2,571
Pharmacia & Upjohn* 55,000 2,303
Smithkline Beecham 36,000 2,025
- -------------------------------------------------------------------------------
TOTAL DRUGS 20,497
- -------------------------------------------------------------------------------
Entertainment--1.0%
Walt Disney 15,200 977
- -------------------------------------------------------------------------------
TOTAL ENTERTAINMENT 977
- -------------------------------------------------------------------------------
(CONTINUED)
14
<PAGE>
STATEMENT OF NET ASSETS
THE OVB FUNDS CAPITAL
APPRECIATION PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
Value
Description Shares (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
Financial Services--7.8%
American Express 42,000 $ 1,932
First Data 28,300 2,002
FNMA 65,200 2,249
Merrill Lynch 31,500 1,792
- -------------------------------------------------------------------------------
TOTAL FINANCIAL SERVICES 7,975
- -------------------------------------------------------------------------------
Food, Beverage & Tobacco--4.9%
Coca-Cola 26,400 1,990
CPC International 14,000 1,019
HJ Heinz 28,800 990
Sara Lee 29,900 1,009
- -------------------------------------------------------------------------------
TOTAL FOOD, BEVERAGE & TOBACCO 5,008
- -------------------------------------------------------------------------------
Household Products--1.9%
Gillette 35,600 1,909
- -------------------------------------------------------------------------------
TOTAL HOUSEHOLD PRODUCTS 1,909
- -------------------------------------------------------------------------------
Insurance--2.0%
AIG 21,000 2,034
- -------------------------------------------------------------------------------
TOTAL INSURANCE 2,034
- -------------------------------------------------------------------------------
Medical Products & Services--6.1%
Guidant 56,000 2,569
McKesson 18,800 940
Medtronic 20,000 1,143
Nellcor* 25,500 1,581
- -------------------------------------------------------------------------------
TOTAL MEDICAL PRODUCTS & SERVICES 6,233
- -------------------------------------------------------------------------------
Miscellaneous Business Services--3.1%
ADT Limited* 65,500 950
CUC International* 60,000 2,212
- -------------------------------------------------------------------------------
TOTAL MISCELLANEOUS BUSINESS SERVICES 3,162
- -------------------------------------------------------------------------------
Office Equipment--4.5%
Alco Standard 42,400 1,664
Danka Business Systems ADR 29,000 1,069
Xerox 15,000 1,854
- -------------------------------------------------------------------------------
TOTAL OFFICE EQUIPMENT 4,587
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE
DESCRIPTION SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
Oil & Gas Well Equipment--3.8%
Halliburton 38,000 $ 1,962
Schlumberger 27,100 1,900
- -------------------------------------------------------------------------------
TOTAL OIL & GAS WELL EQUIPMENT 3,862
- -------------------------------------------------------------------------------
Photographic Equipment &
Supplies--1.8%
Eastman Kodak 24,400 1,790
- -------------------------------------------------------------------------------
TOTAL PHOTOGRAPHIC EQUIPMENT
& SUPPLIES 1,790
- -------------------------------------------------------------------------------
Restaurants--1.1%
McDonalds 21,500 1,080
- -------------------------------------------------------------------------------
TOTAL RESTAURANTS 1,080
- -------------------------------------------------------------------------------
Retail--2.9%
OfficeMax* 90,000 2,070
Warnaco Group 40,000 915
- -------------------------------------------------------------------------------
TOTAL RETAIL 2,985
- -------------------------------------------------------------------------------
Specialty Machinery--1.7%
American Standard* 60,000 1,748
- -------------------------------------------------------------------------------
TOTAL SPECIALTY MACHINERY 1,748
- -------------------------------------------------------------------------------
Telephones & Telecommunication--1.9%
US West Media Group* 48,000 1,014
Worldcom* 25,000 916
- -------------------------------------------------------------------------------
TOTAL TELEPHONES & TELECOMMUNICATION 1,930
- -------------------------------------------------------------------------------
Testing Laboratories--1.8%
Chiron * 16,100 1,852
- -------------------------------------------------------------------------------
TOTAL TESTING LABORATORIES 1,852
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $77,694,000) 100,788
- -------------------------------------------------------------------------------
15
<PAGE>
[LOGO]
JANUARY 31, 1996
THE OVB FUNDS CAPITAL
APPRECIATION PORTFOLIO (CONCLUDED)
- -------------------------------------------------------------------------------
FACE AMT. VALUE
DESCRIPTION (000) (000)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT--1.0%
Lehman Brothers
5.93%, dated 01/31/96,
matures 02/01/96, repurchase
price $1,062,570 (collateralized
by FNMA STRIPS Principal Only,
par value $1,650,000, 0.00%,
matures 02/01/24, market
value $1,085,719) $1,062 $ 1,062
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $1,062,000) 1,062
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.0%
(COST $78,756,000) 101,850
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--0.0%
Other Assets and Liabilities, Net (5)
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS AND LIABILITIES (5)
- -------------------------------------------------------------------------------
NET ASSETS 101,845
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares of Class A
(unlimited authorization--no
par value) based on 7,486,078
outstanding shares of
beneficial interest 74,601
Portfolio shares of Class B
(unlimited authorization--no
par value) based on 168,502
outstanding shares of
beneficial interest 1,967
Undistributed net investment income 4
Accumulated net realized gain
on investments 2,179
Net unrealized appreciation on
investments 23,094
- -------------------------------------------------------------------------------
TOTAL NET ASSETS--100.0% $101,845
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS A $13.31
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE--CLASS B $13.25
- -------------------------------------------------------------------------------
* Non-income producing securities
ADR American Depository Receipt
FNMA Federal National Mortgage Association
STRIPS Separate Trading of Registered Interest and Principal of Securities
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
STATEMENT OF OPERATIONS
===============================================================================
FOR THE YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS WEST VIRGINIA TAX-EXEMPT
PORTFOLIO INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest Income $5,515 $2,131
Dividend Income -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTALINVESTMENT INCOME 5,515 2,131
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Administrator Fees 184 100
Less Administrator Fees Waiver -- (26)
Investment Advisory Fees 230 166
Less Investment Advisory Fees Waiver (138) (27)
Sub-Advisory Fees 69 --
Custodian Fees 13 5
ProfessionalFees 26 12
Registration & Filing Fees 10 6
Printing Expense 10 4
Trustee Fees 6 2
Pricing Fees -- 3
Distribution Fees(1) 6 8
Transfer Agency Fees 37 29
Amortization of Organization Costs 3 3
Miscellaneous Expenses 1 --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 457 285
- ---------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 5,058 1,846
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) From Securities Sold -- (3)
Net Change in Unrealized Appreciation
on Investments -- 2,701
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on
Investments -- 2,698
===========================================================================================================================
Increase in Net Assets Resulting From
Operations $5,058 $4,544
===========================================================================================================================
<FN>
(1) Distribution Fees are only incurred on Class B shares.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
[LOGO]
JANUARY 31, 1996
===============================================================================
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES EMERGING GROWTH CAPITAL APPRECIATION
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest Income $3,748 $86 $141
Dividend Income 86 20 851
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 3,834 106 992
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Administrator Fees 118 100 181
Less Administrator Fees Waiver -- -- --
Investment Advisory Fees 442 446 863
Less Investment Advisory Fees Waiver (165) (79) (231)
Sub-Advisory Fees -- -- --
Custodian Fees 8 6 12
Professional Fees 18 15 26
Registration & Filing Fees 10 4 8
Printing Expense 13 5 10
Trustee Fees 4 3 6
Pricing Fees 3 3 5
Distribution Fees(1) 2 4 3
Transfer Agency Fees 35 34 39
Amortization of Organization Costs 3 3 3
Miscellaneous Expenses -- -- 1
- ---------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 491 544 926
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 3,343 (438) 66
- ---------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) From Securities Sold 125 6,404 12,232
Net Change in Unrealized Appreciation
on Investments 6,459 10,258 17,868
- ---------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on
Investments 6,584 16,662 30,100
=====================================================================================================================
Increase in Net Assets Resulting From
Operations $9,927 $16,224 $30,166
=====================================================================================================================
<FN>
(1) Distribution Fees are only incurred on Class B shares.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
===============================================================================
FOR THE YEAR ENDED JANUARY 31
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS WEST VIRGINIA TAX-EXEMPT
PORTFOLIO INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net Investment Income $5,058 $3,319 $1,846 $1,279
Net Realized Gain (Loss) from Securities
Sold -- (8) (3) (157)
Net Change in Unrealized Appreciation
(Depreciation) on Investments -- -- 2,701 (1,781)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM INVESTMENT OPERATIONS 5,058 3,311 4,544 (659)
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income:
Class A (4,935) (3,304) (1,696) (1,198)
Class B (123) (15) (150) (81)
Net Realized Gains
Class A -- -- -- --
Class B -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS: (5,058) (3,319) (1,846) (1,279)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Class A:
Shares Issued 222,222 175,644 13,270 11,418
Shares Issued in Lieu of Cash
Distributions -- -- -- --
Shares Redeemed (214,858) (180,818) (5,221) (3,937)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS A TRANSACTIONS 7,364 (5,174) 8,049 7,481
- ---------------------------------------------------------------------------------------------------------------------------
Class B:
Shares Issued 8,627 831 1,974 1,777
Shares Issued in Lieu of Cash
Distributions 85 8 123 61
Shares Redeemed (3,226) (170) (280) (404)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS B TRANSACTIONS 5,486 669 1,817 1,434
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS 12,850 (4,505) 9,866 8,915
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 12,850 (4,513) 12,564 6,977
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year 77,964 82,477 28,359 21,382
- ---------------------------------------------------------------------------------------------------------------------------
End of Year $90,814 $77,964 $40,923 $28,359
===========================================================================================================================
CAPITAL SHARE TRANSACTIONS:
Class A:
Shares Issued 222,222 175,644 1,365 1,201
Shares Issued in Lieu of Cash
Distributions -- -- -- --
Shares Redeemed (214,858) (180,818) (533) (425)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS A SHARE TRANSACTIONS 7,364 (5,174) 832 776
- ---------------------------------------------------------------------------------------------------------------------------
Class B:
Shares Issued 8,627 831 201 187
Shares Issued in Lieu of Cash
Distributions 85 8 12 6
Shares Redeemed (3,226) (170) (28) (43)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS B SHARE TRANSACTIONS 5,486 669 185 150
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHARE TRANSACTIONS 12,850 (4,505) 1,017 926
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
[LOGO]
JANUARY 31, 1996
===============================================================================
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES EMERGING GROWTH CAPITAL APPRECIATION
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net Investment Income $ 3,343 $ 2,550 $ (438) $ (268) $ 66 $ 179
Net Realized Gain (Loss) from Securities
Sold 125 (216) 6,404 (9,871) 12,232 (8,352)
Net Change in Unrealized Appreciation
(Depreciation) on Investments 6,459 (3,686) 10,258 (494) 17,868 2,516
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM INVESTMENT OPERATIONS 9,927 (1,352) 16,224 (10,633) 30,166 (5,657)
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income:
Class A (3,302) (2,530) -- -- (61) (189)
Class B (41) (20) -- -- -- (1)
Net Realized Gains
Class A -- -- -- -- (1,472) --
Class B -- -- -- -- (25) --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS: (3,343) (2,550) -- -- (1,558) (190)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Class A:
Shares Issued 12,560 38,847 10,791 14,902 30,408 30,455
Shares Issued in Lieu of Cash
Distributions -- -- -- -- -- --
Shares Redeemed (19,904) (8,566) (13,290) (6,355) (29,613) (8,158)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS A TRANSACTIONS (7,344) 30,281 (2,499) 8,547 795 22,297
- -------------------------------------------------------------------------------------------------------------------------
Class B:
Shares Issued 655 393 1,475 707 1,493 394
Shares Issued in Lieu of Cash
Distributions 26 8 -- -- 24 1
Shares Redeemed (50) (51) (292) (119) (82) (31)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS B TRANSACTIONS 631 350 1,183 588 1,435 364
- -------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (6,713) 30,631 (1,316) 9,135 2,230 22,661
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (129) 26,729 14,908 (1,498) 30,838 16,814
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Year 61,524 34,795 35,502 37,000 71,007 54,193
- -------------------------------------------------------------------------------------------------------------------------
End of Year $ 61,395 $ 61,524 $ 50,410 $ 35,502 $ 101,845 $ 71,007
=========================================================================================================================
CAPITAL SHARE TRANSACTIONS:
Class A:
Shares Issued 1,292 4,210 1,057 1,638 2,627 3,087
Shares Issued in Lieu of Cash
Distributions -- -- -- -- -- --
Shares Redeemed (2,072) (939) (1,276) (709) (2,509) (851)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS A SHARE TRANSACTIONS (780) 3,271 (219) 929 118 2,236
- -------------------------------------------------------------------------------------------------------------------------
Class B:
Shares Issued 67 41 138 76 121 40
Shares Issued in Lieu of Cash
Distributions 3 1 -- -- 2 --
Shares Redeemed (5) (6) (27) (14) (7) (3)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CLASS B SHARE TRANSACTIONS 65 36 111 62 116 37
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHARE TRANSACTIONS (715) 3,307 (108) 991 234 2,273
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
FINANCIAL HIGHLIGHTS
===============================================================================
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUE, NET AND UNREALIZED FROM NET VALUE,
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT END OF
OF PERIOD INCOME ON INVESTMENTS INCOME PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
CLASS A
1996 $ 1.00 $ 0.06 $ 0.00 $(0.06) $ 1.00
1995 1.00 0.04 0.00 (0.04) 1.00
1994(1) 1.00 0.00 0.00 0.00 1.00
CLASS B
1996 $ 1.00 $ 0.05 $ 0.00 $(0.05) $ 1.00
1995(2) 1.00 0.04 0.00 (0.04) 1.00
- ---------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
CLASS A
1996 $ 9.36 $ 0.49 $ 0.76 $(0.49) $10.12
1995 10.17 0.46 (0.81) (0.46) 9.36
1994(9) 10.00 0.07 0.17 (0.07) 10.17
CLASS B
1996 $ 9.36 $ 0.47 $ 0.75 $(0.47) $10.11
1995 10.17 0.43 (0.81) (0.43) 9.36
1994(10) 10.07 0.05 0.10 (0.05) 10.17
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
CLASS A
1996 $ 9.09 $ 0.55 $ 1.06 $(0.55) $10.15
1995 10.06 0.51 (0.97) (0.51) 9.09
1994(7) 10.00 0.08 0.06 (0.08) 10.06
CLASS B
1996 $ 9.10 $ 0.53 $ 1.05 $(0.53) $10.15
1995 10.06 0.49 (0.96) (0.49) 9.10
1994(8) 10.01 0.04 0.05 (0.04) 10.06
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Prime Obligations Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(2) Prime Obligations Class B commenced operations on February 7, 1994. All
ratios for the period have been annualized.
(3) Capital Appreciation Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
(4) Capital Appreciation Class B commenced operations on December 31, 1993. All
ratios for the period have been annualized.
(5) Emerging Growth Class A commenced operations on December 1, 1993. All
ratios for the period have been annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
[LOGO]
JANUARY 31, 1996
===============================================================================
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
RATIO OF EXPENSES TO INCOME TO
RATIO OF NET INVESTMENT AVERAGE AVERAGE
NET ASSETS, EXPENSES TO INCOME NET ASSETS NET ASSETS PORTFOLIO
TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- -----------------------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
1996 5.65% $84,660 0.49% 5.50% 0.64% 5.35% N/A
1995 4.15 77,295 0.49 4.08 0.69 3.88 N/A
1994(1) 2.95 82,477 0.49 2.89 0.80 2.58 N/A
CLASS B
1996 5.39% $ 6,154 0.74% 5.15% 0.89% 5.00% N/A
1995(2) 3.95 669 0.74 4.33 0.93 4.14 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
1996 13.66% $36,611 0.75% 5.02% 0.89% 4.88% 43%
1995 (3.38) 26,096 0.75 4.88 1.09 4.54 28
1994(9) 2.43 20,477 0.75 4.18 1.62 3.31 17
CLASS B
1996 13.26% $ 4,312 1.00% 4.78% 1.14% 4.64% 43%
1995 (3.62) 2,263 1.00 4.68 1.34 4.34 28
1994(10) 1.48 935 1.00 3.87 2.14 2.73 17
- -----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
1996 18.14% $60,228 0.83% 5.68% 1.11% 5.40% 28%
1995 (4.48) 61,067 0.83 5.61 1.17 5.27 13
1994(7) 1.39 34,654 0.83 4.64 1.49 3.98 5
CLASS B
1996 17.72% $ 1,167 1.08% 5.39% 1.36% 5.11% 28%
1995 (4.62) 457 1.08 5.34 1.42 5.00 13
1994(8) 0.89 141 1.08 4.47 2.00 3.35 5
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(6) Emerging Growth Class B commenced operations on December 29, 1993.
All ratios for the period have been annualized.
(7) Government Securities Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(8) Government Securities Class B commenced operations on December 31, 1993.
All ratios for the period have been annualized.
(9) West Virginia Tax-Exempt Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(10) West Virginia Tax-Exempt Class B commenced operations on December 17, 1993.
All ratios for the period have been annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
===============================================================================
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
NET ASSET NET REALIZED DISTRIBUTIONS DISTRIBUTIONS NET ASSET
VALUE, NET AND UNREALIZED FROM NET FROM VALUE,
BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT CAPITAL END OF
OF PERIOD INCOME (LOSS) ON INVESTMENTS INCOME GAINS PERIOD
- ---------------------------------------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
CLASS A
1996 $ 7.86 $(0.10) $3.67 $ 0.00 $0.00 $11.43
1995 10.48 (0.06) (2.56) 0.00 0.00 7.86
1994(5) 10.00 0.00 0.48 0.00 0.00 10.48
CLASS B
1996 $ 7.83 $(0.12) $3.65 $ 0.00 $0.00 $11.36
1995 10.48 (0.06) (2.59) 0.00 0.00 7.83
1994(6) 9.77 0.00 0.71 0.00 0.00 10.48
- ---------------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
CLASS A
1996 $ 9.57 $ 0.01 $3.93 $(0.01) $(0.19) $13.31
1995 10.53 0.03 (0.96) (0.03) 0.00 9.57
1994(3) 10.00 0.00 0.53 0.00 0.00 10.53
CLASS B
1996 $ 9.55 $(0.01) $3.90 $ 0.00 $(0.19) $13.25
1995 10.52 0.01 (0.97) (0.01) 0.00 9.55
1994(4) 10.33 0.00 0.19 0.00 0.00 10.52
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Prime Obligations Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(2) Prime Obligations Class B commenced operations on February 7, 1994.
All ratios for the period have been annualized.
(3) Capital Appreciation Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(4) Capital Appreciation Class B commenced operations on December 31, 1993.
All ratios for the period have been annualized
(5) Emerging Growth Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
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JANUARY 31, 1996
===============================================================================
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET INVESTMENT
RATIO OF EXPENSES TOINCOME (LOSS)
RATIO OF NET INVESTMENT AVERAGE TO AVERAGE
NET ASSETS, EXPENSES TO INCOME (LOSS) NET ASSETS NET ASSETS PORTFOLIO
TOTAL END OF AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- -----------------------------------------------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
1996 45.42% $48,090 1.15% (0.92)% 1.32% (1.09)% 117%
1995 (25.00) 34,772 1.15 (0.75) 1.42 (1.02) 126
1994(5) (4.80) 36,670 1.15 (0.83) 1.70 (1.38) 7
CLASS B
1996 45.08% $ 2,320 1.40% (1.19)% 1.57% (1.36)% 117%
1995 (25.29) 730 1.40 (0.98) 1.67 (1.25) 126
1994(6) 7.27 330 1.40 (1.08) 2.15 (1.83) 7
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
CLASS A
1996 41.31% $99,612 1.02% 0.08% 1.27% (0.17)% 119%
1995 (8.84) 70,502 1.02 0.28 1.33 (0.03) 107
1994(3) 5.30 54,022 1.02 0.12 1.51 (0.37) 7
CLASS B
1996 40.88% $ 2,233 1.27% (0.16)% 1.52% (0.41)% 119%
1995 (9.11) 505 1.27 0.02 1.58 (0.29) 107
1994(4) 1.84 171 1.27 0.19 2.01 (0.55) 7
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(6) Emerging Growth Class B commenced operations on December 29, 1993.
All ratios for the period have been annualized.
(7) Government Securities Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(8) Government Securities Class B commenced operations on December 31, 1993.
All ratios for the period have been annualized.
(9) West Virginia Tax-Exempt Class A commenced operations on December 1, 1993.
All ratios for the period have been annualized.
(10) West Virginia Tax-Exempt Class B commenced operations on December 17, 1993.
All ratios for the period have been annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. ORGANIZATION
The Arbor Fund (the "Trust") was organized as a Massachusetts business
trust under a Declaration of Trust dated July 24, 1992 and had no operations
through February 1, 1993, other than those related to organizational matters and
the sale of initial shares to SEI Financial Management Corporation (the
"Administrator"), a wholly-owned subsidiary of SEI Corporation, on October 9,
1992. The Trust is registered under the Investment Company Act of 1940, as
amended, as an open-end management company. The financial statements included
herein relate to the Trust's OVB Family of Funds. The OVB Family of Funds
include the Prime Obligations Portfolio (the "Money Market Portfolio"), Capital
Appreciation Portfolio, Emerging Growth Portfolio (the "Equity Portfolios"),
Government Securities Portfolio and West Virginia Tax-Exempt Income Portfolio
(the "Fixed Income Portfolios"). The financial statements of the remaining
portfolios are presented separately. The assets of each Portfolio are
segregated, and a shareholder's interest is limited to the Portfolio in which
shares are held. The Portfolios are registered to offer two classes of shares:
Class A and Class B (see note 3).
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the significant accounting policies followed by
the Portfolios.
SECURITY VALUATION--
Investments in equity securities which are traded on a national securities
exchange (or reported on NASDAQ national market system) are stated at the last
quoted sales price if readily available for such equity securities on each
business day; other equity securities traded in the over-the-counter market and
listed equity securities for which no sale was reported on that date are stated
at the last quoted bid price. Debt obligations exceeding sixty days to maturity
for which market quotations are readily available are valued at the most
recently quoted bid price. Debt obligations with sixty days or less until
maturity are valued at their amortized cost.
Investment securities held by the Money Market Portfolio are stated at
amortized cost which approximates market value. Under the amortized cost method,
any discount or premium is amortized ratably to the maturity of the security and
is included in interest income.
FEDERAL INCOME TAXES--
It is each Portfolio's intention to continue to qualify as a regulated
investment company for Federal income tax purposes by complying with the
appropriate provisions of the Internal Revenue Code of 1986, as amended.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
25
<PAGE>
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JANUARY 31, 1996
===============================================================================
SECURITY TRANSACTIONS AND RELATED INCOME--
Security transactions are accounted for on the date the security is purchased or
sold (trade date). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on the accrual basis. Costs used in determining
realized gains and losses on the sales of investment securities are those of the
specific securities sold. Purchase discounts and premiums on securities held by
the Fixed Income Portfolios are accreted and amortized to maturity using the
scientific interest method, which approximates the effective interest method.
REPURCHASE AGREEMENTS--
The Portfolios, except the West Virginia Tax-Exempt Income Portfolio, invest in
tri-party repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained in a segregated account by the broker's
custodian bank until maturity of the repurchase agreement. Provisions of the
repurchase agreements require that the market value of the collateral, including
accrued interest thereon, is sufficient in the event of default of the
counterparty. If the counterparty defaults and the value of the collateral
declines or if the counterparty enters an insolvency proceeding, realization
and/or retention of the collateral by the Portfolios may be delayed or limited.
NET ASSET VALUE PER SHARE--
The net asset value per share of each Portfolio is calculated on each business
day. In general, it is computed by dividing the assets of each Portfolio, less
its liabilities, by the number of outstanding shares of the Portfolio.
CLASSES--
Class specific expenses are borne by that class. Income, expenses, and realized
and unrealized gains/losses are allocated to the respective classes of shares on
the basis of their relative daily net assets.
EXPENSES--
Expenses that are directly related to one of the Portfolios are charged directly
to that Portfolio. Other operating expenses of the Fund are prorated to the
portfolios on the basis of relative net assets.
DISTRIBUTIONS--
Distributions from net investment income for the Equity Portfolios are paid to
shareholders in the form of quarterly dividends. Distributions from net
investment income for the Money Market and Fixed Income Portfolios are declared
daily and paid to shareholders on a monthly basis. Any net realized capital
gains on sales of securities are distributed to shareholders at least annually.
The amounts of distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax regulations,
which may
(CONTINUED)
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
differ from those amounts determined under generally accepted accounting
principles. These book/tax differences are either temporary or permanent in
nature. To the extent these differences are permanent, they are charged or
credited to paid-in capital in the period that the difference arises.
$438,000 relating to permanent differences attributable to cumulative net
operating losses of the Emerging Growth Portfolio as of January 31, 1996, has
been reclassified from that portfolio's accumulated net investment losses to
paid-in capital. This reclassification has no effect on net assets or net asset
value per share.
3. INVESTMENT ADVISORY, ADMINISTRATIVE, TRANSFER AGENT, AND DISTRIBUTION
AGREEMENTS:
One Valley Bank, National Association (the "Advisor") serves as investment
advisor to each Portfolio pursuant to an investment advisory agreement (the
"Advisory Agreement") with the Trust. For its services, the Adviser is entitled
to a fee, which is calculated daily and paid monthly, at an annual rate based on
the average daily net assets of each Portfolio as follows: Prime Obligations
Portfolio--.25%, Capital Appreciation Portfolio--.95%, Emerging Growth
Portfolio--.95%, Government Securities Portfolio--.75% and West Virginia
Tax-Exempt Income Portfolio--.45%. The Adviser has agreed to voluntarily waive a
portion of its fee so that the total annual expenses of each portfolio will not
exceed the voluntary expense limitations adopted by the Adviser. In the event
that the total annual expenses of a Portfolio, after reflecting a waiver of all
fees by the Adviser, exceed the specific limitations, the Adviser has agreed to
bear such excess. Fee waivers by the Adviser are voluntary and may be terminated
at any time.
Wellington Management Company (the "Sub-Adviser") serves as the investment
sub-adviser to the Prime Obligations Portfolio pursuant to a sub-advisory
agreement (the "Sub-Advisory Agreement") with the Adviser and the Trust. Under
the Sub-Advisory Agreement, the Sub-Adviser manages the Portfolio, selects
investments, and places all orders for purchases and sales of the Portfolio's
securities, subject to the general supervision of the Trustees of the Trust and
the Adviser. For the services provided and expenses incurred pursuant to the
Sub-Advisory Agreement, the Sub-Adviser is entitled to receive a fee, computed
daily and paid monthly, at the annual rate of .075% of the first $500 million of
"managed assets" and .02% of "managed assets" in excess of $500 million.
"Managed assets" are all of the money market fund assets that the Sub-Adviser
manages for the Trust, including assets of funds other than the Prime
Obligations Portfolio. The fee
27
<PAGE>
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JANUARY 31, 1996
===============================================================================
paid by the Portfolio is based on its proportionate share of "managed assets."
The Trust and the Administrator have entered into an administration
agreement. Under terms of the administration agreement, the Administrator is
entitled to a fee calculated daily and paid monthly at an annual rate of .20% of
the average daily net assets of each Portfolio. There is a minimum annual fee of
$100,000 payable to the Administrator by each Portfolio. The Administrator has
voluntarily agreed to waive a portion of its fee relating to the West Virginia
Tax-Exempt Income Portfolio in order to limit that Portfolio's administration
fee to .20% of its average daily net assets on an annualized basis. The
Administrator also serves as the shareholder servicing agent for the
Trust. Compensation for this service is paid under the administration agreement.
DST Systems, Inc. serves as the transfer agent and dividend disbursing
agent for the Portfolios under a transfer agency agreement with the Trust.
The Trust and SEI Financial Services Company (the "Distributor"), a
wholly-owned subsidiary of SEI Corporation, have entered into a distribution
agreement. The Class B shares of each Portfolio have a distribution plan (the
"Class B Plan"), pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended. As provided in the Distribution Agreement and the Class B
Plan, the Trust will pay a fee, at an annual rate of .25% of each Portfolio's
average daily net assets attributable to Class B shares to the Distributor as
compensation for its services.
4. ORGANIZATIONAL COSTS AND TRANSACTIONS WITH AFFILIATES:
Organizational costs have been capitalized by the Trust and are being amortized
over sixty months beginning with the commencement of operations. In the event
any of the initial shares are redeemed by any holder thereof during the period
that the fund is amortizing its organizational costs, the redemption proceeds
payable to the holder thereof by the Trust will be reduced by the unamortized
organizational costs in the same ratio as the number of initial shares being
redeemed bears to the number of initial shares outstanding at the time of the
redemption. These costs include legal fees of approximately $23,000 for
organizational work performed by a law firm of which an officer of the Trust and
a Trustee of the Trust is a partner.
Certain officers of the Trust are also officers of the Administrator and/or
Distributor. Such officers are paid no fees by the Trust for serving in their
respective roles.
5. INVESTMENT TRANSACTIONS:
The cost of security purchases and the proceeds from the sale of securities,
other than temporary cash investments, during
(CONTINUED)
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
the year ended January 31, 1996 were as follows:
WEST VIRGINIA TAX-
EXEMPT INCOME PORTFOLIO
U.S.
GOVERNMENT
SECURITIES ALL OTHER TOTAL
(000) (000) (000)
---------- ----------- --------
Purchases ....... $ -- $23,310 $23,310
Sales ........... -- 15,024 15,024
GOVERNMENT SECURITIES PORTFOLIO
U.S.
GOVERNMENT
SECURITIES ALL OTHER TOTAL
(000) (000) (000)
---------- ----------- --------
Purchases ....... $13,372 $2,096 $15,468
Sales ........... 14,308 1,357 15,665
EMERGING GROWTH PORTFOLIO
U.S.
GOVERNMENT
SECURITIES ALL OTHER TOTAL
(000) (000) (000)
---------- ----------- --------
Purchases ....... $ -- $52,612 $52,612
Sales ........... -- 54,181 54,181
CAPITAL APPRECIATION PORTFOLIO
U.S.
GOVERNMENT
SECURITIES ALL OTHER TOTAL
(000) (000) (000)
---------- ----------- --------
Purchases ....... $ -- $108,248 $108,248
Sales ........... -- 104,619 104,619
At January 31, 1996, the total cost of securities and the net realized gains or
losses on securities sold for Federal income tax purposes were not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation on investment securities at
January 31, 1996, for each Equity and Fixed Income Portfolio is as follows:
NET
APPRECIATED DEPRECIATED UNREALIZED
SECURITIES SECURITIES APPRECIATION
(000) (000) (000)
----------- ----------- ------------
West Virginia
Tax-Exempt
Income ......... $ 1,340 $ (137) $ 1,203
Government
Securities ..... 3,018 (61) 2,957
Emerging
Growth ......... 13,751 (1,516) 12,235
Capital
Appreciation ... 23,379 (285) 23,094
At January 31, 1996, the following Portfolios had available realized
capital losses to offset future net capital gains through fiscal year ended:
2003 2004
(000) (000)
---- ----
Prime Obligations ................. $ 7 $--
West Virginia Tax-Exempt Income ... 24 141
Government Securities ............. 3 68
Emerging Growth ................... 4,170 --
29
<PAGE>
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JANUARY 31, 1996
===============================================================================
6. CONCENTRATION OF CREDIT RISK:
The Money Market Portfolio invests primarily in money market instruments
maturing in one year or less whose ratings are within the highest ratings
category assigned by a nationally recognized statistical rating organization or,
if not rated, are believed to be of comparable quality. The Fixed Income
Portfolios invest primarily in marketable debt instruments. The market value of
these investments will change in response to interest rate changes and other
factors. During periods of falling interest rates, the values of debt securities
generally rise. Conversely, during periods of rising interest rates the values
of such securities generally decline. The ability of the issuers of the
securities held by these Portfolios to meet their obligations may be affected by
economic and political developments in a specific industry, state or region.
Changes by recognized rating organizations in the ratings of any debt security
and in the ability of an issuer to make payments of interest and principal may
also affect the value of these investments.
30
<PAGE>
U.S. Government Securities Money Fund
Prime Obligations Fund
Investment Adviser:
Capitoline Investment Services Incorporated
The U.S. Government Securities Money Fund and the Prime Obligations Fund (the
"Funds") are money market funds that offer to qualified individual or
institutional customers that have a Cash Advantage Portfolio or Liquid Asset
Manager account with Capitoline Investment Services Incorporated or Crestar Bank
or other institutions having a selling agreement with the Funds' distributor a
convenient means of investing in professionally managed diversified portfolios
of short-term, high quality securities.
THE SHARES OFFERED HEREBY ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING CRESTAR BANK OR ANY OF ITS AFFILIATES OR
CORRESPONDENTS. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE UNITED
STATES GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. The Funds are separate series
of The Arbor Fund. Investors are advised to read this Prospectus and retain it
for future reference. A Statement of Additional Information dated May 31, 1996,
has been filed with the Securities and Exchange Commission and is available
without charge by calling 1-800-342-5734. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
May 31, 1996
PH02/81909.8
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
================================================================================================================================
ANNUAL OPERATING EXPENSES U.S.
(As a percentage of average net assets) Government Prime
Securities Obligations
Money Fund Fund
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Fees (after fee waiver) (1) .06% .04%
12b-1 Fees None None
Other Expenses (after fee waiver) (1) .14% .15%
- --------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after fee waiver) (2) .20% .19%
================================================================================================================================
</TABLE>
(1) The Adviser and the Administrator have agreed to waive, on a voluntary
basis, portions of their respective fees so that total operating expenses
do not exceed .20%. The Adviser and the Administrator each reserves the
right to terminate its waiver at any time in its sole discretion. Absent
such waivers, the advisory fees and other expenses (including the
Administrator's fees) for each Fund would be .28%.
(2) Absent the voluntary fee waivers described above, total operating expenses
would be .37% for the U.S. Government Securities Money Fund and .40% for
the Prime Obligations Fund. Additional information may be found under
"The Adviser," "The Administrator" and "The Distributor."
<TABLE>
<CAPTION>
EXAMPLE
================================================================================================================================
1 yr. 3 yrs. 5 yrs. 10 yrs.
================================================================================================================================
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the end of
each time period:
U.S. Government Securities Money Fund $2 $6 $11 $26
Prime Obligations Fund $2 $6 $11 $26
================================================================================================================================
</TABLE>
The example should not be considered a representation of past or future expenses
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 a
Fund. A person who purchases shares through a financial institution may be
charged separate fees by that institution. Additional information may be found
under "The Adviser" and "The Administrator."
2
<PAGE>
FINANCIAL HIGHLIGHTS The Arbor Fund
The following information has been audited by Price Waterhouse LLP, the Trust's
independent accountants, as indicated in their report dated March 8, 1996 on the
Trust's financial statements as of January 31, 1996 included in the Trust's
Statement of Additional Information under "Financial Statements." Additional
performance information is set forth in the 1996 Annual Report to Shareholders
and is available upon request and without charge by calling 1-800-342-5734. This
table should be read in conjunction with the Trust's financial statements and
notes thereto.
For a Share Outstanding Throughout the Period.
<TABLE>
<CAPTION>
U.S. Government Prime
Securities Money Obligations
Fund Fund
-------------------------------------------------------------
02/01/95 08/01/94(1) 10/25/95(2)
to to to
01/31/96 01/31/95 01/31/96
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning................................ $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations 0.01522
Net Investment Income.................................. 0.05729 0.02508
- ------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations....................... 0.05729 0.02508 0.01522
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends From Net Investment Income................... (0.05729) (0.02508) (0.01522)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (0.05729) (0.02508) (0.01522)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period............................ $ 1.00 $ 1.00 $ 1.00
========================================================================================================================
Total Return.............................................. 5.88% 4.98%* 5.82%*
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000)........................... 514,870 579,422 382,632
========================================================================================================================
Ratios and Supplemental Data:
Ratio of Expenses to Average Net Assets................... 0.20% 0.20%* 0.20%*
Ratio of Expenses to Average Net Assets
(Excluding Fee Waivers)................................... 0.37% 0.38%* 0.40%*
Ratio of Net Investment Income to Average Net
Assets.................................................... 5.72% 4.98%* 5.61%*
Ratio of Net Investment Income to Average Net
Assets (Excluding Fee Waivers)............................ 5.55% 4.80%* 5.41%*
========================================================================================================================
(1) Commenced operations on August 1, 1994.
(2) Commenced operations on October 25, 1995.
* Annualized
</TABLE>
3
<PAGE>
THE FUNDS AND THE TRUST
This Prospectus offers shares of the U.S. Government Securities Money Fund and
the Prime Obligations Fund (the "Funds"), both diversified portfolios. The Funds
are separate investment portfolios of The Arbor Fund (the "Trust"), an open-end
management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each Fund is to provide high current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity. Each Fund seeks to maintain a constant net asset value of $1.00 per
share. There is no assurance that either Fund will achieve its investment
objective or be able to maintain a stable net asset value.
Each Fund also intends to comply with regulations of the Securities and Exchange
Commission (the "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 each Fund's investments.
Under these regulations, each 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 maturities of 397 days or less.
U.S. Government Securities Money Fund
The U.S. Government Securities Money Fund will invest solely in (i) U.S.
Treasury Obligations; (ii) obligations issued or guaranteed as to principal and
interest by the agencies or instrumentalities of the U.S. Government; (iii)
repurchase agreements involving any of the foregoing obligations; and (iv)
shares of registered money market companies that invest in the foregoing.
Prime Obligations Fund
The Prime Obligations Fund will invest in: (i) U.S. Treasury Obligations, (ii)
obligations issued or guaranteed as to principal and interest by the agencies or
instrumentalities of the U.S. Government; (iii) repurchase agreements involving
any of the foregoing obligations; (iv) commercial paper of U.S. or foreign
issuers; (v) short-term corporate obligations of U.S. or foreign issuers; (vi)
certificates of deposit, time deposits and bankers' acceptances of U.S.
commercial banks, foreign branches of such banks and domestic and foreign
branches of foreign banks; (vii) obligations of foreign governments and their
agencies; (viii) obligations of supranational entities; and (ix) custodial
receipts representing investments in component parts of U.S. Treasury
Obligations. The Fund also may purchase the securities of other registered money
market investment companies to the extent permitted by applicable law, and may
purchase bank investment contracts and guaranteed investment contracts in
aggregate amounts up to 5% of its total assets.
The Fund will invest only in those obligations of U.S. and foreign banks that
meet the following quality standards: (a) investments in the obligations of U.S.
banks (including their foreign branches) are limited to those banks having total
assets in excess of $1 billion and subject to regulation by the U.S. Government,
provided, however, that the Fund may invest in certificates of deposit issued by
banks insured by the Federal Deposit Insurance Corporation ("FDIC") having total
assets of less than $1 billion, if the Fund at no time owns more than an
aggregate of $100,000 in principal and interest obligations (or any higher
principal amount or principal and interest that in the future may be fully
covered by FDIC insurance) of any one such issuer; and (b) investments in
obligations of U.S. or foreign branches of foreign banks are limited to U.S.
dollar denominated obligations of foreign banks that, at the time of investment,
have more than $5 billion (or the equivalent in other currencies) in total
assets and have branches or agencies in the United States; provided further that
these obligations are limited to banks headquartered in and to those branches
located in the United Kingdom, France, Germany, Belgium, the Netherlands, Italy,
4
<PAGE>
Switzerland, Denmark, Norway, Sweden, Australia, Japan and Canada. The Fund's
investments in foreign government obligations will be limited to those of the
governments of the foregoing countries and their respective agencies.
GENERAL INVESTMENT POLICIES
Each Fund also may borrow money in amounts up to 33 1/3% of total assets for
temporary or emergency purposes; lend portfolio securities or enter into reverse
repurchase agreements, in either case up to 33 1/3% of total assets; purchase
securities subject to standby commitments or puts, or on a when-issued or
delayed delivery basis; and invest up to 10% of net assets in illiquid
securities.
For additional information regarding permitted investments for the Funds, see
"Description of Permitted Investments and Risk Factors" in this Prospectus and
"Description of Permitted Investments" in the Statement of Additional
Information.
INVESTMENT LIMITATIONS AND
FUNDAMENTAL POLICIES
The investment objectives and the following investment limitations are
fundamental policies of each Fund. Fundamental policies cannot be changed with
respect to a Fund without the consent of the holders of a majority of that
Fund's outstanding shares.
A 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; provided, however,
that the Fund may invest up to 25% of its total assets without regard to this
restriction as permitted by applicable law. Money market funds are subject to
special diversification requirements. See "Description of Permitted Investments
and Risk Factors-Restraints on Investments by Money Market Funds."
2. Purchase any securities which would cause more than 25% of the total assets
of the 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 obligations issued or guaranteed by
the U.S. Government or its agencies and 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 regulations as U.S.
banks. For purposes of this limitation, supranational entities will be
considered to be a separate industry.
3. Make loans, except that each 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 percentages will apply at the time of the purchase of a security.
THE ADVISER
Capitoline Investment Services Incorporated (the "Adviser") acts as investment
adviser to the Funds. The Adviser sets investment policies, and continuously
reviews, supervises and administers each Fund's investment program. The Adviser
discharges its responsibilities subject to the supervision of, and policies
established by, the Trustees of the Trust.
The Adviser, 919 East Main Street, Richmond, Virginia 23219, was established in
1973. As of January 31, 1996, the Adviser's total assets under management were
approximately $11.5 billion, including approximately $1.7 billion in other
open-end investment companies.
The Adviser is a wholly-owned subsidiary of Crestar Bank, which is a wholly
owned subsidiary of Crestar Financial Corporation. Crestar Financial Corporation
is a bank holding company operating in the mid-Atlantic region that had over
$17.4 billion in assets as of January 31, 1996.
5
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The Adviser is entitled to a fee, which is calculated daily and paid monthly, at
an annual rate of .20% of the average daily net assets of the U.S. Government
Securities Money Fund and at an annual rate of .20% of the average daily net
assets of the Prime Obligations Fund. The Adviser and the Administrator have
voluntarily agreed to waive a portion of their respective fees to the extent
necessary so that the total operating expenses of the U.S. Government Securities
Fund do not exceed .20% of the Fund's average daily net assets and the total
operating expenses of the Prime Obligations Fund do not exceed .20% of the
Fund's average daily net assets. The Adviser and the Administrator each reserves
the right to terminate its voluntary fee waivers at any time.
For the fiscal year ended January 31, 1996, the U.S. Government Securities Money
Fund and Prime Obligations Fund paid the Adviser an advisory fee of .06% and
.04%, respectively, of its average daily net assets.
The Glass-Steagall Act restricts the securities activities of banks and banks'
affiliates, such as the Adviser, 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 Funds might have to make other investment advisory arrangements.
THE ADMINISTRATOR AND DISTRIBUTOR
SEI Financial Management Corporation (the "Administrator"), 680 East Swedesford
Road, Wayne, Pennsylvania, 19087, a wholly-owned subsidiary of SEI Corporation
("SEI"), provides the Funds with administrative services, including fund
accounting, 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 .08% of the average daily net assets of each of
the Funds. The Administrator and the Adviser have agreed to waive a portion of
their respective fees to the extent necessary so that the total operating
expenses of the U.S. Government Securities Money Fund and Prime Obligations Fund
do not exceed .20% of average daily net assets. The Administrator and the
Adviser each reserve the right to terminate its voluntary fee waivers at any
time. For the fiscal year ended January 31, 1996, the U.S. Government Securities
Money Fund and the Prime Obligations Fund paid the Administrator an
administration fee of .04% and .03%, respectively, of its average daily net
assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI and an affiliate of the Administrator, serves as the distributor of each
Fund's shares. The Distributor receives no fee for its services.
THE TRANSFER AGENT AND CUSTODIAN
Crestar Bank, 919 East Main Street, Richmond, Virginia 23219 ("Crestar Bank" or
the "Transfer Agent"), serves as the transfer agent and dividend disbursing
agent for the Funds. The Transfer Agent also acts as the shareholder servicing
agent and custodian of the Funds. As custodian, Crestar Bank holds cash,
securities and other assets of the Funds as required by the Investment Company
Act of 1940, as amended (the "1940 Act").
HOW TO PURCHASE SHARES
Each Fund is offered to qualified individuals or institutional customers that
have a Cash Advantage Portfolio or Liquid Asset Manager account with the Adviser
or Crestar Bank or other institutions having a selling agreement with the
Distributor. Financial institutions that are the record owner of shares for the
account of their customers may impose separate fees for account services to
their customers. An institution may arrange with the Transfer Agent for
sub-accounting services and will be charged directly for the cost of such
services.
Shares of each Fund may be purchased or redeemed on days on which the New York
Stock Exchange and the Federal Reserve wire are open for business ("Business
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<PAGE>
Days"). Shares of a Fund may not be purchased by wire on federal holidays
restricting wire transfers. The minimum initial investment is $10,000,000,
unless the Shareholder has, in the opinion of a Fund, adequate intent and
availability of funds to reach a future level of investment of $10,000,000.
There is no minimum for subsequent purchases. Each Fund reserves the right to
reject any purchase order. Share certificates will not be issued.
Fund shares may be purchased by contacting an account executive at the
Shareholder's financial institution ("Account Executive") or by calling
1-800-342-5734.
A telephone order will become effective at the price determined at 1:00 p.m.
Eastern time, and the shares purchased will receive the dividend on Fund shares
declared on that day if such order is placed by 1:00 p.m. Eastern time, and
federal funds are received by the Fund by 4:00 p.m. Eastern time, on that day.
In the case of wire orders, Shareholders whose payments are received in or
converted into federal funds by 1:00 p.m. Eastern time will become effective at
the price determined at 1:00 p.m. Eastern time, and the shares purchased will
receive the dividend declared that day. Shareholders whose payments are received
in or converted into federal funds after 1:00 p.m. Eastern time will begin to
accrue dividends on the following business day.
Initial purchases of Fund shares must be accompanied by an account application
which can be obtained from an Account Executive or by calling 1-800-342-5734.
A purchase order for shares will be executed at a per share price equal to the
net asset value next determined after the purchase order is received and
accepted by a Fund. Net asset value per share is determined at 1:00 p.m. on each
Business Day, based on the amortized cost method described in the Statement of
Additional Information. The net asset value per share of a Fund is determined by
dividing the total market value of the Fund's investments, using amortized cost
valuations, and other assets, less any liabilities, by the total number of
outstanding shares of the Fund.
HOW TO REDEEM SHARES
Shareholders may redeem their shares without charge on any Business Day by
contacting their Account Executive or by calling 1-800-342-5734. Shares will be
redeemed by wire transfer, if requested, or by check. Shares may not be redeemed
by wire on federal holidays restricting wire transfers.
Shares may be redeemed by telephone unless the Shareholder has elected not to
effect telephone redemptions on the account application. Telephone redemption
orders must be placed prior to 1:00 p.m. Eastern time, on any Business Day in
order to be effective on such day. If transfer by wire is requested and the
order is placed prior to 1:00 p.m. Eastern time, the proceeds of the redemption
ordinarily will be transmitted in federal funds on the same day and the shares
will not receive the dividend declared on that day. If the request is received
later than 1:00 p.m. Eastern time, the shares will receive the dividend on a
Fund's shares declared on that day and the proceeds of redemption, if wire
transfer is requested, ordinarily will be transmitted in federal funds on the
next Business Day.
Each Fund reserves the right to refuse any request made by telephone and may
limit the amount involved or the number of telephone redemptions. This procedure
may be modified or terminated at any time by the Fund.
Purchase and redemption orders may be made by telephone. Neither a Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense for
acting upon wire instructions or upon telephone instructions that it reasonably
believes to be genuine. A Fund and the Transfer Agent will each employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, including requiring a form of personal identification prior to acting
7
<PAGE>
upon instructions received by telephone and recording telephone instructions. If
market conditions are extraordinarily active, or other extraordinary
circumstances exist, Shareholders may wish to consider placing an order by other
means.
Other Information Regarding Redemptions
At various times, a Fund may be requested to redeem shares for which it has not
yet received good payment. In such circumstances, proceeds will be forwarded as
soon as payment has been collected for the purchase of such shares, which may
take 10 days or more.
Each Fund reserves the right to redeem, at net asset value, the shares of any
Shareholder if, because of redemptions of shares by or on behalf of the
Shareholder, the account of such Shareholder decreases in value below the
minimum initial purchase amount for the shares. Accordingly, a Shareholder
purchasing shares of a Fund in only the minimum investment amount may be subject
to such involuntary redemption if it thereafter redeems any of these shares.
Before a Fund exercises its right to redeem such shares and to send the proceeds
to the Shareholder, the Shareholder will be given notice that the value of the
shares in its account is less than the minimum amount and will be allowed 60
days to make an additional investment in the Fund in an amount which will
increase the value of the account to at least the minimum initial purchase
amount.
See "Purchase and Redemption of Shares" in the Statement of Additional
Information for examples of when the right of redemption may be suspended.
The purchase and redemption price is expected to remain constant at $1.00 per
share.
PERFORMANCE
From time to time a Fund may advertise its current yield and effective yield.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. No representation can be made concerning actual
future yields.
The "current yield" of a Fund refers to the income generated by an investment in
the Fund over a stated 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" (also called "effective compound 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
current yield because of the compounding effect of this assumed reinvestment.
A Fund may periodically compare performance to other mutual funds tracked by
mutual fund rating services (such as Lipper Analytical Services, Inc.), to broad
groups of comparable mutual funds or to unmanaged indices which may assume
investment of dividends but generally do not reflect deductions for account
level fees.
TAXES
The following summary of 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 Funds or
its Shareholders. Accordingly, Shareholders are urged to consult their tax
advisors regarding specific questions as to federal, state and local income
taxes. State and local tax consequences of an investment in a Fund may differ
from the federal income tax consequences described below. Additional information
concerning taxes is set forth in the Statement of Additional Information.
Tax Status of the Funds
A Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other funds. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies as defined under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so
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<PAGE>
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) that it distributes to Shareholders.
Tax Status of Distributions
Each Fund will distribute all of its net investment income (including, for this
purpose, net short-term capital gains) to Shareholders. Dividends from net
investment company taxable income are taxable to Shareholders as ordinary income
(whether received in cash or in additional shares) and will not qualify for the
corporate dividends-received deduction. Distributions of net capital gains are
taxable to Shareholders as long-term capital gains, regardless of the length of
time a Shareholder has held its shares. Each Fund will provide annual reports to
Shareholders of the federal income tax status of all distributions.
Dividends declared by a Fund in October, November or December of any year and
payable to Shareholders of record on a date in that month will be deemed to have
been paid by the Fund and received by the Shareholders in the year declared if
paid by the Fund at any time during the following January.
Income received on direct U.S. Government obligations is exempt from tax at the
state level when received directly and may be exempt, depending on the state,
when received by a Shareholder from a Fund provided certain conditions are
satisfied. Interest received on repurchase agreements normally is not exempt
from state taxation. Each Fund will inform Shareholders annually 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 a Fund is considered tax
exempt in their particular states.
A Fund may make investments in securities (such as STRIPS or zero coupon
obligations) that bear "original issue discount" or "acquisition discount". The
Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because each Fund distributes
all of its net investment income to its Shareholders, a Fund may have to sell
portfolio securities to distribute such imputed income which may occur at a time
when the Adviser would not have chosen to sell such securities and which may
result in a taxable gain or loss.
Each Fund intends to make sufficient distributions each calendar year to avoid
liability for federal excise tax.
A sale, exchange or redemption of a Fund's shares is a taxable event to the
Shareholder.
Income that a Fund derives from obligations of foreign issuers may be subject to
foreign withholding taxes. A Fund will not be able to elect to treat
Shareholders as having paid their proportionate share of such foreign taxes.
GENERAL INFORMATION
The Trust
The Trust is an open-end management investment company that has diversified and
non-diversified portfolios. The Trust is organized as a Massachusetts business
trust under a Declaration of Trust dated July 24, 1992. The Declaration of Trust
permits the Trust to offer separate portfolios of shares and different classes
of shares within each portfolio.
All consideration received by the Trust for shares of any portfolio and all
assets of such portfolio belong to that portfolio and are subject to liabilities
related thereto.
The Trust 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 and registering the
shares under federal and state securities laws, pricing, insurance expenses,
litigation and other extraordinary expenses, brokerage costs, interest charges,
taxes and organization expenses.
Trustees of the Trust
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The management and affairs of the Trust are supervised by the Trustees under the
laws of 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 the Shareholder of record to one vote. 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.
Reporting
The Trust issues unaudited financial information semiannually 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 an Account Executive.
Dividends
Substantially all of the net investment income (exclusive of capital gains) of
each Fund is distributed in the form of periodic dividends declared daily and
distributed monthly to Shareholders. Currently, capital gains of a Fund, if any,
will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the Shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to their Account Executive at least 15 days prior to the distribution.
Counsel and Independent Accountants
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Price Waterhouse LLP
serves as the independent accountants of the Trust.
DESCRIPTION OF PERMITTED
INVESTMENTS AND RISK FACTORS
The following is a description of the permitted investment practices for one or
more of the Funds, and the associated risk factors:
BANKERS' ACCEPTANCES - Bankers' acceptances are bills of exchange or time drafts
drawn on and accepted by a commercial bank. Bankers' acceptances are used by
corporations to finance the shipment and storage of goods. 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 a term used to describe unsecured
short-term promissory notes issued by banks, municipalities, corporations and
other entities. Maturities on these issues vary from a few to 270 days.
EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS - Eurodollar bank obligations are U.S.
dollar denominated certificates of deposit or time deposits issued outside the
United States by foreign branches of U.S. banks or by foreign banks. Yankee
dollar obligations are U.S. dollar denominated obligations issued in the United
States by foreign banks.
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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. An illiquid security includes a demand instrument
with a demand notice period exceeding seven days, where there is no secondary
market for such security, and repurchase agreements with maturities over seven
days in length.
OBLIGATIONS OF SUPRANATIONAL ENTITIES - Supranational entities are entities
established through the joint participation of several governments, and include
the Asian Development Bank, the Inter-American Development Bank, International
Bank for Reconstruction and Development (World Bank), African Development Bank,
European Economic Community, European Investment Bank and the Nordic Investment
Bank.
RECEIPTS - Receipts are sold as zero coupon securities which means that they are
sold at a substantial discount and redeemed at face value at their maturity date
without interim cash payments of interest or principal. This discount is
accreted over the life of the security, and such accretion will constitute the
income earned on the security for both accounting and tax purposes. Because of
these features, such securities may be subject to greater interest rate
volatility than interest paying investments.
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 of the other party defaults on its obligations and the Fund
is delayed or prevented from exercising its right to dispose of the collateral
or if the Fund realizes a loss on the sale of the collateral. 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 acquire only obligations
that present minimal credit risk 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 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 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. In the case of taxable money market funds, investments in
second tier securities are subject to further constraints in that (i) no more
than 5% of a money market fund's assets may be invested in second tier
securities and (ii) any investment in securities of any one such issuer is
limited to the greater of 1% of the money market fund's total assets or $1
million. However, a taxable money market fund may not purchase securities of any
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies of instrumentalities) if, as a result, more than 5% of the total assets
of the Fund would be invested the securities of one issuer. A taxable money
market fund may also hold more than 5% of its assets in first tier securities of
a single issuer for three "business days" (that is, any day other than a
Saturday, Sunday or customary business holiday).
RESTRICTED SECURITIES - Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933,
as amended, or an exemption from registration.
REVERSE REPURCHASE AGREEMENTS Reverse repurchase agreements are agreements by
which a Fund sells securities to financial institutions and simultaneously
11
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agrees to repurchase those securities at a mutually agreed-upon date and price.
At the time a Fund enters into a reverse repurchase agreement, the Fund will
place liquid assets having a value equal to the repurchase price in a segregated
custodial account and monitor this account to ensure equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by a Fund may decline below the price at which the Fund
is obligated to repurchase the securities. Reverse repurchase are considered to
be borrowings by a Fund under the 1940 Act.
SECURITIES LENDING - In order to generate additional income, a 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. A 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.
SECURITIES OF FOREIGN ISSUERS - There are certain risks connected with investing
in foreign securities. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting requirements, the
possibility that there will be less information on such securities and their
issuers available to the public, the difficulty of obtaining or enforcing court
judgments abroad, restrictions on foreign investments in other jurisdictions,
difficulties in effecting repatriation of capital invested abroad, and
difficulties in transaction settlements and the effect of delay on Shareholder
equity. Foreign securities may be subject to foreign taxes, and may be less
marketable than comparable U.S. securities.
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 a 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 of reducing the yield otherwise payable on the underlying security. A
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 are considered to be illiquid
securities.
U.S. GOVERNMENT AGENCIES - Obligations issued or guaranteed by agencies of the
U.S. Government and obligations issued or guaranteed by instrumentalities of the
U.S. Government. 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.
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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.
A Fund will maintain with the custodian a separate account with liquid high
grade debt securities or cash in an amount at least equal to these commitments.
The interest rate realized on these securities is fixed as of the purchase date
and no interest accrues to a Fund before settlement. These securities are
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 a Fund generally purchases securities on a when- issued or
forward commitment basis with the intention of actually acquiring securities for
its portfolio, a Fund may dispose of a when-issued security or forward
commitment prior to settlement if it deems appropriate.
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<TABLE>
TABLE OF CONTENTS
<S> <C>
EXPENSE SUMMARY................................................................................................. 2
ANNUAL OPERATING EXPENSES....................................................................................... 2
FINANCIAL HIGHLIGHTS............................................................................................ 3
THE FUNDS AND THE TRUST......................................................................................... 4
INVESTMENT OBJECTIVE AND POLICIES............................................................................... 4
INVESTMENT LIMITATIONS AND
FUNDAMENTAL POLICIES............................................................................................ 5
THE ADVISER..................................................................................................... 5
THE ADMINISTRATOR AND DISTRIBUTOR............................................................................... 6
THE TRANSFER AGENT AND CUSTODIAN................................................................................ 6
HOW TO PURCHASE SHARES.......................................................................................... 6
HOW TO REDEEM SHARES............................................................................................ 7
PERFORMANCE..................................................................................................... 8
TAXES........................................................................................................... 8
GENERAL INFORMATION............................................................................................. 9
DESCRIPTION OF PERMITTED INVESTMENTS
AND RISK FACTORS................................................................................................ 10
</TABLE>
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<PAGE>
Trust: The Arbor Fund
Funds: U.S. Government Securities Money Fund
Prime Obligations Fund
Investment Adviser: Capitoline Investment Services Incorporated
Statement of Additional Information
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information about the activities and operations of the U.S.
Government Securities Money Fund (the "Fund"), a separate series of The Arbor
Fund (the "Trust"). This Statement of Additional Information should be read in
conjunction with the Fund's Prospectus dated May 31, 1996. The Prospectus may be
obtained by calling 1-800-342-5734.
TABLE OF CONTENTS
THE FUNDS AND THE TRUST.....................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS........................................S-2
INVESTMENT LIMITATIONS......................................................S-7
NON-FUNDAMENTAL POLICIES....................................................S-8
THE ADVISER.................................................................S-9
THE ADMINISTRATOR...........................................................S-9
THE DISTRIBUTOR............................................................S-10
TRUSTEES AND OFFICERS OF THE TRUST.........................................S-10
COMPUTATION OF YIELD.......................................................S-13
CALCULATION OF TOTAL RETURN................................................S-13
PURCHASE AND REDEMPTION OF SHARES..........................................S-14
DETERMINATION OF NET ASSET VALUE...........................................S-15
TAXES......................................................................S-15
FUND TRANSACTIONS..........................................................S-17
TRADING PRACTICES AND BROKERAGE............................................S-17
DESCRIPTION OF SHARES......................................................S-19
SHAREHOLDER LIABILITY......................................................S-19
LIMITATION OF TRUSTEES' LIABILITY..........................................S-19
5% SHAREHOLDERS............................................................S-19
EXPERTS....................................................................S-20
FINANCIAL STATEMENTS.......................................................S-20
May 31, 1996
<PAGE>
THE FUNDS AND THE TRUST
The Funds are a separate series of The Arbor Fund (the "Trust"). The Trust is an
open-end management investment company established under Massachusetts law as a
"Massachusetts business trust" under an Agreement and Declaration of Trust dated
as of July 24, 1992 (the "Declaration of Trust"). 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. Each share of each
portfolio represents an equal proportionate interest in that portfolio. See
"Description of Shares". This Statement of Additional Information relates only
to the U.S. Government Securities Money Fund and the Prime Obligations Fund
(each a "Fund" and collectively the "Funds").
DESCRIPTION OF PERMITTED INVESTMENTS
Bank Investment Contracts ("BICs")
BICs are contracts issued by U.S. banks and savings and loans institutions.
Pursuant to such contracts, the Prime Obligations Fund makes cash contributions
to a deposit fund of the general account of the bank or savings and loan
institution. The bank or savings and loan institution then credits to the Fund
on a monthly basis guaranteed interest at either a fixed, variable or floating
rate. A BIC provides that this guaranteed interest will not be less than a
certain minimum rate. A BIC is a general obligation of the issuing bank or
savings and loan institution and not a separate account. The purchase price paid
for a BIC becomes part of the general assets of the issuer, and the contract is
paid at maturity from the general assets of the issuer.
BICS are generally not assignable or transferable without the permission of the
issuing bank or savings and loan institution. For this reason, an active
secondary market in BICs currently does not exist. Therefore, BICs are
considered to be illiquid investments. The Fund may invest up to an aggregate
amount of 5% of its total assets in BICs and guaranteed investment contracts.
Bank Obligations
The Prime Obligations Fund is not prohibited from investing in obligations of
banks that are clients of SEI Corporation ("SEI"). However, the purchase of
shares of the Fund by such banks or by their customers will not be a
consideration in determining which bank obligations the Fund will purchase. The
Fund will not purchase obligations of the Adviser.
Demand Instruments
Certain instruments may entail a demand feature that permits the holder to
demand payment of the principal amount of the instrument. Demand instruments
include variable rate demand notes. Each Fund may invest in demand instruments.
Foreign Securities
The Prime Obligations Fund may invest in certain U.S. dollar denominated
obligations or securities of foreign issuers. Permissible investments for the
Fund may consist of obligations of foreign branches of U.S. banks and U.S. or
foreign branches of foreign banks; provided further that these obligations are
limited to banks headquartered in and to those branches located in the United
Kingdom, France, Germany, Belgium, the Netherlands, Italy, Switzerland, Denmark,
Norway, Sweden, Australia, Japan and Canada.
Foreign securities may subject the Fund 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
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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 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 commissions 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.
Government National Mortgage Association ("GNMA") Certificates
Each Fund may invest in securities issued by GNMA, a wholly-owned U.S.
Government corporation that guarantees the timely payment of principal and
interest. The market value and interest yield of these instruments 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. GNMA certificates consist of underlying mortgages with a maximum
maturity of 30 years. However, due to scheduled and unscheduled principal
payments, GNMA certificates 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 GNMA pool. The scheduled monthly interest and principal payments
relating to mortgages in the pool will be "passed through" to investors. GNMA
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 GNMA certificates may offer yields higher
than those available from other types of U.S. Government securities, GNMA
certificates 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 a GNMA certificate 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 GNMA
certificate originally purchased at a premium to decline in price to its par
value, which may result in a loss.
Guaranteed Investment Contracts ("GICs")
GICs are contracts issued by U.S. insurance companies. Pursuant to such
contracts, the Prime Obligations Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
to the Fund on a monthly basis guaranteed interest at either a fixed, variable
or floating rate. A GIC provides that this guaranteed interest will not be less
than a certain minimum rate. A GIC is a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for a GIC
becomes part of the general assets of the issuer, and the contract is paid at
maturity from the general assets of the issuer.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance company. For this reason, an active secondary market in GICs
does not currently exist and GICs are considered to be illiquid investments. The
Fund may invest not more than 5% of its total assets in GICs and BICs.
Investment Company Shares
Each Fund may invest in shares of other investment companies (including other
money market mutual funds), to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur fees
that are separate from those fees incurred directly by the Fund. The Fund's
purchase of such investment company securities results in the layering of
expenses, such that shareholders would indirectly bear a proportionate share of
the operating expenses of such investment companies,
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including advisory fees, in addition to paying Fund expenses. Under
applicable regulations, the Fund is prohibited from acquiring the securities of
another investment company if, as a result of such acquisition: (1) the Fund
owns more than 3% of the total voting stock of the other company; (2) securities
issued by any one investment company represent more than 5% of the Fund's total
assets; or (3) securities (other than treasury stock) issued by all investment
companies represent more than 10% of the total assets of the Fund. See also
"Investment Limitations".
Put Transactions (Standby Commitments)
Each Fund reserves the right to engage in put transactions. The Adviser has the
authority to purchase securities at a price that would result in a yield to
maturity lower than that generally offered by the seller at the time of purchase
when the Funds 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 "put" or "standby commitment". The Funds' ability to put
the securities depends on the writer's ability to pay for the securities at the
time the Funds exercise the put. The Funds will engage in put transactions only
with institutions that the Adviser believes present minimal credit risks, and
the Adviser will use its best efforts to determine initially and continue to
monitor the financial strength of the sellers of the options in accordance with
credit guidelines adopted by the Trust's Board of Trustees. In the event that
any writer is unable to honor a put for financial reasons, the Funds would be
general creditors (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 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 Funds 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.
The 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 Funds.
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 Funds could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Funds, the Funds could, of course, sell the 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 the
Funds may purchase subject to a put or a standby commitment but the amount paid
directly or indirectly for premiums on all puts and standby commitments
outstanding will not exceed 0.5% of the Funds' total assets calculated
immediately after any such put is acquired.
The Funds will consider the maturity of a security subject to a put to be the
first date on which the Funds have the right to demand payment from the writer,
even though the final maturity of the security will ordinarily be later than
such date.
Repurchase Agreements
Each Fund may enter into repurchase agreements with primary securities dealers
recognized by the Federal Reserve Bank of New York or with national member banks
as defined in Section 3(d)(1) of the Federal Deposit Insurance Act, as amended.
The repurchase agreement will have an agreed-upon price (including principal and
interest) and an agreed-upon repurchase 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
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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.
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 Adviser, or its designated agent,
monitors compliance with this requirement. Under all repurchase agreements
entered into by the Funds, the Custodian or its agent must take possession of
the underlying collateral. However, if the seller defaults, the Funds 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
Bankruptcy Code provides protection for proceedings, the Funds may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Funds are treated as unsecured creditors and required to
return the underlying security to the seller's estate.
Restricted and Illiquid Securities
Each Fund may to the extent consistent with its investment policies invest in
restricted securities that are securities in which the Funds may otherwise
invest as provided in the Prospectus or this Statement of Additional
Information. The Funds may invest up to 10% of its net assets in illiquid
securities, including restricted securities other than Section 4(2) commercial
paper. The Funds may invest in Section 4(2) commercial paper. Section 4(2)
commercial paper is issued in reliance on an exemption from registration under
Section 4(2) of the Act and is generally sold to institutional investors who
purchase for investment. Any resale of such commercial paper must be in an
exempt transaction, usually to an institutional investor through the issuer or
investment dealers who make a market in such commercial paper. The Trust
believes that Section 4(2) commercial paper is liquid to the extent it meets the
criteria established by the Board of Trustees of the Trust. The Trust intends to
treat such commercial paper as liquid and not subject to the investment
limitations applicable to illiquid securities or restricted securities.
Securities Lending
Each Fund will normally pay lending fees to broker/dealers in connection with
securities loans, and related expenses from the interest earned on invested
collateral. Investments made with this collateral are considered to be assets of
the Funds and must comply with the Funds' investment limitations. Any securities
loan may be terminated by either party upon reasonable notice to the other
party. The Funds may use the Distributor or a broker/dealer affiliate of the
Adviser as a broker in these transactions. The Funds may lend securities in an
amount up to 33 1/3% of its total assets.
Separately Traded Interest and Principal Securities ("STRIPS")
Each Fund may invest in STRIPS, which are component parts of U.S. Treasury
Securities traded through the Federal Book-Entry System. The Adviser will
purchase only STRIPS that it determines are liquid or, if illiquid, do not
violate the Funds' investment policy concerning investments in illiquid
securities. Consistent with Rule 2a-7, the Adviser will purchase for the Funds
only those STRIPS that have a remaining maturity of 397 days or less; therefore,
the Funds currently may purchase only interest component parts of U.S. Treasury
securities. While there is no limitation on the percentage of a Funds' assets
that may be comprised of STRIPS, the Adviser will monitor the level of such
holdings to avoid the risk of impairing shareholders' redemption rights and of
deviations in the value of shares of the Funds.
Variable and Floating Rate Obligations
The Funds may invest in variable rate obligations and floating rate obligations
(together, "adjustable interest rate obligations"). A variable rate obligation
is one whose terms provide for the adjustment of its interest
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rate on set dates and which, upon such adjustment, can reasonably be expected to
have a market value that approximates its par value; the degree to which a
variable rate obligation's market value approximates its par value will depend
on the frequency of the readjustment of the obligation's interest rate and the
length of time that must elapse before the next readjustment. A floating rate
obligation is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Although there may be no active secondary market with respect to a particular
variable or floating rate obligation purchased by a Fund, the Funds may seek to
resell the obligation at any time to a third party. The absence of an active
secondary market, however, could make it difficult for the Funds to dispose of a
variable or floating rate obligation in the event the issuer of the obligation
defaulted on its payment obligations, and the Funds could, as a result or for
other reasons, suffer a loss to the extent of the default. In addition, a
variable or floating rate demand obligation with a demand notice exceeding seven
days may be considered illiquid if there is no secondary market for such
securities. Variable or floating rate obligations may be secured by bank letters
of credit.
For the Funds, variable and floating rate obligations will be deemed to have
maturities as follows:
1. A variable rate obligation, the principal amount of which
is scheduled on the face of the instrument to be paid in thirteen
months or less, will be deemed by the Funds to have a maturity
equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate obligation that is subject to a demand
feature will be deemed by the Funds to have a maturity equal to the
longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount
can be recovered through demand.
3. A floating rate obligation that is subject to a demand
feature will be deemed by the Funds to have a maturity equal to the
period remaining until the principal amount can be recovered
through demand.
As used above, an obligation is "subject to a demand feature" where the Funds
are entitled to receive the principal amount of the obligation either at any
time on no more than thirty days' notice or at specified intervals not exceeding
thirteen months and upon no more than thirty days notice.
Each Fund may invest in variable rate master demand notes, which may or may not
be backed by bank letters of credit. These variable rate obligations 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.
Zero Coupon Obligations
Zero coupon obligations are debt securities that do not bear any interest, but
instead are issued at a deep discount from par. The value of a zero coupon
obligation increases over time to reflect the interest accreted. Such
obligations will not result in the payment of interest until maturity, and will
have greater price volatility than similar securities that are issued at par and
pay interest periodically. The Funds currently intend to invest no more than 5%
of its net assets in zero coupon obligations.
DESCRIPTION OF RATINGS
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Description of Commercial Paper Ratings
The following descriptions are summaries of published ratings.
Commercial paper rated A by Standard & Poor's Corporation ("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 + and 2, 1 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 reflect a safety regarding timely
payment but not as high as A-1.
Commercial paper issues rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's") are judged by Moody's to be of the "highest" quality and
"higher" quality respectively on the basis of relative repayment capacity.
The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by
Fitch Investors Service, 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 &
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, Inc. ("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.
Obligations rated A2 are supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
INVESTMENT LIMITATIONS
Fundamental Policies
Each Fund is subject to a number of fundamental investment restrictions that may
be changed only by a vote of a majority of the outstanding shares of the Funds.
A "majority of the outstanding shares" of the Funds means the affirmative vote,
at a meeting of shareholders duly called, of the lesser of (a) 67% or more of
the votes of shareholders of the Funds present at a meeting at which the holders
of more than 50% of the votes attributable to shareholders of record of the
Funds are represented in person or by proxy, or (b) the holders of more than 50%
of the outstanding votes of shareholders of the Funds. The following investment
limitations are in addition to those set forth in the Funds' Prospectus.
Pursuant to these investment restrictions, the Funds will not:
1. Invest in companies for the purpose of exercising control.
2. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding one-third 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 Funds 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 solely to facilitate the orderly sale of portfolio
securities to
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accommodate heavy redemption requests if they should occur and is not for
investment purposes. All borrowings will be repaid before making additional
investments and any interest paid on such borrowings will reduce income.
3. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (2) above in aggregate amounts not to exceed 10% of
total assets taken at current value at the time of the incurrence of such
loan, except as permitted with respect to securities lending or reverse
repurchase agreements.
4. Purchase or sell real estate, real estate limited partnership interests,
commodities or commodities contracts. However, subject to its permitted
investments, the Funds may invest in companies that invest in real estate,
commodities or commodities contracts and the Prime Obligations Fund may
purchase commodities contracts relating to financial futures contracts and
options on such contracts.
5. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Funds may obtain short-term credits
as necessary for the clearance of security transactions; this limitation
shall not prohibit short sales "against the box".
6. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter under federal securities laws in selling a Fund
security.
7. Purchase securities of other investment companies, except as permitted by
the 1940 Act, and the rules and regulations thereunder.
8. Issue senior securities (as defined in the Investment Company Act of 1940,
as amended (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.
Non-Fundamental Policies
The following investment limitations of the Funds are non-fundamental and may be
changed by the Trust's Board of Trustees without shareholder approval.
1. The Funds may not invest in warrants.
2. The Funds may not invest in illiquid securities in an amount exceeding, in
the aggregate, 10% of its net assets.
3. The Funds may not 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 adviser of the Trust owns beneficially more than
0.5% of the shares or securities of such issuer and all such officers,
trustees, partners and directors owning more than 0.5% of such shares or
securities together own more than 5% of such shares or securities.
4. The Funds may not invest in interests in oil, gas or other mineral
exploration or development programs and oil, gas or mineral leases.
5. A Fund may not purchase securities of any company which has (with
predecessors) a record of less than three years continuing operations if,
as a result more than 5% of total assets (taken at fair market value) of
the Fund would be invested in such securities, except obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
municipal securities
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which are rated by at least two nationally recognized bond rating services.
This restriction shall not apply to investments a Fund may make in
asset-backed securities and in other investment companies, as described in
the appropriate Prospectus.
Except as specifically noted above, the foregoing percentages will apply at the
time of the purchase of a security and shall not be considered violated unless
an excess occurs or exists immediately after and as a result of a purchase of
such security.
THE ADVISER
The Trust and Capitoline Investment Services Incorporated ("Capitoline" or the
"Adviser") have entered into an advisory agreement (the "Advisory Agreement").
The Advisory Agreement provides that the Adviser 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 Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any Fund (including amounts payable to the Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by any jurisdiction in which shares of the Fund
are qualified for offer and sale, the Adviser will bear the amount of such
excess.
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 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 each Fund, on
not less than 30 days' nor more than 60 days' written notice to the Adviser, or
by the Adviser on 60 days' written notice to the Trust.
For the fiscal years ended January 31, 1995 and January 31, 1996, the Funds paid
the following advisory fee:
<TABLE>
<CAPTION>
================================================================================================================================
Fund Fees Paid (000) Fee Waivers (000)
-----------------------------------------------------------------------------------------
1995 1996 1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities $150 $236 $402 $207
Money Fund
- --------------------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund * $44 * $47
================================================================================================================================
</TABLE>
* Not in operation during such period.
THE ADMINISTRATOR
SEI Financial Management Corporation serves as administrator (the
"Administrator") to the Funds pursuant to an Administration Agreement (the
"Administration Agreement") with 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 a Fund 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.
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The Administration Agreement shall remain in effect for an initial period of
four years and thereafter shall continue in effect for successive two-year
periods subject to annual review by the Trustees.
The Administrator, a wholly owned subsidiary of SEI Corporation ("SEI"), was
organized as a Delaware corporation in 1969 and has its principal business
offices at 680 East Swedesford Road, Wayne, PA 19087-1658. Alfred P. West, Jr.,
Henry H. Greer and Carmen V. Romeo constitute the Board of Directors of the
Administrator. Mr. West is the Chairman of the Board and Chief Executive Officer
of the Administrator and of SEI. Mr. Greer is the President and Chief Operating
Officer of the Administrator and of SEI. SEI and its subsidiaries 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 also serves as administrator to the following
other mutual funds: The Achievement Funds Trust, The Advisors' Inner Circle
Fund, ARK Funds, Bishop Street Funds, Conestoga Family of Funds, CoreFunds,
Inc., CrestFunds, Inc., CUFUND, First American Funds, Inc., First American
Investment Funds, Inc., Insurance Investment Products Trust, Inventor Funds,
Inc., Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The
PBHG Funds, Inc., The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone
Funds, STI Classic Funds and STI Classic Variable Trust.
THE DISTRIBUTOR
SEI Financial Services Company serves as distributor (the "Distributor") to the
Trust pursuant to a distribution agreement (the "Distribution Agreement"). The
Distribution Agreement shall be reviewed and ratified at least annually (i) by
the Trust's Trustees or by the vote of a majority of the outstanding shares of
the Trust, and (ii) by the vote of a majority of the Trustees of the Trust who
are not parties to the Distribution Agreement or interested persons (as defined
in the 1940 Act) of any party to the Distribution Agreement, cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement will terminate in the event of any assignment, as defined in the 1940
Act, and is terminable with respect to a particular Fund on not less than 60
days' notice by the Trust's Trustees, by vote of a majority of the outstanding
shares of such Fund or by the Distributor.
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.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees and executive officers
of the Trust 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
executive officer is SEI Financial Management Corporation, 680 East Swedesford
Road, Wayne, PA 19087-1658. Certain officers of the Trust also serve as Trustees
and/or officers of The Achievement Funds Trust, The Advisors' Inner Circle Fund,
The Arbor Fund, ARK Funds, Bishop Street Funds, Conestoga Family of Funds,
CoreFunds, Inc., CrestFunds, Inc., CUFUND, First American Funds, Inc., First
American Investment Funds, Inc., Insurance Investment Products Trust, Inventor
Funds, Inc., Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust,
The PBHG Funds, Inc., The Pillar Funds, Rembrandt Funds(R), 1784 Funds, SEI
Daily Income Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid
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Asset Trust, SEI Tax Exempt Trust, Stepstone Funds, STI Classic Funds and STI
Classic Variable Trust, each of which is an open-end management investment
company.
ROBERT A. NESHER - Trustee* - Date of Birth: 8/17/46. 8 South Street,
Kennebunkport, ME 04046. Retired since 1994. Director, Executive Vice President
of SEI Corporation (1986-1994). Director and Executive Vice President of SEI and
the Administrator and the Distributor (1981-1994).
JOHN T. COONEY - Trustee** - Date of Birth: 1/20/27. 569 N. Post Oak Lane,
Houston, TX 77024. Retired since 1992. Formerly Vice Chairman of Ameritrust
Texas N.A. (1989-1992), and MTrust Corp. (1985-1989).
WILLIAM M. DORAN - Trustee* - Date of Birth: 5/26/40. 2000 One Logan
Square, Philadelphia, PA 19103. Partner of Morgan, Lewis & Bockius LLP (law
firm). Counsel to SEI, the Trust, Administrator and Distributor (1990-present).
Director and Secretary of SEI.
FRANK E. MORRIS - Trustee** - Date of Birth: 12/30/23 . 105 Walpole Street,
Dover, MA 02030. Retired since 1990. Peter Drucker Professor of Management,
Boston College since 1989. President, Federal Reserve Bank of Boston
(1968-1988).
ROBERT A. PATTERSON - Trustee** - Date of Birth: 11/5/17. 208 Old Main,
University Park, PA 16802. Pennsylvania State University, Senior Vice President,
Treasurer (Emeritus). Financial and Investment Consultant, Professor of
Transportation (1984-present). Vice President-Investments, Treasurer, Senior
Vice President (Emeritus) (1982-1984). Director, Pennsylvania Research Corp.
Member and Treasurer, Board of Trustees of Grove City College.
GENE PETERS - Trustee** - Date of Birth: 6/3/29. 943 Oblong Road,
Williamstown, MA 01267. Private investor from 1987 to present. Vice President
and Chief Financial Officer, Western Company of North America (petroleum service
company) (1980-1986). President of Gene Peters and Associates (import company)
(1978-1980). President and Chief Executive Officer of Jos. Schlitz Brewing
Company before 1978.
JAMES M. STOREY - Trustee** - Date of Birth: 4/12/31. Ten Post Office
Square South, Boston, MA 02109. Retired since 1993. Formerly Partner of Dechert
Price & Rhoads (law firm).
DAVID G. LEE - President, Chief Executive Officer - Date of Birth: 4/16/52.
Senior Vice President of the Administrator and Distributor since 1993. Vice
President of the Administrator and Distributor (1991-1993). President, GW Sierra
Trust Funds before 1991.
SANDRA K. ORLOW - Vice President, Assistant Secretary - Date of Birth:
10/18/53. Vice President and Assistant Secretary of SEI, the Administrator and
the Distributor since 1983.
KEVIN P. ROBINS - Vice President, Assistant Secretary - Date of Birth:
4/15/61. Senior Vice President and General Counsel of SEI, the Administrator and
the Distributor, and Assistant Secretary of SEI since 1994. Secretary of the
Administrator and the Distributor since 1994. Vice President and Assistant
Secretary of SEI, the Administrator and the Distributor (1992-1994). Associate,
Morgan, Lewis & Bockius LLP (law firm) prior to 1992.
JEFFREY A. COHEN, CPA - Controller, Chief Financial Officer - Date of
Birth: 4/22/61. Vice President, International and Domestic Funds Accounting, SEI
Corporation since 1991. Audit Manager, Price Waterhouse prior to 1991.
KATHRYN L. STANTON - Vice President, Assistant Secretary - Date of Birth:
11/18/58. Vice President and Assistant Secretary of SEI, the Administrator and
the Distributor since 1994. Associate, Morgan, Lewis & Bockius LLP (law firm)
(1989-1994).
S-11
<PAGE>
JOSEPH M. LYDON - Vice President, Assistant Secretary - Date of Birth:
9/27/59. Director of Business Administration of Fund Resources, SEI Corporation
since 1995. Vice President of Fund Group and Vice President of the Advisor,
Dreman Value Management and President of Dreman Financial Services, Inc. prior
to 1995.
TODD 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).
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 SEI, the Trust, Administrator and the Distributor
(1990-present).
- ---------------
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Trust as the term is defined in the 1940 Act.
** Messrs. Cooney, Morris, Patterson, Peters and Storey serve on the Audit
Committee of the Trust.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees. For the
fiscal year ended January 31, 1996, the Trust paid the unaffiliated Trustees
aggregate fees of $61,924.25.
COMPENSATION TABLE
<TABLE>
<CAPTION>
================================================================================================================================
Name of Person, Aggregate Pension or Retirement Estimated Annual Total Compensation
Position Compensation From Benefits Accrued as Benefits Upon From Registrant and
Registrant Part of Fund Retirement Fund Complex Paid
Expenses to Trustees for the
Fiscal Year Ended
January 31, 1996(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Patterson, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Gene Peters, Trustee $12,384.82 N/A N/A $12,384.82
- --------------------------------------------------------------------------------------------------------------------------------
Frank E. Morris, $12,384.82 N/A N/A $12,384.82
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, $0 N/A N/A $0
Trustee*
- --------------------------------------------------------------------------------------------------------------------------------
William M. Doran, $0 N/A N/A $0
Trustee*
- --------------------------------------------------------------------------------------------------------------------------------
James M. Storey, $12,384.82 N/A N/A $12,384.82
Trustee
================================================================================================================================
</TABLE>
1 Total Compensation for service on one board.
* A Trustee who is an "interested person" as defined in the 1940 Act.
S-12
<PAGE>
COMPUTATION OF YIELD
From time to time a Fund may advertise its "current yield" and "effective
compound yield". Both yield figures are based on historical earnings and are not
intended to indicate future performance. The "yield" of a Fund refers to the
income generated by an investment in the Fund over a stated seven-day period.
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 "yield" because of the compounding effect of this assumed
reinvestment.
The current yield of a Fund 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 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 a Fund 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, 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.
For the seven-day period ended January 31, 1996, the U.S. Government Securities
Money Fund had a current yield of 5.41% and an effective yield of 5.55% and the
Prime Obligations Fund had a current yield of 5.47% and an effective yield of
5.62%.
The yield of the a Fund 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.
Yields are one basis upon which shareholders may compare a Fund with other money
market funds; however, yields of other money market 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. A Fund also
may compare its performance or the performance of securities in which it may
invest to IBC/Donoghue's MONEY FUND AVERAGES(TM), which monitors the performance
of taxable and tax-free money market funds. This index, which assumes
reinvestment of distributions, is published by IBC/Donoghue's MONEY FUND
REPORT(R) of Ashland, Massachusetts 01721.
CALCULATION OF TOTAL RETURN
From time to time, a Fund may advertise total return. The total return of a Fund
refers to the average compounded rate of return to a hypothetical investment for
designated time periods (including but not limited to, the period from which the
Portfolio commenced operations through the specified date), assuming that the
entire investment is redeemed at the end of each period. In particular, total
return will be calculated according to the following formula:
S-13
<PAGE>
P (1 + T)n = ERV
where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
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.
Based on the foregoing, the average annual total return for the U.S. Government
Securities Money Fund and the Prime Obligations Fund from inception through
January 31, 1996 and for the one, five and ten year periods ended January 31,
1996 were as follows:
<TABLE>
<CAPTION>
===============================================================================================================
Fund Class Average Annual Total Return
--------------------------------------------------------
One Five Ten Since
Year Year Year Inception
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Class A 5.88% * * 5.63%
Securities Money Fund
- ---------------------------------------------------------------------------------------------------------------
Prime Obligations Fund Class A * * * 5.82%
===============================================================================================================
</TABLE>
*Not in operation during such period.
PURCHASE AND REDEMPTION OF SHARES
Each 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
partly 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.
It is currently the Trust's policy to pay for all 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 a Fund 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 Securities and Exchange Commission by rule or
regulation) as a result of disposal or valuation of each Fund's securities is
not reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted. The Trust also reserves the right to
suspend sales of shares of each Fund for any period during which the New York
Stock Exchange, the Adviser, the Administrator and/or the Custodian are not open
for business.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Fund 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,
S-14
<PAGE>
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 the Fund resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in the 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.
A Fund's use of amortized cost and the maintenance of a 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 each Fund. Such procedures include the
determination of the extent of deviation, if any, of a Fund's current net asset
value per share calculated using available market quotations from a Fund's
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 0.5%, 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 a Fund incurs a significant loss or
liability, the Trustees have the authority to reduce pro rata the number of
shares of the Fund 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.
TAXES
The information set forth in the Prospectus and the following is only a summary
of certain federal income tax considerations generally affecting each Fund and
its shareholders, and is not intended as a substitute for careful tax planning.
No attempt has been made to present a detailed explanation of the income tax
treatment of each Fund or its shareholders. Shareholders and potential
purchasers of shares are urged to consult their tax advisors with specific
reference to their own tax situations, including their state and local tax
liabilities.
The Funds
The following discussion of federal income tax consequences is based on the Code
and the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, certain administrative changes or
court decisions may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein. Shareholders will be advised annually as to certain federal income tax
consequences of distributions made during the year.
It is the policy of each Fund to qualify for the favorable tax treatment
accorded regulated investment companies under Subchapter M of the Code. By
following such policy, each Fund expects to eliminate or reduce to a nominal
amount the federal taxes to which it may be subject.
S-15
<PAGE>
In order to qualify as a regulated investment company each Fund must, among
other things, (1) derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities or foreign currencies; or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in stock, securities or
currencies; (2) derive less than 30% of its gross income each taxable year from
the sale or other disposition of certain assets held for less than three months
("Short-Short Limitation"), including stock and securities; options, futures or
forward contracts (other than on foreign currencies); or foreign currencies
(including options, futures or forward contracts on such currencies) if not
directly related to the Fund's principal business of investing in stocks and
securities; and (3) diversify its holdings so that at the end of each quarter of
each taxable year (i) at least 50% of the market value of the Fund's total
assets is represented by cash or cash items, United States Government
securities, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to a value not greater than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than United States
Government securities or securities of any other regulated investment company)
or of two or more issuers that the Fund controls and that are engaged in the
same, similar, or related trades or businesses. These requirements may restrict
the degree to which the Fund may engage in short-term trading and in certain
hedging transactions and may limit the range of the Fund's investments. If a
Fund qualifies as a regulated investment company, it will not be subject to
federal income tax on the part of its net investment income and net realized
capital gains, if any, which it distributes each year to shareholders, provided
the Fund distributes at least (a) 90% of its "investment company taxable income"
(generally, net investment income plus net short-term capital gain) and (b) 90%
of its net tax-exempt interest income (the excess of (i) its tax-exempt interest
income over (ii) certain deductions attributable to that income).
If for any taxable year a Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to federal income tax at regular corporated tax rates without any
deduction for distributions to its shareholders and all such distributions will
be taxable to shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the 70% dividend received deduction for corporate shareholders.
If a Fund fails to distribute in a calendar year at least the sum of 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term gain over short and long term capital losses) for the
one-year period ending October 31 of the year (and any retained amount from the
prior calendar year), the Fund will be subject to a nondeductible 4% federal
excise tax on the undistributed amounts.
Distributions declared in October, November, or December to shareholders of
record during those months and paid during the following January are treated as
if they were received by each shareholder on December 31 of the year declared
for tax purposes.
In certain cases, a Fund will be required to withhold and remit to the U.S.
Treasury 31% of any distribution paid to an individual or certain other
non-corporate shareholder (1) who has failed to provide a correct taxpayer
identification number, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
Generally, gain or loss on the sale or exchange 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
S-16
<PAGE>
has previously received a capital gains distribution with respect to the Share
(or any undistributed net capital gains of a 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 a 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.
Additional Information Concerning State Taxes
A Fund is not liable for any income or franchise tax in Massachusetts if it
qualifies as a regulated investment company for federal income tax purposes.
Distributions by the Fund to shareholders and the ownership of shares may be
subject to state and local taxes. Therefore, shareholders are urged to consult
with their tax advisors concerning the application of state and local taxes to
investments in the Fund, which may differ from the federal income tax
consequences. For example, under certain specified circumstances, state income
tax laws may exempt from taxation distributions of a regulated investment
company to the extent that such distributions are derived from interest on
federal obligations. Shareholders are urged to consult with their tax advisors
regarding whether, and under what conditions such exemption is available.
FUND TRANSACTIONS
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 Adviser is responsible for placing the orders
to execute transactions for a 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 Adviser generally seeks reasonably competitive spreads or commissions, the
Fund will not necessarily be paying the lowest spread or commission available.
The money market securities in which a Fund invests 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 Adviser
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 a Fund will primarily consist of dealer spreads and
underwriting commissions.
For the fiscal year ended January 31, 1996, the U.S. Government Securities Money
Fund and the Prime Obligations Fund did not pay any brokerage commissions.
TRADING PRACTICES AND BROKERAGE
The Adviser may place portfolio transactions with broker-dealers which furnish,
without cost, certain research, statistical, and quotation services of value to
the Adviser and its affiliates in advising the Funds and other clients, provided
that it shall always seek best price and execution with respect to the
transactions. Certain investments may be appropriate for the Funds and for other
clients advised by the Adviser. Investment decisions for the Funds and other
clients are made with a view to achieving their respective
S-17
<PAGE>
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their investments
generally. A particular security may be bought or sold for only one client or in
different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients of the Adviser
on the same day. In such event, such transactions will be allocated among the
clients in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by the Funds. Purchase and sale orders for the
Funds may be combined with those of other clients of the Adviser in the interest
of achieving the most favorable net results for the Funds.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by a Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by a Fund usually includes
an undisclosed dealer commission or mark-up. In underwritten offerings, the
price paid by a Fund includes a disclosed, fixed commission or discount retained
by the underwriter or dealer.
The Adviser places all orders for the purchase and sale of portfolio securities
for the Funds through a substantial number of brokers and dealers. In so doing,
it uses its best efforts to obtain for the Funds the best price and execution
available. In seeking the best price and execution, the Adviser, having in mind
a Fund's best interest, considers all factors it deems relevant, including, by
way of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of the commission, the timing of the
transaction taking into account market process and trends, the reputation,
experience and financial stability of the broker-dealer involved, and the
quality of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive research, statistical, and quotation services from broker-dealers that
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Adviser receives research, statistical, and quotation
services from many broker-dealers with which it places the Fund's transactions.
These services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities, and recommendations as to the purchase and
sale of securities. Some of these services are of value to the Adviser and its
affiliates in advising various of their clients (including the Funds), although
not all of these services are necessarily useful and of value in managing the
Funds. The fee paid by each Fund to the Adviser is not reduced because the
Adviser and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended, the Adviser may cause a Fund to pay a broker-dealer that provides
brokerage and research services to the Adviser a commission in excess of the
commission charged by another broker-dealer for effecting a particular
transaction. To cause a Fund to pay any such greater commissions the Adviser
must determine in good faith that such commissions are reasonable in relation to
the value of the brokerage or research service provided by such executing
broker-dealers viewed in terms of a particular transaction or the Adviser's
overall responsibilities to the Funds or its other clients. In reaching this
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage or research services provided or to determine what portion of the
compensation should be related to those services.
S-18
<PAGE>
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, a
Fund may place orders with broker/dealers which have agreed to defray certain
Fund expenses such as custodian fees.
It is expected that each Fund may execute brokerage or other agency transactions
through the Distributor or a registered broker/dealer affiliate of the Adviser
for a commission in conformity with the 1940 Act, the Securities Exchange Act of
1934 and rules promulgated by the Securities and Exchange Commission. Under
these provisions, the Distributor or an affiliate of the Adviser is permitted to
receive and retain compensation for effecting portfolio transactions for the
Fund on an exchange if a written contract is in effect between the Distributor
and the Fund expressly permitting the Distributor or an affiliate of the Adviser
to receive and retain such compensation. These rules further require that
commissions paid to the Distributor or affiliate of the Adviser by the Fund 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". In addition, a Fund may
direct commission business to one or more designated broker/dealers in
connection with such broker/dealer's provision of services to that Fund or
payment of certain Fund expenses (e.g., custody, pricing and professional fees).
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.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of the Fund, and to divide or redivide any unissued shares of
the Trust into one or more additional series.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this Statement of
Additional Information, the Trust's shares will be fully paid and
non-assessable, subject only to the possibility of shareholder liability
described in the following section. 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. In the event of a liquidation or dissolution of the Trust,
shareholders of a Fund are entitled to receive the assets available for
distribution belonging to that Fund, and a proportionate distribution, based
upon the relative asset values of the respective Funds, of any general assets
not belonging to any particular Fund which are available for distribution.
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 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.
S-19
<PAGE>
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, 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 liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
5% SHAREHOLDERS
As of March 1, 1996, the following person were the only persons who were record
owners (to the knowledge of the Trust, beneficial owners) of 5% or more of the
shares of the Funds. The Trust believes that most of the shares referred to
below were held by the below persons in account for their fiduciary, agency or
custodial customers.
U.S. Government Securities Money Fund: Crestar Bank, P.O. Box 26665,
Richmond, VA 23261, 93%; Crestar Securities Corporation, P.O. Box 498,
Richmond, VA 23204, 7%.
Prime Obligations Fund: Crestar Bank, P.O. Box 26665, Richmond, VA 23261,
99%.
EXPERTS
The financial statements in this Statement of Additional Information have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
FINANCIAL STATEMENTS
Following are the audited financial statements of the U.S. Government Securities
Money Fund for the fiscal year ended January 31, 1996, and the Report of
Independent Accountants of Price Waterhouse LLP dated March 8, 1996, relating to
the financial statements, including the financial highlights of the Fund. The
Prime Obligations Fund had not commenced operations as of January 31, 1996.
S-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
U.S. Government Securities Money Portfolio and
Prime Obligations Portfolio of The Arbor Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the U.S. Government Securities Money Portfolio and Prime Obligations Portfolio
of The Arbor Fund (hereafter referred to as the "Fund") at January 31, 1996, the
results of each of their operations, the changes in each of their net assets and
the financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at January 31, 1996, by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 8, 1996
<PAGE>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1996
<TABLE>
<CAPTION>
Face
Amount Value
(000) U.S. GOVERNMENT SECURITIES MONEY FUND (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATION -- 1.9%
U.S. Treasury STRIPS
$10,000 5.670% (DAGGER), 05/15/96................................. $ 9,840
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligation
(Cost $9,839,901)........................... 9,840
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 68.7%
FFCB
15,000 6.120%, 02/08/96 ......................................... 15,000
25,000 5.630%, 03/01/96 ......................................... 25,000
20,000 5.400%, 12/02/96 ......................................... 19,982
FHLB
5,000 5.575%, 06/12/96 ......................................... 4,998
15,000 6.000%, 08/07/96 ......................................... 15,000
5,000 6.000%, 08/16/96 ......................................... 5,000
20,000 5.520%, 01/09/97 ......................................... 20,000
FHLB Callable 02/11/96 @ 100
25,000 5.825%, 11/11/96 ......................................... 25,000
FHLB Callable 04/10/96 @ 100
20,000 5.430%, 01/10/97 ......................................... 20,000
FHLB Callable 04/17/96 @ 100
2,500 5.415%, 01/17/97 ......................................... 2,500
FHLMC
10,000 4.200%, 09/09/96 ......................................... 9,922
FHLMC Discount Note
10,000 5.220%, 04/25/96 ......................................... 9,878
FNMA
10,000 9.350%, 02/12/96 ......................................... 10,010
5,000 6.430%, 04/18/96 ......................................... 5,000
30,000 5.370%, 02/21/97 (A) ..................................... 29,984
FNMA Callable 02/01/96 @ 100
5,000 8.610%, 02/01/00 ......................................... 5,000
FNMA Discount Note
15,000 5.520%, 02/08/96 ......................................... 14,984
10,000 5.450%, 05/02/96 ......................................... 9,862
10,000 5.520%, 04/04/96 ......................................... 9,903
SLMA
4,000 6.831%, 02/21/96 ......................................... 4,001
15,000 5.310%, 09/23/96 (A) ..................................... 15,000
20,000 5.380%, 08/02/99 (A) ..................................... 19,980
Tennessee Valley Authority
13,000 4.375%, 03/04/96 ......................................... 12,986
9,990 4.600%, 12/15/96 ......................................... 9,912
Tennessee Valley Authority Discount Note
15,000 5.200%, 04/25/96 ......................................... 14,818
World Bank Discount Note
20,000 5.700%, 02/13/96 ......................................... 19,963
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $353,683,882)................................... 353,683
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996
Face
Amount Value
(000) U.S. GOVERNMENT SECURITIES MONEY FUND (continued) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 29.1%
First Boston Securities, 6.00%, dated 01/31/96,
matures 02/01/96, repurchase price $24,004,000
(collateralized by various FHLB obligations,
ranging in par value $3,640,000-$3,775,000,
rates 7.500%-7.600%, maturities 09/30/10-11/08/00;
FNMA obligations, ranging in par value $4,735,000-
$10,380,000, rates 6.550%-7.930%, maturities
$ 24,000 09/12/05-02/14/25, total market value $24,603,713)....... $ 24,000
Greenwich Securities, 5.95%, dated 01/31/96,
matures 02/01/96, repurchase price $102,812,990
(collateralized by various FHLMC obligations,
ranging in par value $14,700,000-$53,815,000, rates
5.125%-8.000%, maturities 09/15/06-04/15/22, total
102,796 market value $104,853,724)................................ 102,796
Nomura Securities, 5.95%, dated 01/31/96, matures
02/01/96, repurchase price $23,192,833 (collateralized
by various FHLMC obligations, ranging in par value
$5,582,900-$90,650,000, rates 2.650%-6.158%, maturities
07/15/20-10/01/23;FNMA obligations, ranging in par value
$144,000-$20,336,486, rates 0.000%-8.176%, maturities
23,189 05/01/21-04/25/22, total market value $23,652,324)........ 23,189
------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $149,984,564)............................... 149,985
- -------------------------------------------------------------------------------
Total Investments--99.7%
(Cost $513,508,347)............................... 513,508
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.3%
Other Assets and Liabilities, Net .......................... 1,362
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares (unlimited authorization-- no par value)
based on 514,884,536 outstanding shares of beneficial
interest................................................... 514,884
Realized Loss on Investments ............................... (14)
- -------------------------------------------------------------------------------
Total Net Assets (100.0%).......................... $514,870
===============================================================================
Net Asset Value, Offering Price and Redemption
Price Per Share.................................. $1.00
===============================================================================
<FN>
FFCB -- Federal Farm Credit Bank
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
SLMA -- Student Loan Marketing Association
STRIPS -- Separately Traded Registered Interest and Principal of Securities
(A) Variable Rate Security -- The rate reported in the Statement of Net Assets
is the rate in effect on January 31, 1996.
(DAGGER) Effective yield
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1996
<TABLE>
<CAPTION>
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER -- 69.9%
AT&T
$ 14,000 5.460%, 05/02/96.......................................... $ 13,807
AT&T Capital
4,700 5.480%, 04/04/96.......................................... 4,655
Chase Manhattan Bank
9,000 5.380%, 05/09/96.......................................... 8,868
CIESCO
20,000 5.610%, 02/28/96.......................................... 19,916
Daimler Benz
15,000 5.500%, 03/29/96.......................................... 14,869
Enterprise Funding
7,607 5.680%, 02/15/96.......................................... 7,590
10,000 5.822%, 02/21/96.......................................... 9,969
E.I. Du Pont de Nemours
10,000 5.470%, 05/09/96.......................................... 9,851
10,000 5.400%, 05/23/96.......................................... 9,832
First Boston (A)
20,000 5.450%, 07/11/96.......................................... 20,000
General Electric Capital
20,000 5.520%, 04/04/96.......................................... 19,807
Guangdong Enterprises
15,000 5.540%, 05/01/96.......................................... 14,792
Hanson PLC
9,450 5.660%, 02/09/96.......................................... 9,438
10,000 5.650%, 02/22/96.......................................... 9,967
International Nederlanden
15,000 5.610%, 03/05/96.......................................... 14,923
6,000 5.600%, 03/15/96.......................................... 5,960
NationsBank
17,000 5.640%, 02/13/96.......................................... 16,968
Stellar Capital
17,421 5.380%, 06/21/96.......................................... 17,054
Strategic Asset Funding
19,800 5.370%, 04/30/96.......................................... 19,537
Svenska Handelsbanken
5,000 5.560%, 03/11/96.......................................... 4,970
15,000 5.270%, 04/26/96.......................................... 14,813
- -------------------------------------------------------------------------------
Total Commercial Paper (Cost $267,586,116) ........... 267,586
- -------------------------------------------------------------------------------
CORPORATE OBLIGATION -- 3.9%
Exxon Capital
15,000 7.750%, 02/14/96.......................................... 15,009
- -------------------------------------------------------------------------------
Total Corporate Obligation (Cost $15,008,833)......... 15,009
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS (concluded) THE ARBOR FUND
January 31, 1996
<TABLE>
<CAPTION>
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (continued) (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT -- 11.8%
First Alabama Bank
$20,000 5.330%, 07/09/96.......................................... $ 20,000
National Bank of Detroit
5,000 5.850%, 06/05/96.......................................... 5,001
Sanwa Bank
10,000 5.600%, 04/05/96.......................................... 10,000
10,000 5.550%, 09/30/96.......................................... 10,003
- -------------------------------------------------------------------------------
Total Certificates Of Deposit
(Cost $45,004,384).................................. 45,004
- -------------------------------------------------------------------------------
BANKERS ACCEPTANCES -- 8.9%
American Express
8,000 5.550%, 03/07/96.......................................... 7,957
Bank of Tokyo
15,000 5.780%, 03/15/96.......................................... 14,896
Mellon Bank
7,300 5.550%, 03/08/96.......................................... 7,260
NationsBank
4,100 5.350%, 06/24/96.......................................... 4,012
- -------------------------------------------------------------------------------
Total Bankers Acceptances (Cost $34,125,020).......... 34,125
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.5%
Nomura Securities, 5.95%, dated 01/31/96, matures
02/01/96, repurchase price $20,896,453 (collateralized
by various FNMA obligations ranging in par value
$3,000,000 - $3,750,000, 5.90% - 6.00%, 07/25/08 -
07/25/15; FHLMC obligations ranging in par value
$4,850,000 - $8,725,000, 7.50% - 8.00%, 07/15/07 -
20,893 04/15/22; with total market value of $21,312,316)......... 20,893
- -------------------------------------------------------------------------------
Total Repurchase Agreement (Cost $20,892,763)...... 20,893
- -------------------------------------------------------------------------------
CASH EQUIVALENT -- 0.3%
Dreyfus Government Cash Management Fund
1,000 ............................................................ 1,000
- -------------------------------------------------------------------------------
Total Cash Equivalent (Cost $1,000,000)............... 1,000
- -------------------------------------------------------------------------------
Total Investments--100.3% (Cost $383,617,116)......... 383,617
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets and Liabilities, Net........................... (985)
- -------------------------------------------------------------------------------
NET ASSETS:
Portfolio shares (unlimited authorization-- no par
value) based on 382,631,520 outstanding shares
of beneficial interest.................................... 382,632
- -------------------------------------------------------------------------------
Total Net Assets (100.0%).......................... $382,632
===============================================================================
Net Asset Value, Offering Price and
Redemption Price Per Share....................... $1.00
===============================================================================
<FN>
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
PLC -- Private Limited Corporation
(A) Variable Rate Security -- The rate reported in the Statement of Net Assets
is the rate in effect on January 31, 1996.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF OPERATIONS THE ARBOR FUND
For the Period Ended January 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS)
-------------------------------
U.S. GOVERNMENT PRIME
SECURITIES OBLIGATIONS
MONEY FUND FUND(1)
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Interest Income........................... $32,824 $6,589
- -------------------------------------------------------------------------------
Expenses:
Management Fees........................... 443 91
Waiver of Management Fees................. (207) (47)
Investment Advisory Fees.................. 1,108 227
Waiver of Advisory Fees................... (753) (181)
Custodian Fees............................ 219 45
Transfer Agent Fees....................... 166 34
Professional Fees......................... 30 13
Registration Fees......................... 5 1
Insurance Expense......................... 5 1
Directors Fees............................ 9 1
Printing Fees............................. 11 1
Pricing Fees.............................. 1 1
Amortization of Organizational Cost....... 69 40
- -------------------------------------------------------------------------------
Total Expenses.......................... 1,106 227
- -------------------------------------------------------------------------------
Net Investment Income..................... 31,718 6,362
- -------------------------------------------------------------------------------
Net Realized Loss on Investments.......... (14) --
- -------------------------------------------------------------------------------
Increase in Net Assets Resulting
from Operations......................... $31,704 $6,362
===============================================================================
<FN>
(1) Commenced operations on October 25, 1995
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS THE ARBOR FUND
For the Period Ended January 31, 1996
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT PRIME
SECURITIES OBLIGATIONS
MONEY FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
02/01/95 08/01/94(1) 10/25/95(2)
TO 01/31/96 TO 01/31/95 TO 01/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Activities:
Net Investment Income.............................................. $ 31,718 $ 13,742 $ 6,362
Net Realized Loss on Investments................................... (14) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations...................... 31,704 13,742 6,362
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income.............................................. (31,718) (13,742) (6,362)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions.............................................. (31,718) (13,742) (6,362)
- ---------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (all at $1.00 per share):
Proceeds from Shares Issued........................................ 5,309,363 3,724,167 1,497,447
Reinvestment of Cash Distributions................................. 1,480 640 --
Cost of Shares Redeemed............................................ (5,375,381) (3,145,385) (1,114,815)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets from Capital
Share Transactions............................................... (64,538) 579,422 382,632
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets.......................... (64,552) 579,422 382,632
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period.............................................. 579,422 -- --
End of Period.................................................... $ 514,870 $ 579,422 $ 382,632
- ---------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Shares Issued...................................................... 5,309,363 3,724,167 1,497,447
Shares Issued in Lieu of Cash Distributions........................ 1,480 640 --
Shared Redeemed.................................................... (5,375,381) (3,145,385) (1,114,815)
===========================================================================================================================
<FN>
(1) Commenced operations on August 1, 1994
(2) Commenced operations on October 25, 1995
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS THE ARBOR FUND
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
U.S. GOVERNMENT PRIME
SECURITIES OBLIGATIONS
MONEY FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
02/01/95 08/01/94(1) 10/25/95(2)
TO 01/31/96 TO 01/31/95 TO 01/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......................................... $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
Net Investment Income..................................................... 0.06 0.03 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations........................................ 0.06 0.03 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends From Net Investment Income...................................... (0.06) (0.03) (0.02)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions..................................................... (0.06) (0.03) (0.02)
===========================================================================================================================
Net Asset Value, End of Period............................................... $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------
Total Return................................................................. 5.88% 4.98%* 5.82%*
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000).............................................. 514,870 579,422 382,632
===========================================================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Ratio of Expenses to Average Net Assets...................................... 0.20% 0.20%* 0.20%*
Ratio of Expenses to Average Net Assets Excluding Fee Waivers................ 0.37% 0.38%* 0.40%*
Ratio of Net Investment Income to Average Net Assets......................... 5.72% 4.98%* 5.61%*
Ratio of Net Investment Income to Average Net Assets
Excluding Fee Waivers................................................... 5.55% 4.80%* 5.41%*
===========================================================================================================================
<FN>
(1) Commenced operations on August 1, 1994
(2) Commenced operations on October 25, 1995
*Annualized
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE ARBOR FUND
January 31, 1996
1. Organization:
THE U. S. GOVERNMENT SECURITIES MONEY AND PRIME OBLIGATIONS FUNDS (the "Funds")
are separate investment portfolios of The Arbor Fund (the "Trust"), an open-end
management investment company. The Trust was organized as a Massachusetts
Business Trust under a Declaration of Trust dated July 24, 1992. The Prime
Obligations Fund had no operations through October 24, 1995 ("commencement of
operations") other than those related to organizational matters and the sale of
initial shares to SEI Financial Management Corporation (the "Administrator"), a
wholly-owned subsidiary of SEI Corporation. The Trust is registered under the
Investment Company Act of 1940, as amended, as an open-end management company.
The financial statements included herein relate only to the U.S Government
Securities Money and Prime Obligations Funds. The Funds' prospectus provides a
description of the Funds' investment objectives, policies and strategies.
2. Significant Accounting Policies:
The following is a summary of the significant accounting policies followed by
the Funds. The policies are in conformity with generally accepted accounting
principles.
SECURITY VALUATION--Investment securities held by the Fund are stated at
amortized cost, which approximates market value. Under this method,
purchase discounts and premiums are accreted and amortized ratably to
maturity and are included in interest income.
FEDERAL INCOME TAXES--It is the Funds' intention to continue to qualify as
regulated investment companies for Federal income tax purposes by complying
with the appropriate provisions of the Internal Revenue Code of 1986, as
amended. Accordingly, no provision for Federal income taxes is required in
the financial statements.
SECURITY TRANSACTIONS AND RELATED INCOME--Security transactions are
accounted for on the date the security is purchased or sold (trade date).
Interest income is recognized using the accrual method of accounting. Costs
used in determining realized gains and losses on sales of investment
securities are those of the specific securities sold adjusted for the
accretion and amortization of purchase discounts and premiums during the
respective holding periods.
REPURCHASE AGREEMENTS--The Funds invest in tri-party repurchase agreements.
Securities held as collateral for tri-party repurchase agreements are
maintained in a segregated account by the broker's custodian bank until
maturity of the repurchase agreement. Provisions of the repurchase
agreements require that the market value of the collateral, including
accrued interest thereon, is sufficient in the event of default of
the counterparty. If the counterparty defaults and the value of the
collateral declines or if the counterparty enters an insolvency proceeding,
realization and/or retention of the collateral by the Fund may be delayed
or limited.
NET ASSET VALUE PER SHARE--The net asset value per share of the Funds is
calculated on each business day. In general, it is computed by dividing the
assets of each Fund, less its liabilities, by the number of outstanding
shares of each Fund.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are
declared daily and paid monthly to shareholders. Any net realized capital
gains on sales of securities are distributed to shareholders at least
annually.
OTHER--On January 31, 1996 the total cost of securities and the net
realized gains or losses on securities sold for federal income tax purposes
was not significantly different from amounts reported for financial
reporting purposes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded) THE ARBOR FUND
January 31, 1996
3. Administration, Transfer Agent and Distribution Agreements:
The Trust and the Administrator have entered into an administration agreement
dated August 1, 1994. Under terms of the Administration Agreement, the
Administrator is entitled to a fee which is calculated daily and paid monthly at
an annual rate of .08% of the average daily net assets of each Fund. The
Administrator and Capitoline Investment Services Incorporated (the "Advisor")
have agreed to waive a portion of their respective fees to the extent necessary
so that the total operating expenses of the Funds do not exceed an annual rate
of .20% of average daily net assets. During the period from February 1, 1995 to
January 31, 1996, the Administrator received net administration fees totaling
approximately .04% of the average daily net assets of each Fund. Fee waivers and
expense reimbursements are voluntary and may be terminated at any time.
Crestar Bank (the "Transfer Agent") serves as the transfer agent and dividend
disbursing agent for each Fund. The Transfer Agent also acts as the shareholder
servicing agent and custodian of the Funds.
The Trust and SEI Financial Services Company (the "Distributor"), a wholly-owned
subsidiary of SEI Corporation and an affiliate of the Administrator, have
entered into a distribution agreement (the "Distribution Agreement") dated
August, 1, 1994. The Distributor receives no fees for its distribution services
under the Distribution Agreement.
4. Investment Advisory Agreement:
The Trust has entered into an investment advisory agreement with the Advisor
dated August 1, 1994 under which the Advisor is entitled to a fee which is
calculated daily and paid monthly, at an annual rate of .20% of the average
daily net assets of each Fund. During the period from February 1, 1995 to
January 31, 1996, the Advisor received net fees totaling approximately .06% and
.04% of the average daily net assets for U.S. Government Securities Money and
Prime Obligations Funds, respectively. Fee waivers and expense reimbursements
are voluntary and may be terminated at any time. The Advisor is a wholly-owned
subsidiary of Crestar Bank, which is a wholly-owned subsidiary of Crestar
Financial Corporation.
5. Organizational Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Trust and are being amortized
over sixty months beginning with the commencement of operations. In the event
any of the initial shares of the Trust are redeemed by any holder thereof during
the period that the Trust is amortizing its organizational costs, the redemption
proceeds payable to the holder thereof by the Trust will be reduced by the
unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption. These costs include legal fees for organizational work
performed by a law firm of which an officer of the Funds is a partner.
Certain officers and Trustees of the Trust are also officers of the
Administrator and/or Distributor. Such officers and Trustees are paid no fees
by the Trust for serving in their respective roles.
6. Concentration of Credit Risk
The Funds invest primarily in money market instruments maturing in one year or
less whose ratings are within the highest ratings category assigned by a
nationally recognized statistical rating agency or, if not rated, are believed
to be of comparable quality. The ability of the issuers of the securities held
by the Fund to meet their obligations may be affected by economic and political
developments in a specific industry, state or region.
<PAGE>
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the Corporation. The report is not
authorized for distribution to prospective investors in the Corporation unless
preceded or accompanied by an effective prospectus. Shares in the Fund are not
deposits or obligations of, or guaranteed or endorsed by Crestar Bank, the
parent corporation of the Fund's investment adviser. Such shares are also not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency.
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements
(1) Audited Financial Statements for the Golden Oak Diversified
Growth Portfolio, Golden Oak Intermediate-Term Income
Portfolio and Golden Oak Prime Obligation Money Market
Portfolio of the Registrant for the fiscal period ended
January 31, 1996, included in the Statement of Additional
Information, filed as part of this Post-Effective Amendment
No. 14 to the Registrant's Registration Statement on Form N-
1A (No. 33-50718) as filed with the Securities and Exchange
Commission on March 28, 1996 are included herein.
(2) Audited Financial Statements for the California Tax Exempt
Portfolio and Institutional Tax Free Portfolio (the "PIMC
Portfolios") for the fiscal period ended January 31, 1996,
included in the Statement of Additional Information, filed
as part of this Post-Effective Amendment No. 14 to the
Registrant's Registration Statement on Form N-1A (No.
33-50718) as filed with the Securities and Exchange
Commission on March 28, 1996 are included herein.
(3) Audited Financial Statements for the OVB Prime Obligations
Portfolio, OVB Capital Appreciation Portfolio, OVB Emerging
Growth Portfolio, OVB Government Securities Portfolio and
OVB West Virginia Tax-Exempt Income Portfolio (the "OVB
Portfolios") for the fiscal period ended January 31, 1996,
included in the Statement of Additional Information, filed
as part of this Post-Effective Amendment No. 14 to the
Registrant's Registration Statement on Form N-1A (No.
33-50718) as filed with the Securities and Exchange
Commission on March 28, 1996 are included herein.
(4) Audited Financial Statements for the U.S. Government
Securities Money Fund for the fiscal period ended January
31, 1996, included in the Statement of Additional
Information, filed as part of this Post-Effective Amendment
No. 14 to the Registrant's Registration Statement on Form
N-1A (No. 33-50718) as filed with the Securities and
Exchange Commission on March 28, 1996 are included herein.
<PAGE>
(b) Additional Exhibits
(1) Registrant's Agreement and Declaration of
Trust.1
(2) Registrant's By-Laws.1
(3) Not Applicable
(4) Not Applicable
(5) (a) Administration Agreement between
Registrant and SEI Financial Management Corporation
with Schedule dated January 28, 1993 for the Golden
Oak Portfolios and forms of Schedule for the
California Tax Exempt Portfolio and Institutional
Tax Free Portfolio.4
(5) (b) Investment Advisory Agreement between the
Registrant and Citizens Commercial and
Savings Bank with respect to the Golden
Oak Diversified Growth Portfolio, the
Golden Oak Intermediate-Term Income
Portfolio, Golden Oak Michigan Tax Free
Bond Portfolio and Golden Oak Prime
Obligation Money Market Portfolio.3
(5) (c) Investment Sub-Advisory Agreement by and
among Registrant, Citizens Commercial and
Savings Bank and Wellington Management
Company with respect to the Golden Oak
Prime Obligation Money Market Portfolio.3
(5) (f) Form of Investment Advisory Agreement
between Registrant and Prudential
Investment Corporation with respect to
the California Tax Exempt Portfolio and
the Institutional Tax Free Portfolio.4
(5) (g) Form of Schedule, relating to the OVB
Prime Obligations, OVB Capital
Appreciation, OVB Emerging Growth, OVB
Government Securities and OVB West
Virginia Tax-Exempt Income Portfolios
(the "OVB Portfolios"), to Administration
Agreement by and between the Registrant
and SEI Financial Management Corporation
dated as of January 28, 1993.5
(5) (h) Form of Investment Advisory Agreement between
the Registrant and One Valley Bank, National
Association with respect to the OVB Portfolios.5
(5) (i) Form of Investment Sub-Advisory Agreement
by and among the Registrant, One Valley
Bank, National Association, and
Wellington Management Company with
respect to the OVB Prime Obligations
Portfolio.5
(5) (j) Form of Investment Advisory Agreement
C-2
<PAGE>
between the Registrant and Capitoline
Investment Services, Incorporated with
respect to the U.S. Government Securities
Money Fund.7
(5) (k) Form of Schedule relating to U.S.
Government Securities Money Fund, to
Administration Agreement by and between
Registrant and SEI Financial Management
Corporation.7
(5) (l) Form of Schedule B to Investment Advisory
Agreement between the Registrant and Citizens
Commercial & Savings Bank with respect to Golden
Oak Growth and Income Portfolio.8
(5) (m) Form of Investment Sub-Advisory Agreement
by and between Scudder, Stevens & Clark, Inc. with
respect to Golden Oak Growth and Income
Portfolio.8
(5) (n) Form of Schedule, relating to Golden Oak Growth
and Income Portfolio, to Administration Agreement
by and between Registrant and SEI Financial
Management Corporation.8
(5) (o) Administration Agreement between Registrant and
SEI Financial Corporation with Schedule dated
January 28, 1993 as amended and restated on May 17,
1994 for Golden Oak Portfolios, the Prudential
Portfolios and the OVB Portfolios.9
(5) (p) Administration Agreement between Registrant and
SEI Financial Management Corporation with Schedule
dated August 1, 1994.9
(5) (q) Form of Schedule to the Investment Advisory
Agreement between Registrant and Capitoline
Investment Services Incorporated with respect to
the Prime Obligations Fund.10
(5) (r) Form of Schedule relating to the Prime
Obligations Fund, to Administration Agreement filed
under (5)(p) by and between Registrant and SEI
Financial Management Corporation.10
(5) (s) Form of Investment Advisory Agreement
between the Registrant and PNC
Institutional Management Corporation with
respect to the California Tax-Exempt
Portfolio.*
(5) (t) Form of Investment Advisory Agreement
between the Registrant and PNC
Institutional Management Corporation with
respect to the Institutional Tax Free
Portfolio.*
C-3
<PAGE>
(5) (u) Investment Sub-Advisory Agreement by and among
the Registrant and Citizens Bank and Nicholas-
Applegate Capital Management with respect to the
Golden Oak Diversified Growth Portfolio.*
(6) (a) Distribution Agreement between Registrant
and SEI Financial Services Company.2
(6) (b) Transfer Agent Agreement between
Registrant and SEI Financial Management
Corporation.3
(6) (c) Transfer Agent Agreement between
Registrant and Crestar Bank.9
(6) (d) Transfer Agent Agreement between
Registrant and Supervised Service
Company.9
(7) Not Applicable
(8) (a) Custodian Agreement between Registrant
and CoreStates Bank N.A.2
(8) (b) Form of Custodian Agreement between
Registrant and Crestar Bank.7
(9) Not Applicable
(10) Opinion and Consent of Counsel.3
(11) Consent of Independent Accountants.*
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) (a) Registrant's Distribution Plan with
respect to the Class B shares of the
Golden Oak Portfolios( except Golden Oak
Growth and Income Portfolio).2
(15) (b) Registrant's Distribution Plan with
respect to the Class B shares of the OVB
Portfolios.5
(15) (c) Form of Registrant's Distribution Plan
with respect to the Class B
Shares of the Golden Oak Growth and Income
Portfolio.8
(15) (d) Rule 18f-3 Multi-Class Plan.9
(16) Performance Quotation Computation with respect
to the Golden Oak Portfolios.3
(24) Powers of Attorney.6
- -------------------------------------------
* filed herewith
1 Incorporated herein by reference to Registrant's
Registration Statement on Form N-1A
(No. 33-50718) filed with the Securities
and Exchange Commission on August 11, 1992.
2 Incorporated herein by reference to Pre-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on October 14, 1992.
3 Incorporated herein by reference to Pre-Effective
Amendment No. 2 to Registrant's Registration
Statement on Form N-1A (No. 33-50718) filed with
the Securities and Exchange Commission on
January 13, 1993.
4 Incorporated herein by reference to Post-Effective
Amendment No. 4 to Registrant's
C-4
<PAGE>
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on July 29, 1993.
5 Incorporated herein by reference to Post-Effective
Amendment No. 6 to Registrant's
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on September 23, 1993.
6 Incorporated herein by reference to Post-Effective
Amendment No. 8 to Registrant's
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on May 31, 1994.
7 Incorporated herein by reference to Post-Effective
Amendment No. 9 to Registrant's
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on June 2, 1994.
8 Incorporated herein by reference to Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on September 30, 1994.
9 Incorporated herein by reference to Post-Effective
Amendment No. 12 to Registrant's
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on May 31, 1995.
10 Incorporated herein by reference to Post-Effective
Amendment No. 13 to Registrant's
Registration Statement on Form N-1A (No. 33-50718)
filed with the Securities and
Exchange Commission on August 11, 1995.
Item 25. Persons Controlled By or Under Common Control With Registrant
See the Prospectuses and the Statement of Additional Information
regarding the Trust's control relationships. The Administrator is a subsidiary
of SEI Corporation which also controls the distributor of the Registrant, SEI
Financial Services Company, and other corporations engaged in providing various
financial and record keeping services, primarily to bank trust departments,
pension plan sponsors, and investment managers.
Item 26. Number of Holders of Securities As of March 3, 1996:
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Units of beneficial interest, without par value-
Golden Oak Diversified Growth Portfolio
Class A 6
Class B 29
Golden Oak Intermediate-Term Income Portfolio
Class A 6
Class B 20
Golden Oak Michigan Tax Free Bond Portfolio
Class A N/A
Class B N/A
Golden Oak Prime Obligation Money Market Portfolio
Class A 6
Class B 101
Golden Oak Growth and Income
Class A N/A
Class B N/A
California Tax Exempt Portfolio 9
Institutional Tax Free Portfolio 7
OVB Prime Obligations Portfolio
Class A 5
C-5
<PAGE>
Class B 96
OVB Capital Appreciation Portfolio
Class A 5
Class B 280
OVB Emerging Growth Portfolio
Class A 5
Class B 266
OVB Government Securities Portfolio
Class A 5
Class B 124
OVB West Virginia Tax-Exempt Income Portfolio
Class A 5
Class B 163
US Government Securities Money Fund 2
Prime Obligations Fund 2
</TABLE>
Item 27. Indemnification:
Article VIII of the Agreement and Declaration of Trust filed as Exhibit 1
to the Registration Statement is incorporated by reference. Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to trustees, directors, officers and controlling
persons of the Registrant by the Registrant pursuant to the Declaration of Trust
or otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, directors, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such trustees, directors,
officers or controlling persons in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
Item 28. Business and Other Connections of Investment Adviser:
Other business, profession, vocation or employment of a substantial nature
in which each director or principal officer of the Adviser is or has been, at
any time during the last two fiscal years, engaged for his or her own account or
in the capacity of director, officer, employee, partner or trustee are as
follows:
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Citizens Bank (as of 3/28/96):
Victor E. George Victor George Oldsmobile, Inc. Chairman
Chairman Citizens Banking Corporation Director
Charles R. Weeks Citizens Banking Corporation Chairman
Vice Chairman Second National Bank of Saginaw Director
Wolohan Lumber Co. Director
David A. Thomas, Jr. Citizens Banking Corporation Vice Chairman
Director, President, CEO National Bank of Royal Oak Director
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Edward P. Abbot Abbott's Meat, Inc. President
Director Citizens Banking Corporation Director
John W. Ennest Citizens Banking Corporation Vice Chairman, CFO and Treasurer
Director Second National Bank of Saginaw Director
Commercial National Bank of Berwyn Chairman
George H. Kossaras Spring's Drug Store, Inc. President
Director Citizens Banking Corporation Director
Gerald Schreiber Royalite Co. Vice President
Director
William C. Shedd Winegarden, Shedd, Haley, Attorney & Partner
Director Lindholm & Robertson
Citizens Banking Corporation Director
Joseph G. Shomsky Massachusetts Mutual Insurance Insurance
Director Company
James E. Truesdell J. Austin Oil Company of Flint, Inc. President-Secretary
Director Citizens Banking Corporation Director
Robert J. Vitito Citizens Banking Corporation President, CEO and CAO
Director Second National Bank of Saginaw Chairman
State Bank of Standish Director
Second National Bank of Bay City Director
Grayling State Bank Director
Kendall B. Williams Gault Davison, P.C. Attorney & Vice President
Director Citizens Banking Corporation Director
Ada C. Washington
Director
Gary P. Drainville Citizens Banking Corporation Executive Vice President
Executive Vice President Citizens Bank Ypsilanti Director
Wayne G. Schaeffer Commercial National Bank of Berwyn Director
Senior Executive Vice President, Citizens Banking Corporation Executive Vice President
Chief Financial Officer and Director
Chief Operating Officer
Gordon F. Strayer Citizens Bank Fenton Director
Executive Vice President Region Board
David H. Buick
Senior Vice President
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Dana A. Czmer
Senior Vice President and
Trust Officer
Thomas W. Gallagher Citizens Banking Corporation Senior Vice President, General
Senior Vice President, General Counsel, Secretary
Counsel, Secretary
Gary O. Clark Citizens Bank - Sturgis Director
Citizens Banking Corporation Executive Vice President
Commercial National Bank of Berwyn President, CEO, Director
Edward P. Majask
Senior Vice President
and Senior Investment Officer
Richard J. Mitsdarfer Citizens Banking Corporation Senior Vice President & General
Senior Vice President Auditor
and General Auditor
Edward H. Newman Citizens Banking Corporation Vice President & Assistant Secretary
Senior Vice President,
Cashier & Secretary
Thomas C. Shafer
Senior Vice President
Lawrence G. Southwell
Senior Vice President
Richard T. Albee
Senior Vice President
Stephen I. Swett
Executive Vice President
and Senior Trust Officer
Marilyn K. Allar
Senior Vice President
Daniel E. Bekemeier
Senior Vice President & Controller
Dennis R. Johnston
Senior Vice President
Vicent V. Maysura
Senior Vice President
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Leslie V. Starr
Senior Vice President
Steven C. Futrell Citizens Bank - East Lansing
Community President & Director
Richard L. Collier Citizens Bank - East Lansing
Director - Retired Surgeon
Marcia G. Jensen Citizens Bank - East Lansing
Director Moore-Jensen Associates Realtor
William E. Madigan Citizens Bank - East Lansing
Director Michigan State Medical Society Executive Director
Joseph C. Overbeck Citizens Bank - East Lansing
Director Motor Wheel Corporation Retired President
Richard R. Simonds Citizens Bank - East Lansing
Director Michigan State University Chairman, Department of Finance
& Insurance
James M. VanTiflin Citizens Bank - East Lansing
Director Second National Bank of Saginaw President, Chief Executive Officer
& Director
Robert L. Critchfield Citizens Bank - Fenton
Community President & Director
Richard L. Adams Citizens Bank - Fenton
Director Freeway Sports Center, Inc. President & Chief Executive Officer
Donald K. Bell Citizens Bank - Fenton
Director Dupuis & Ryden CPA
Penny J. Fausey Citizens Bank - Fenton
Director Penny J. Fausey, CPA PC - President
E. Doran Kasper Citizens Bank - Fenton
Director Optometrist
William L. Kershaw Citizens Bank - Fenton
Director Kersaw Realty Realtor
Henry H. Phillips Citizens Bank - Fenton
Director Optometrist
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Nicholas A. Popa Citizens Bank - Fenton
Director Epic Machine, Inc. Chairman
Louis L. Schaedig Citizens Bank - Fenton
Director Kundinger Fluid Power Executive Vice President
Jeri L. Stileo Citizens Bank - Fenton
Director Stiles Insurance Agency Owner
Joseph F. Smith Citizens Bank - Sturgis
Community President & Director
Dennis O. Baker Citizens Bank - Sturgis
Director Owens Products, Inc. President & Chief Executive Officer
John E. Brand Citizens Bank - Sturgis
Director Sturgis MI Retired City Manager
Paul L. Brothers Citizens Bank - Sturgis
Director Surgeon
Lawrence A. Franks Citizens Bank - Sturgis
Director Burr Oak Tool & Gauge President
Alice M. Happel Citizens Bank - Sturgis
Director Burr Oak Township Farmer
Lawrence G. Hopkins Citizens Bank - Sturgis
Director Retired Bank President
John W. Kirsch Citizens Bank - Sturgis
Director Retired Manufacturer
Lawrence Rosenberg Citizens Bank - Sturgis
Director Rosenberg-Schipper Funeral Home President
Melvin G. Scheske Citizens Bank - Sturgis
Director CPA
Richard J. DeVries Citizens Bank - Ypsilanti
Community President & Director
Sandra J. French Citizens Bank - Ypsilanti
Director Cady's Grill Owner
Jerry F. Gooding Citizens Bank - Ypsilanti
Director Retired Business Owner
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Benjamin P. Koerber Citizens Bank - Ypsilanti
Director Retired Bank President
Gary M. Owen Citizens Bank - Ypsilanti
Director Governmental Consulting Services Partner
Information
Edwin L. Pear Citizens Bank - Ypsilanti
Director Pear, Sperling, Eggan & Muskovitz Attorney & Partner
Richard K. Robb Citizens Bank - Ypsilanti
Director Dentist
Richard K. Roberts Citizens Bank - Ypsilanti
Director Roberts & Freatman Attorney & Partner
John C. Shelton Citizens Bank - Ypsilanti
Director Retired Physician
Scudder, Stevens & Clark, Inc.:
Stephen R. Beckwith
Director
Lynn S. Birdsong The Latin America Income and Supervisory Director
Director Appreciation Fund N.V.
The Venezuela High Income Supervisory Director
Fund N.V.
Scudder Mortgage Fund Supervisory Director
Scudder Floating Rate Funds for Supervisory Director
Fannie Mae Mortgage Securities I & II
Scudder, Stevens & Clark Director
(Luxembourg) S.A.
Scudder Funds Trust Trustee
The Latin America Dollar Income President & Director
Fund, Inc.
Scudder World Income Opportunities President & Director
Fund, Inc.
Nicholas Bratt
Director
Scudder New Europe Fund, Inc. President & Director
The Brazil Fund, Inc. President & Director
The First Iberian Fund, Inc. President & Director
Scudder International Fund, Inc. President & Director
Scudder Global Fund, Inc. Director
The Korea Fund, Inc. President & Director
Scudder New Asia Fund, Inc. President & Director
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
The Argentina Fund, Inc. President
Scudder, Stevens & Clark Corporation Vice President
Scudder, Stevens & Clark Japan, Inc. Vice President
Scudder, Stevens & Clark of Canada Vice President
Ltd., Toronto, Ontario, Canada
Linda C. Coughlin Scudder Investor Services, Inc. Director
Director AARP Cash Investment Funds President & Trustee
AARP Growth Trust President & Trustee
AARP Income Trust President & Trustee
AARP Tax Free Income Trust President & Trustee
SFA, Inc. Director
Margaret D. Hadzina
Director
Jerard K. Hartman Scudder California Tax Free Vice President
Director Scudder Equity Trust Vice President
Scudder Cash Investment Trust Vice President
Scudder Fund, Inc. Vice President
Scudder Global Fund, Inc. Vice President
Scudder GNMA Fund Vice President
Scudder Institutional Fund, Inc. Vice President
Scudder Portfolio Trust Vice President
Scudder International Fund, Inc. Vice President
Scudder Investment Trust Vice President
Scudder Municipal Trust Vice President
Scudder Mutual Funds, Inc. Vice President
Scudder New Asia Fund, Inc. Vice President
Scudder New Europe Fund, Inc. Vice President
Scudder Securities Trust Vice President
Scudder State Tax Free Trust Vice President
Scudder Funds Trust Vice President
Scudder Tax Free Money Fund Vice President
Scudder Tax Free Trust Vice President
Scudder U.S. Treasury Money Fund Vice President
Scudder Variable Life Investment Vice President
Fund
Scudder World Income Opportunities Vice President
Fund, Inc.
Scudder Treasurers Trust Vice President
The Brazil Fund, Inc. Vice President
The Korea Fund, Inc. Vice President
The Argentina Fund, Inc. Vice President
Scudder, Stevens & Clark of Canada, Vice President and
Ltd., Toronto, Ontario, Canada Director
The First Iberian Fund, Inc. Vice President
</TABLE>
C-12
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
The Latin America Dollar Income Vice President
Fund, Inc.
Richard A. Holt Scudder Variable Life Investment Fund Vice President
Director
Dudley H. Ladd Scudder Investor Services, Inc. Director
Director Scudder Cash Investment Trust Vice President & Trustee
Scudder Investment Trust Trustee
Scudder Portfolio Trust Trustee
Scudder Municipal Trust Trustee
Scudder State Tax Free Trust Trustee
Scudder U.S. Treasury Money Fund Vice President
SFA, Inc. Vice President & Treasurer
Douglas M. Loudon Scudder Equity Trust Vice President & Trustee
Director Scudder Global Fund, Inc. Vice President
Scudder Investment Trust Vice President
Scudder Mutual Funds, Inc. Vice President & Director
Scudder Securities Trust Vice President & Trustee
AARP Cash Investment Funds Vice President
AARP Growth Trust Vice President
AARP Income Trust Vice President
AARP Tax Free Income Trust Vice President
Scudder, Stevens & Clark Corporation Vice President
Scudder Investor Services, Inc. Senior Vice President
Scudder, Stevens & Clark of Canada Vice President
Ltd., Toronto, Ontario, Canada
World Capital Fund Luxembourg Chairman
NKK - Scudder Capital Asset Managing Director
Management Corporation
Scudder, Stevens & Clark Japan, Inc. Chairman & Director
The Japan Fund, Inc. President
Scudder, Stevens & Clark Trustee
Supplemental Retirement Income Plan
Scudder, Stevens & Clark Profit Trustee
Sharing Plan
Scudder, Stevens & Clark, S.A., Chairman
Luxembourg
Berkshire Farm & Services for Youth Director
Investment Counsel Association of Board of Governors
America
Canadian High Income Fund Chairman
Hot Growth Companies Fund Chairman
John T. Packard Montgomery Street Income Securities, President
Director Inc.
Scudder Realty Advisors, Inc. Director
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
PSI Star Corporation Director
Juris Padegs The Brazil Fund, Inc. Chairman of the Board &
Secretary and Director Director
Scudder Equity Trust Trustee & Vice President
The First Iberian Fund, Inc. Chairman of the Board &
Director
Scudder Funds Trust Trustee
Scudder Global Fund, Inc. Vice President & Assistant
Secretary
Scudder Investment Trust Trustee
Scudder International Fund, Inc. Vice President, Assistant
Secretary & Director
The Latin America Dollar Income Vice President
Fund, Inc.
Scudder Municipal Trust Trustee
Scudder Mutual Funds, Inc. Vice President & Assistant
Secretary
Scudder New Europe Fund, Inc. Vice President & Director
Scudder Securities Trust Trustee
Scudder State Tax Free Trust Trustee
Scudder New Asia Fund, Inc. Vice President, Assistant
Secretary & Director
Scudder Tax Free Money Fund Vice President & Trustee
Scudder Tax Free Trust Trustee
The Korea Fund, Inc. Chairman of the Board and
Director
The Argentina Fund, Inc. Vice President & Director
Scudder, Stevens & Clark of Canada Secretary
Ltd., Toronto, Ontario, Canada
Scudder Realty Advisors, Inc. Vice President
SFA, Inc. Assistant Secretary
Scudder Investor Services, Inc. Vice President & Director
NKK-Scudder Capital Asset Assistant Treasurer
Management
Scudder, Stevens & Clark Japan, Inc. Director and Chairman of the
Board
Scudder, Stevens & Clark Corporation President & Director
Sovereign High Yield Investment Supervisory Director
Company N.V.
President Investment Trust Director
Corporation
</TABLE>
C-14
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Daniel Pierce Scudder New Europe Fund, Inc. Chairman of the Board and
Chairman of the Board, Director
Director & Assistant California Tax Free Trust Trustee
Treasurer Scudder Equity Trust President & Trustee
The First Iberian Fund, Inc. Director
Scudder GNMA Fund President & Trustee
Scudder Portfolio Trust President & Trustee
Scudder Funds Trust President & Trustee
Scudder Institutional Fund, Inc. President & Director
Scudder Fund, Inc. President & Director
Scudder International Fund, Inc. Director
Scudder Investment Trust President & Trustee
Scudder Municipal Trust Vice President & Trustee
Scudder Mutual Funds, Inc. President & Director
Scudder New Asia Fund, Inc. Director
Scudder Securities Trust President & Trustee
Scudder State Tax Free Trust Trustee
Scudder Treasurers Trust President & Trustee
Scudder Variable Life Investment Vice President & Trustee
Fund
The Brazil Fund, Inc. Director
Montgomery Street Income Securities, Vice President & Assistant
Inc. Treasurer
Scudder Global Fund, Inc. Vice President and Director
Scudder Investor Services, Inc. Vice President, Director &
Assistant Treasurer
Scudder Service Corporation Vice President & Director
Scudder, Stevens & Clark of Canada, Chairman of the Board &
Ltd., Toronto, Ontario, Canada President
Scudder, Stevens & Clark, Ltd. Director
Brigham and Women's Hospital Trustee
(hospital) Boston, MA
Fiduciary Trust Company Director
Fiduciary Company Incorporated, Director
Boston, MA
Cornelia M. Small AARP Cash investment Funds Vice President
Director AARP Growth Trust Vice President
AARP Income Trust Vice President
AARP Tax Free Income Trust Vice President
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Edmond D. Villani Scudder Global Fund, Inc. Chairman of the Board &
President & Director Director
Scudder International Fund, Inc. Chairman of the Board &
Director
Scudder New Asia Fund, Inc. Chairman of the Board &
Director
Scudder Securities Trust Trustee
The Argentina Fund, Inc. Chairman of the Board &
Director
Scudder Realty Advisors, Inc. Director
Scudder Mortgage Fund Supervisory Director
The Latin America Dollar Income Chairman of the Board &
Fund, Inc. Director
Scudder, Stevens & Clark Japan, Inc. Director
Scudder World Income Opportunities Chairman of the Board &
Fund, Inc. Director
One Valley Bank, National Association:
J. Holmes Morrison One Valley Bancorp President & Chief
Chairman of the Board Executive Officer
Phyllis H. Arnold One Valley Bancorp Director
Director, President & Chief One Valley Bank, N.A. President & CEO
Executive Officer
Frederick H. Belden, Jr. One Valley Bancorp Senior Vice President and
Executive Vice President Assistant Corporate Secretary
Charles M. Avampato Clay Foundation, Inc. President
Director One Valley Bancorp Director
Robert F. Baronner One Valley Bancorp Chairman of the Board
Director of Directors
Herald R. Baughman One Valley Bank, N.A.
Senior Vice President
Gary L. Brown Parkerburg Region
Region President
James K. Brown Jackson & Kelly Attorney, Partner
Director One Valley Bancorp Director
Lloyd P. Calvert One Valley Bank, N.A.
Senior Vice President
John T. Chambers Ravenswood Land Co. and President
Director Mt. Alpha Development Co.
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
One Valley Bancorp Director
Nelle Ratrie Chilton Dickinson Fuel Co. Director
Director Terra Co., Inc. Director
Terra Care, Inc. Director
Terra Salis, Inc. Director
TerraSod, Inc. Director
One Valley Bancorp Director
Anthony N. Ciliberti One Valley Bank, N.A.
General Auditor
Bernice J. Deem One Valley Bank, N.A.
Senior Vice President
Ray Marshall Evans, Jr. Dickinson Co. and President
Director Quincy Coal Co.
One Valley Bancorp Director
Jane Fleming One Valley Bank, N.A.
Senior Vice President
Brian Fox One Valley Bank, N.A.
Senior Vice President
Robert F. Goldsmith Cascades Coal Sales, Inc. President
Director Sentry Resource Executive Vice President
Associates, Inc.
Phillip H. Goodwin CAMCARE and Charleston President
Director Area Medical Center
One Valley Bancorp Director
O. Nelson Jones Madison Coal & Supply President
Director Company
Amherst Industries, Inc. Vice President
William M. Kidd One Valley Bank, N.A.
Senior Vice President
Carl E. Little One Valley Bank Vice Chairman (retired)
Director
Edward H. Maier General Corporation President
Director One Valley Bancorp Director
Roger D. Mooney
Senior Vice President
</TABLE>
C-17
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
John F. Mork Eastern American Energy President
Director Corp.
Harold E. Neely One Valley Bank, N.A.
Senior Vice President
Robert O. Orders, Sr. Orders Construction Company Chief Executive Officer
Director One Valley Bancorp Director
John L. D. Payne Payne-Gallatin Mining Co. President
Director One Valley Bancorp Director
Angus E. Peyton Brown & Peyton Attorney & Partner
Director American Electric Power Director
Co., Inc.
One Valley Bancorp Director
Brent D. Robinson One Valley Bank Huntington President
K. Richard C. Sinclair Jefferds Corporation President
Director
James C. Smith O.V. Smith & Sons of Big President
Director Chimney, Inc.
O.V. Smith & Sons, Inc. Vice President
Michael W. Stajduhar One Valley Bank, N.A.
Senior Vice President
James R. Thomas II Carbon Industries, Inc. Chairman (retired)
Director
J. Randy Valentine One Valley Bank, N.A.
Senior Vice President
Dr. Edwin H. Welch University of Charleston President
Director One Valley Bank, N.A.
John Henry Wick III Dickinson Fuel Co., Inc.
Director Harrison & Bates Commercial Realtor (retired)
Thomas D. Wilkerson Northwestern Mutual Life General Agent
Director Insurance Company Director
James D. Williams
Director
James A. Winter One Valley Bank, N.A.
Senior Vice President
</TABLE>
C-18
<PAGE>
<TABLE>
<CAPTION>
Name and Position Name of Connection with
with Investment Adviser Other Company Other Company
- ----------------------- ------------- -------------
<S> <C> <C>
Jack B. Young One Valley Bank, N.A.
Senior Vice President
Craig L. Zander One Valley Bank, N.A.
Senior Vice President
John F. Ziebold One Valley Bank, N.A.
Senior Vice President
Capitoline Investment Services Incorporated:
Thomas Dean Hogan Crestar Bank Group Executive Vice
Chairman and Director President - Trust
Linda Flory Rigsby Crestar Financial Corporation Senior Vice President
Secretary and its subsidiary Crestar Bank and Deputy General Counsel
James M. Wells, III Crestar Financial Corporation President
Director and its subsidiary Crestar Bank
</TABLE>
The list required by this Item 28. of officers and partners of Wellington
Management Company, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and partners during the past two years, is incorporated by reference to
Schedules A and D of Form ADV, filed by Wellington Management Company pursuant
to the Investment Advisers Act of 1940 (SEC File No. 801-15908).
The list required by this Item 28. of officers and partners of
Nicholas-Applegate Capital Management, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by Nicholas-Applegate Capital
Management pursuant to the Investment Advisers Act of 1940 (SEC File No.
801-21442).
PNC Institutional Management Corporation ("PIMC") performs investment
advisory services for the Registrant and certain other investment companies and
accounts. PNC Bank, N.A. ("PNC"), the parent company of PIMC, and its
predecessors have been in the business of managing the investments of fiduciary
and other accounts in the Philadelphia area since 1847. In addition to its trust
business, PNC provides commercial banking services.
To the Registrant's knowledge, none of the directors or officers of PIMC,
except as set forth in the filings referred to below, is, or has been at any
time during the Registrant's past two fiscal years, engaged in any other
business, profession, vocation or employment of a substantial nature, except
that certain directors and officers and certain executives of PIMC also hold
various positions with, and engage in business for, PNC Bank Corp., which
indirectly owns all the outstanding stock of PIMC, or other subsidiaries of PNC
Bank Corp. Set forth in the filings referred to below are the names and
principal businesses of the directors and certain executives of PIMC who are
engaged in any other business, profession, vocation or employment of a
substantial nature.
C-19
<PAGE>
The information required by this Item 28 with respect to each director,
officer and partner of PIMC is incorporated by reference to Schedules A and D of
Form ADV, filed by PNC Institutional Management Corporation pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-13304).
Item 29. Principal Underwriters:
(a) Furnish the name of each investment company (other than the Registrant) for
which each principal underwriter currently distributing the securities of
the Registrant also acts as a principal underwriter, distributor or
investment adviser.
Registrant's distributor, SEI Financial Services Company ("SFS"), acts as
distributor for:
SEI Daily Income Trust............................... July 15, 1982
SEI Liquid Asset Trust............................... November 29, 1982
SEI Tax Exempt Trust................................. December 3, 1982
SEI Index Funds...................................... July 10, 1985
SEI Institutional Managed Trust...................... January 22, 1987
SEI International Trust.............................. August 30, 1988
Stepstone Funds...................................... January 30, 1991
The Advisors' Inner Circle Fund...................... November 14, 1991
The Pillar Funds..................................... February 28, 1992
CUFUND............................................... May 1, 1992
STI Classic Funds.................................... May 29, 1992
CoreFunds, Inc....................................... October 30, 1992
First American Funds, Inc............................ November 1, 1992
First American Investment Funds, Inc................. November 1, 1992
The Arbor Fund....................................... January 28, 1993
1784 Funds........................................... June 1, 1993
The PBHG Funds, Inc.................................. July 16, 1993
Marquis Funds(R)..................................... August 17, 1993
Morgan Grenfell Investment Trust..................... January 3, 1994
Inventor Funds, Inc.................................. August 1, 1994
The Achievement Funds Trust.......................... December 27, 1994
Insurance Investment Products Trust.................. December 30, 1994
Bishop Street Funds.................................. January 27, 1995
CrestFunds, Inc...................................... March 1, 1995
Conestoga Family of Funds............................ May 1, 1995
STI Classic Variable Trust........................... August 18, 1995
ARK Funds............................................ November 1, 1995
Monitor Funds........................................ January 11, 1996
SFS provides numerous financial services to investment managers, pension
plan sponsors, and bank trust departments. These services include portfolio
evaluation, performance measurement and consulting services ("Funds
Evaluation") and automated execution, clearing and settlement of securities
transactions ("MarketLink").
(b) Furnish the Information required by the following table with respect to
each director, officer or partner of each principal underwriter named in the
answer to Item 21 of Part B. Unless otherwise noted, the business address of
each director or officer is 680 East Swedesford Road, Wayne, PA 19087.
C-20
<PAGE>
<TABLE>
<CAPTION>
Position and Office Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman & Chief Executive Officer --
Henry H. Greer Director, President & Chief Operating Officer --
Carmen V. Romeo Director, Executive Vice President & Treasurer --
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President --
Charles A. Marsh Executive Vice President-Capital Resources Division --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Jerome Hickey Senior Vice President --
David G. Lee Senior Vice President President & Chief
Executive Officer
William Madden Senior Vice President --
A. Keith McDowell Senior Vice President --
Dennis J. McGonigle Senior Vice President --
Hartland J. McKeown Senior Vice President --
James V. Morris Senior Vice President --
Steven Onofrio Senior Vice President --
Kevin P. Robins Senior Vice President, General Counsel & Vice President & Assistant
Secretary Secretary
Robert Wagner Senior Vice President --
Patrick K. Walsh Senior Vice President --
Kenneth Zimmer Senior Vice President --
Robert Crudup Managing Director --
Vic Galef Managing Director --
Kim Kirk Managing Director --
John Krzeminski Managing Director --
Carolyn McLaurin Managing Director & Vice President --
Barbara Moore Managing Director --
Donald Pepin Managing Director --
Mark Samuels Managing Director --
Wayne M. Withrow Managing Director --
Mick Duncan Team Leader --
Robert S. Ludwig Team Leader & Vice President --
Vicki Malloy Team Leader --
Robert Aller Vice President --
Steve Bendinelli Vice President --
W. Kelso Morrill Vice President --
Gordon W. Carpenter Vice President --
Robert B. Carroll Vice President & Assistant Secretary Vice President &
Assistant Secretary
Todd Cipperman Vice President & Assistant Secretary Vice President &
Assistant Secretary
Ed Daly Vice President --
Jeff Drennen Vice President --
Lucinda Duncalfe Vice President --
Kathy Heilig Vice President --
Larry Hutchison Vice President --
Michael Kantor Vice President --
C-21
<PAGE>
Samuel King Vice President --
Donald H. Korytowski Vice President --
Jack May Vice President --
Sandra K. Orlow Vice President & Assistant Secretary Vice President &
Assistant Secretary
Larry Pokora Vice President --
Kim Rainey Vice President --
Paul Sachs Vice President --
Steve Smith Vice President --
Daniel Spaventa Vice President --
Kathryn L. Stanton Vice President & Assistant Secretary Vice President &
Assistant Secretary
William Zawaski Vice President --
James Dougherty Director of Brokerage Services --
</TABLE>
Item 30. Location of Accounts and Records:
Books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940, and the rules promulgated
thereunder, are maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3);
(6); (8); (12); and 31a-1(d), the required books and records are
maintained at the offices of Registrant's Custodians:
CoreStates Bank, N.A.
Broad and Chestnut Streets
P.O. Box 7618
Philadelphia, PA 19101
Crestar Bank
919 East Main Street
Richmond, VA 23219
(b)/(c) With respect to Rules 31a-1(a); 31a-1(b)(1),(4); (2)(C) and
(D); (4); (5); (6); (8); (9); (10); (11); and 31a-1(f), the required
books and records are maintained at the offices of Registrant's
Administrator:
SEI Financial Management Corporation
680 E. Swedesford Road
Wayne, PA 19087
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f),
the required books and records are maintained at the principal offices
of the Registrant's Advisers:
<TABLE>
<CAPTION>
<S> <C> <C>
GOLDEN OAK PORTFOLIOS Citizens Bank
328 Saginaw Street
Flint, MI 48502
C-22
<PAGE>
Wellington Management Company
75 State Street
Boston, MA 02109
Scudder, Stevens & Clark, Inc.
Two International Place
Boston, MA 02110
Nicholas-Applegate Capital Management
600 West Broadway
29th Floor
San Diego, CA 92101
PIMC PORTFOLIOS PNC Institutional Management Corporation
400 Bellevue Parkway
Wilmington, DE 19809
OVB PORTFOLIOS One Valley Bank, National Association
One Valley Square
Charleston, WV 25301
Wellington Management Company
75 State Street
Boston, MA 02109
U. S. GOVERNMENT Capitoline Investment Services Incorporated
SECURITIES MONEY 919 East Main Street
AND PRIME OBLIGATIONS FUNDS Richmond, VA 23219
</TABLE>
Item 31. Management Services: None.
Item 32. Undertakings:
Registrant hereby undertakes to file a Post-Effective Amendment to this
Registration Statement containing reasonably current financial information
regarding the Golden Oak Growth and Income Portfolio within 4-6 months of the
later of the effective date or commencement of operations.
Registrant hereby undertakes to file a Post-Effective Amendment to this
Registration Statement containing reasonably current financial information
regarding the Golden Oak Michigan Tax Free Bond Portfolio within 4-6 months of
the later of the effective date or commencement of operations.
Registrant hereby undertakes that whenever Shareholders meeting the
requirements of Section 16(c) of the Investment Company Act of 1940 inform the
Board of Trustees of their desire to communicate with Shareholders of the Trust,
the Trustees will inform such Shareholders as to the approximate number of
Shareholders of record and the approximate costs of mailing or afford said
Shareholders access to a list of Shareholders.
Registrant undertakes to hold a meeting of Shareholders for the purpose
of voting upon the question of removal of a Trustee(s) when requested in writing
to do so by the holders of at least 10% of Registrant's outstanding shares and
in connection with such meetings to comply with the provisions of Section 16(c)
C-23
<PAGE>
of the Investment Company Act of 1940 relating to Shareholder communications.
Registrant undertakes to furnish each prospective person to whom a
prospectus will be delivered with a copy of the Registrant's latest annual
report to shareholders, when such annual report is issued containing information
called for by Item 5A of Form N-1A, upon request and without charge.
NOTICE
A copy of the Agreement and Declaration of Trust for The Arbor Fund is on file
with the Secretary of State of The Commonwealth of Massachusetts and notice is
hereby given that this Registration Statement has been executed on behalf of the
Trust by an officer of the Trust as an officer and by its Trustees as trustees
and not individually and the obligations of or arising out of this Registration
Statement are not binding upon any of the Trustees, officers, or Shareholders
individually but are binding only upon the assets and property of the Trust.
C-24
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment to Registration No. 33-50718 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Wayne,
Commonwealth of Pennsylvania on the 27th day of March, 1996.
THE ARBOR FUND
By: /s/ David G. Lee
-------------------------------------
David G. Lee
ATTEST: President and Chief Executive Officer
/s/ Jeffrey Cohen
- ------------------------------
Jeffrey A. Cohen
Controller
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacity and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
* Trustee March 27, 1996
- --------------------------------
John T. Cooney
* Trustee March 27, 1996
- --------------------------------
William M. Doran
* Trustee March 27, 1996
- --------------------------------
Frank E. Morris
* Trustee March 27, 1996
- --------------------------------
Robert A. Nesher
* Trustee March 27, 1996
- --------------------------------
Robert A. Patterson
* Trustee March 27, 1996
- --------------------------------
Gene B. Peters
* Trustee March 27, 1996
- --------------------------------
James M. Storey
/s/ David G. Lee President & Chief Executive March 27, 1996
- --------------------------------
David G. Lee Officer
/s/ Jeffrey A. Cohen Controller & Chief Financial Officer March 27, 1996
- ---------------------------------
Jeffrey A. Cohen
*By: /s/ David G. Lee
----------------
David G. Lee
Attorney-in-Fact
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Page
------- ----
<S> <C> <C>
(1) Registrant's Agreement and Declaration of Trust.1
(2) Registrant's By-Laws.1
(3) Not Applicable
(4) Not Applicable
(5)(a) Administration Agreement between Registrant and SEI
Financial Management Corporation with Schedule dated
January 28, 1993 for the Golden Oak Portfolios and forms of
Schedule for the California Tax Exempt Portfolio and
Institutional Tax Free Portfolio.4
(5)(b) Investment Advisory Agreement between the Registrant and
Citizens Commercial and Savings Bank with respect to the
Golden Oak Diversified Growth Portfolio, the Golden Oak
Intermediate-Term Income Portfolio, Golden Oak Tax Free
Bond Portfolio and Golden Oak Prime Obligation Money Market
Portfolio.3
(5)(c) Investment Sub-Advisory Agreement by and among Registrant,
Citizens Commercial and Savings Bank and Wellington Management
Company with respect to the Golden Oak Prime Obligation Money
Market Portfolio.3
(5)(f) Form of Investment Advisory Agreement between Registrant and
Prudential Investment Corporation with respect to the California Tax
Exempt Portfolio and the Institutional Tax Free Portfolio.4
(5)(g) Form of Schedule, relating to the OVB Prime Obligations,
OVB Capital Appreciation, OVB Emerging Growth, OVB
Government Securities and OVB West Virginia Tax-Exempt
Income Portfolios (the "OVB Portfolios"), to Administration
Agreement by and between the Registrant and SEI Financial
Management Corporation dated as of January 28, 1993.5
(5)(h) Form of Investment Advisory Agreement between the Registrant and
One Valley Bank, National Association with respect to the OVB
Portfolios.5
(5)(i) Form of Investment Sub-Advisory Agreement by and among the
Registrant, One Valley Bank, National Association and Wellington
Management Company with respect to the OVB Prime Obligations
Portfolio.5
(5)(j) Form of Investment Advisory Agreement between the
Registrant and Capitoline Investment Services, Incorporated with respect
to the U.S. Government Securities Money Fund.7
(5)(k) Form of Schedule, relating to U.S. Government Securities Money
Fund, to Administration Agreement by and between Registrant and
SEI Financial Management.7
(5)(l) Form of Schedule B to Investment Advisory Agreement between the
Registrant and Citizens Commercial & Savings Bank with respect to
Golden Oak Growth and Income Portfolio.8
(5)(m) Form of Investment Sub-Advisory Agreement by and between
Scudder, Stevens & Clark, Inc. with respect to Golden Oak Growth
and Income Portfolio.8
(5)(n) Form of Schedule, relating to Golden Oak Growth and
Income Portfolio, to Administration Agreement by and
between Registrant and SEI Financial Management
Corporation.8
(5)(o) Administration Agreement between Registrant and SEI Financial Corporation with
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
------- ----
<S> <C> <C>
Schedule dated January 28, 1993 as amended and restated on
May 17, 1994 for Golden Oak Portfolios, the Prudential
Portfolios and the OVB Portfolios.9
(5)(p) Administration Agreement between Registrant and SEI Financial Management
Corporation with Schedule dated August 1, 1994.9
(5)(q) Form of Schedule to the Investment Advisory Agreement between Registrant and
Capitoline Investment Services Incorporated with respect to the Prime Obligations
Fund.10
(5)(r) Form of Schedule relating to the Prime Obligations Funds,
to Administration Agreement filed under (5)(p) by and
between Registrant and SEI Financial Management
Corporation.10
(5)(s) Form of Investment Advisory Agreement between the Registrant and PNC Institutional
Management Corporation with respect to the California Tax-Exempt Portfolio.*
(5)(t) Form of Investment Advisory Agreement between the
Registrant and PNC Institutional Management Corporation
with respect to the Institutional Tax Free Portfolio.*
(5)(u) Investment Sub-Advisory Agreement by and among the Registrant and Citizens
Bank and Nicholas-Applegate Capital Management with respect to the Golden Oak
Diversified Growth Portfolio.*
(6)(a) Distribution Agreement between Registrant and SEI Financial Services Company.2
(6)(b) Transfer Agent Agreement between Registrant and SEI Financial
Management Corporation.3
(6)(c) Transfer Agent Agreement between Registrant and Crestar Bank.9
(6)(d) Transfer Agent Agreement between Registrant and Supervised Service Company.9
(7) Not Applicable
(8)(a) Custodian Agreement between Registrant and CoreStates Bank N.A.2
(8)(b) Form of Custodian Agreement between Registrant and Crestar Bank.7
(9) Not Applicable
(10) Opinion and Consent of Counsel.3
(11) Consent of Independent Accountants.*
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15)(a) Registrant's Distribution Plan with respect to the Class B shares of the
Golden Oak Portfolios.2
(15)(b) Registrant's Distribution Plan with respect to the Class B shares of the
OVB Portfolios.5
(15)(c) Form of Registrant's Distribution Plan with respect to the
Class B Shares of the Golden Oak Growth and Income
Portfolio.8
(15)(d) Rule 18f-3 Multi-Class Plan.9
(16) Performance Quotation Computation with respect to the Golden Oak
Portfolios.3
(24) Powers of Attorney.6
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
----------
* filed herewith
1 Incorporated herein by reference to Registrant's Registration Statement on Form N-1A (No.
33-50718) filed with the Securities and Exchange Commission on August 11, 1992.
2 Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on October 14, 1992.
3 Incorporated herein by reference to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on January 13, 1993.
4 Incorporated herein by reference to Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on July 29, 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5 Incorporated herein by reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on September 23, 1993.
6 Incorporated herein by reference to Post-Effective Amendment No. 8 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on May 31, 1994.
7 Incorporated herein by reference to Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on June 2, 1994.
8 Incorporated herein by reference to Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on September 30, 1994.
9 Incorporated herein by reference to Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on May 31, 1995.
10 Incorporated herein by reference to Post-Effective Amendment No. 13 to Registrant's
Registration Statement on Form N-1A (No. 33-50718) filed with the Securities and Exchange
Commission on August 11, 1995.
</TABLE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of December 1, 1995 between THE ARBOR FUND, a
Massachusetts business trust (the "Fund"), and PNC INSTITUTIONAL MANAGEMENT
CORPORATION, a Delaware corporation (the "Advisor").
WHEREAS, the Fund is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund desires to retain Advisor to furnish investment
advisory services to the Fund and Advisor is willing to so furnish such
services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) The Fund hereby appoints Advisor to act as investment
advisor to the following investment portfolio of the Fund: California Tax Exempt
Portfolio (the "Portfolio"), for the period and on the terms set forth in this
Agreement. Advisor accepts such appointment and agrees to furnish the services
herein set forth for the compensation herein provided.
(b) In the event that the Fund establishes one or more
portfolios other than the Portfolio with respect to which it desires to retain
Advisor to act as investment adviser hereunder, the Fund shall notify Advisor in
writing. If Advisor is willing to render such services under this Agreement it
shall notify the Fund in writing whereupon, subject to such shareholder approval
as may be required pursuant to Paragraph 10 hereof, such portfolio shall become
a portfolio hereunder and shall be subject to the provisions of this Agreement
to the same extent as the Portfolio named above in subparagraph (a) except to
the extent that said provisions (including those relating to the compensation
payable by the Fund to Advisor) are modified with respect to such portfolio in
writing by the Fund and Advisor at the time.
2. Sub-Contractors. It is understood that Advisor will from time to
time employ or associate with such person or persons as Advisor may believe to
be particularly fitted to assist it in the performance of this Agreement;
provided, however, that the compensation of such person or persons shall be paid
by Advisor and that Advisor shall be as fully responsible to the Fund for the
acts and omissions of any subcontractor as it is for its own acts and omissions.
Such person or persons shall be employed pursuant to sub-advisory agreements
agreeable to the Fund and approved in accordance with the provisions of the 1940
Act.
<PAGE>
3. Delivery of Documents. The Fund has furnished Advisor with copies,
properly certified or authenticated, of each of the following:
(a) Resolutions of the Fund's Board of Trustees
authorizing the appointment of Advisor as the
Portfolio's advisor and approving this Agreement;
(b) The Fund's Declaration of Trust as filed with the
State Secretary of the Commonwealth of
Massachusetts and the Boston City Clerk on
July 24, 1992;
(c) The Fund's By-Laws;
(d) The Fund's Notification of Registration on Form N- 8A
under the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") on August 11, 1992;
(e) The Fund's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of
1933 and 1940 Act, as filed with the SEC on August
11, 1992, and all amendments thereto; and
(f) The Fund's most recent prospectus(es) for the
Portfolio (such prospectus(es) together with the
related statement(s) of additional information, as
currently in effect and all amendments and
supplements thereto, are herein called "Prospectus").
The Fund will furnish Advisor from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Services. Subject to the supervision of the Fund's Board of
Trustees, Advisor will (either directly or through the sub- advisors and other
sub-contractors employed by it in accordance with Section 2 hereof) provide a
continuous investment program for the Portfolio, including investment research
and management with respect to all securities, investments, cash and cash
equivalents in the Portfolio. Advisor will (either directly or through the
sub-advisors and other sub-contractors employed by it in accordance with
Paragraph 2 hereof) determine from time to time what securities and other
investments will be purchased, retained or sold by the Portfolio and will place
the daily orders for the purchase or sale of securities. Advisor will provide
the services rendered by it under this Agreement in accordance with the
Portfolio's investment objective, policies and restrictions as stated in the
2
<PAGE>
Portfolio's Prospectus (as currently in effect and as it may be amended or
supplemented from time to time) and the resolutions of the Fund's Board of
Trustees. Advisor further agrees that it:
(a) will comply with all applicable rules and regulations
of the SEC and will in addition conduct its
activities under this Agreement in accordance with
other applicable law;
(b) will place orders either directly with the issuer
or with any broker or dealer. Subject to the other
provisions of this paragraph, in placing orders
with brokers and dealers, Advisor will attempt to
obtain the best price and the most favorable
execution of its orders. In placing orders,
Advisor will consider the experience and skill of
the firm's securities traders as well as the firm's
financial responsibility and administrative
efficiency. In addition, Advisor is authorized to
take into account the sale of shares of the Fund in
allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers
and dealers that are affiliated with Advisor, the
sub-advisors or the Fund's distributor) in
compliance with applicable law. In no instance,
however, will the Portfolio's securities be
purchased from or sold to Advisor, any sub-advisor,
the Fund's distributor or any affiliated person
thereof, except to the extent permitted by the SEC
or by applicable law;
(c) will maintain books and records with respect to the
Portfolio's securities transactions and will furnish
the Fund's Board of Trustees such periodic and
special reports as the Board may request;
(d) will maintain a policy and practice of conducting
its investment advisory services hereunder
independently of the commercial banking operations
of its affiliates. When Advisor makes investment
recommendations for the Portfolio, its investment
advisory personnel will not inquire or take into
consideration whether the issuer of securities
proposed for purchase or sale for the Portfolio's
account are customers of the commercial departments
of its affiliates. In dealing with commercial
customers, Advisor and the sub-advisors will not
inquire or take into consideration whether
securities of those customers are held by the Fund;
and
3
<PAGE>
(e) will treat confidentially and as proprietary
information of the Fund all records and other
information relative to the Fund, the Portfolio and
the Fund's prior, current or potential
shareholders, and will not use such records and
information for any purpose other than performance
of its responsibilities and duties hereunder,
except after prior notification to and approval in
writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld where
Advisor may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by
the Fund.
5. Services Not Exclusive. Advisor's services hereunder are not
deemed to be exclusive, and Advisor shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
6. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Advisor hereby agrees that all records which it maintains
for the Portfolio are the property of the Fund and further agrees to surrender
promptly to the Fund any of such records upon the Fund's request. Advisor
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act.
7. Expenses. During the term of this Agreement, Advisor will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolio.
8. Compensation.
(a) For the services provided and the expenses assumed
pursuant to this Agreement the Fund will pay Advisor and Advisor will accept as
full compensation therefor a fee, computed daily and payable monthly, at the
following annual rate: .095% of the Portfolio's average daily net assets. Prior
to the requisite approval of this Agreement by the shareholders of the
California Tax Exempt Portfolio, Advisor agrees to accept a fee from the Fund
for its services hereunder with respect to the Portfolio at the level the
Portfolio was required to compensate its previous investment adviser pursuant to
its most recent investment advisory agreement. Such fee as is attributable to
the Portfolio shall be a separate charge to the Portfolio and shall be the
several (and not joint or joint and several) obligation of the Portfolio.
4
<PAGE>
(b) If in any fiscal year the aggregate expenses of the
Portfolio (as defined under the securities regulations of any state having
jurisdiction over the Portfolio) exceeds the expense limitations of any such
state, Advisor will bear its share of the amount of such excess in proportion to
the aggregate fees otherwise payable to it hereunder and to the Fund's
administrator under its administration agreement with the Fund. The obligation
of Advisor to reimburse the Fund under this Paragraph 8(b) is limited in any
fiscal year to the amount of its fees otherwise payable hereunder attributable
to the Portfolio for such fiscal year, provided, however, that notwithstanding
the foregoing, Advisor shall reimburse the Fund for the full amount of its share
of any such excess expenses regardless of the amount of fees otherwise payable
to it during such fiscal year to the extent that the securities regulations of
any state having jurisdiction over the Portfolio so require. Such expense
reimbursement, if any, will be estimated, reconciled and paid on a monthly
basis.
9. Limitation of Liability. Advisor shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of this Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations or duties under this Agreement.
10. Duration and Termination. This Agreement will become effective as
of the date hereof with respect to the Portfolio listed in Section 1(a) hereof
and, with respect to any additional portfolio, on the date of receipt by the
Fund of notice from Advisor in accordance with Section 1(b) hereof that Advisor
is willing to serve as investment advisor with respect to such portfolio,
provided that this Agreement (as supplemented by the terms specified in any
notice and agreement pursuant to Section 1(b) hereof) shall have been approved
by the shareholders of such portfolio(s) in accordance with the requirements of
the 1940 Act, and, unless sooner terminated as provided herein, shall continue
in effect with respect to the Portfolio until December 1, 1997. Thereafter, if
not terminated, this Agreement shall continue in effect with respect to the
Portfolio for successive annual periods ending on December 1, provided such
continuance is specifically approved at least annually (a) by vote of a majority
of those members of the Fund's Board of Trustees who are not interested persons
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Funds's Board of Trustees or
by vote of a majority of the outstanding voting securities of the Portfolio.
Notwithstanding the foregoing, this Agreement may be terminated at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
5
<PAGE>
Portfolio), or by Advisor on sixty days' written notice. This Agreement will
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meaning as such terms
in the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
12. Release. The names "The Arbor Fund" and "Trustees of The Arbor
Fund" refer respectively to the Trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated which is hereby referred to and a copy of which is on file at the
office of the State Secretary of the Commonwealth of Massachusetts and at the
principal office of the Trust. The obligations of "The Arbor Fund" entered into
in the name or on behalf thereof by any of the Trustees, officers,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Shareholders, officers,
representatives or agents of the Trust personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Trust must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Trust.
13. Miscellaneous. This Agreement replaces any prior or contemporaneous
agreements between the parties hereto regarding the California Tax Exempt
Portfolio with respect to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto and their respective successors and
shall be governed by Delaware law.
14. Counterparts. This Agreement may be executed in counterparts by
the parties hereto, each of which shall constitute an original counterpart,
and all of which, together, shall constitute one Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE ARBOR FUND
By:____________________________________
Title:
PNC INSTITUTIONAL
MANAGEMENT CORPORATION
By:____________________________________
Title:
7
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of December 1, 1995 between THE ARBOR FUND, a
Massachusetts business trust (the "Fund"), and PNC INSTITUTIONAL MANAGEMENT
CORPORATION, a Delaware corporation (the "Advisor").
WHEREAS, the Fund is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund desires to retain Advisor to furnish investment
advisory services to the Fund and Advisor is willing to so furnish such
services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) The Fund hereby appoints Advisor to act as investment
advisor to the following investment portfolio of the Fund: Institutional Tax
Free Portfolio (the "Portfolio"), for the period and on the terms set forth in
this Agreement. Advisor accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
(b) In the event that the Fund establishes one or more
portfolios other than the Portfolio with respect to which it desires to retain
Advisor to act as investment adviser hereunder, the Fund shall notify Advisor in
writing. If Advisor is willing to render such services under this Agreement it
shall notify the Fund in writing whereupon, subject to such shareholder approval
as may be required pursuant to Paragraph 10 hereof, such portfolio shall become
a portfolio hereunder and shall be subject to the provisions of this Agreement
to the same extent as the Portfolio named above in subparagraph (a) except to
the extent that said provisions (including those relating to the compensation
payable by the Fund to Advisor) are modified with respect to such portfolio in
writing by the Fund and Advisor at the time.
2. Sub-Contractors. It is understood that Advisor will from time to
time employ or associate with such person or persons as Advisor may believe to
be particularly fitted to assist it in the performance of this Agreement;
provided, however, that the compensation of such person or persons shall be paid
by Advisor and that Advisor shall be as fully responsible to the Fund for the
acts and omissions of any subcontractor as it is for its own acts and omissions.
Such person or persons shall be employed pursuant to sub-advisory agreements
agreeable to the Fund and approved in accordance with the provisions of the 1940
Act.
<PAGE>
3. Delivery of Documents. The Fund has furnished Advisor
with copies, properly certified or authenticated, of each of the
following:
(a) Resolutions of the Fund's Board of Trustees
authorizing the appointment of Advisor as the
Portfolio's advisor and approving this Agreement;
(b) The Fund's Declaration of Trust as filed with the
State Secretary of the Commonwealth of
Massachusetts and the Boston City Clerk on
July 24, 1992;
(c) The Fund's By-Laws;
(d) The Fund's Notification of Registration on Form N- 8A
under the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") on August 11, 1992;
(e) The Fund's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of
1933 and 1940 Act, as filed with the SEC on August
11, 1992, and all amendments thereto; and
(f) The Fund's most recent prospectus(es) for the
Portfolio (such prospectus(es) together with the
related statement(s) of additional information, as
currently in effect and all amendments and
supplements thereto, are herein called "Prospectus").
The Fund will furnish Advisor from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Services. Subject to the supervision of the Fund's Board of
Trustees, Advisor will (either directly or through the sub- advisors and other
sub-contractors employed by it in accordance with Section 2 hereof) provide a
continuous investment program for the Portfolio, including investment research
and management with respect to all securities, investments, cash and cash
equivalents in the Portfolio. Advisor will (either directly or through the
sub-advisors and other sub-contractors employed by it in accordance with
Paragraph 2 hereof) determine from time to time what securities and other
investments will be purchased, retained or sold by the Portfolio and will place
the daily orders for the purchase or sale of securities. Advisor will provide
the services rendered by it under this Agreement in accordance with the
Portfolio's investment objective, policies and restrictions as stated in the
2
<PAGE>
Portfolio's Prospectus (as currently in effect and as it may be amended or
supplemented from time to time) and the resolutions of the Fund's Board of
Trustees. Advisor further agrees that it:
(a) will comply with all applicable rules and regulations
of the SEC and will in addition conduct its
activities under this Agreement in accordance with
other applicable law;
(b) will place orders either directly with the issuer
or with any broker or dealer. Subject to the other
provisions of this paragraph, in placing orders
with brokers and dealers, Advisor will attempt to
obtain the best price and the most favorable
execution of its orders. In placing orders,
Advisor will consider the experience and skill of
the firm's securities traders as well as the firm's
financial responsibility and administrative
efficiency. In addition, Advisor is authorized to
take into account the sale of shares of the Fund in
allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers
and dealers that are affiliated with Advisor, the
sub-advisors or the Fund's distributor) in
compliance with applicable law. In no instance,
however, will the Portfolio's securities be
purchased from or sold to Advisor, any sub-advisor,
the Fund's distributor or any affiliated person
thereof, except to the extent permitted by the SEC
or by applicable law;
(c) will maintain books and records with respect to the
Portfolio's securities transactions and will furnish
the Fund's Board of Trustees such periodic and
special reports as the Board may request;
(d) will maintain a policy and practice of conducting
its investment advisory services hereunder
independently of the commercial banking operations
of its affiliates. When Advisor makes investment
recommendations for the Portfolio, its investment
advisory personnel will not inquire or take into
consideration whether the issuer of securities
proposed for purchase or sale for the Portfolio's
account are customers of the commercial departments
of its affiliates. In dealing with commercial
customers, Advisor and the sub-advisors will not
inquire or take into consideration whether
securities of those customers are held by the Fund;
and
3
<PAGE>
(e) will treat confidentially and as proprietary
information of the Fund all records and other
information relative to the Fund, the Portfolio and
the Fund's prior, current or potential
shareholders, and will not use such records and
information for any purpose other than performance
of its responsibilities and duties hereunder,
except after prior notification to and approval in
writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld where
Advisor may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by
the Fund.
5. Services Not Exclusive. Advisor's services hereunder are not
deemed to be exclusive, and Advisor shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
6. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Advisor hereby agrees that all records which it maintains
for the Portfolio are the property of the Fund and further agrees to surrender
promptly to the Fund any of such records upon the Fund's request. Advisor
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act.
7. Expenses. During the term of this Agreement, Advisor will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolio.
8. Compensation.
(a) For the services provided and the expenses assumed
pursuant to this Agreement the Fund will pay Advisor and Advisor will accept as
full compensation therefor a fee, computed daily and payable monthly, at the
following annual rate: .095% of the Portfolio's average daily net assets. Prior
to the requisite approval of this Agreement by the shareholders of the
Institutional Tax Free Portfolio, Advisor agrees to accept a fee from the Fund
for its services hereunder with respect to the Portfolio at the level the
Portfolio was required to compensate its previous investment adviser pursuant to
its most recent investment advisory agreement. Such fee as is attributable to
the Portfolio shall be a separate charge to the Portfolio and shall be the
several (and not joint or joint and several) obligation of the Portfolio.
4
<PAGE>
(b) If in any fiscal year the aggregate expenses of the
Portfolio (as defined under the securities regulations of any state having
jurisdiction over the Portfolio) exceeds the expense limitations of any such
state, Advisor will bear its share of the amount of such excess in proportion to
the aggregate fees otherwise payable to it hereunder and to the Fund's
administrator under its administration agreement with the Fund. The obligation
of Advisor to reimburse the Fund under this Paragraph 8(b) is limited in any
fiscal year to the amount of its fees otherwise payable hereunder attributable
to the Portfolio for such fiscal year, provided, however, that notwithstanding
the foregoing, Advisor shall reimburse the Fund for the full amount of its share
of any such excess expenses regardless of the amount of fees otherwise payable
to it during such fiscal year to the extent that the securities regulations of
any state having jurisdiction over the Portfolio so require. Such expense
reimbursement, if any, will be estimated, reconciled and paid on a monthly
basis.
9. Limitation of Liability. Advisor shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of this Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations or duties under this Agreement.
10. Duration and Termination. This Agreement will become effective as
of the date hereof with respect to the Portfolio listed in Section 1(a) hereof
and, with respect to any additional portfolio, on the date of receipt by the
Fund of notice from Advisor in accordance with Section 1(b) hereof that Advisor
is willing to serve as investment advisor with respect to such portfolio,
provided that this Agreement (as supplemented by the terms specified in any
notice and agreement pursuant to Section 1(b) hereof) shall have been approved
by the shareholders of such portfolio(s) in accordance with the requirements of
the 1940 Act, and, unless sooner terminated as provided herein, shall continue
in effect with respect to the Portfolio until December 1, 1997. Thereafter, if
not terminated, this Agreement shall continue in effect with respect to the
Portfolio for successive annual periods ending on December 1, provided such
continuance is specifically approved at least annually (a) by vote of a majority
of those members of the Fund's Board of Trustees who are not interested persons
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Funds's Board of Trustees or
by vote of a majority of the outstanding voting securities of the Portfolio.
Notwithstanding the foregoing, this Agreement may be terminated at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
5
<PAGE>
Portfolio), or by Advisor on sixty days' written notice. This Agreement will
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meaning as such terms
in the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
12. Release. The names "The Arbor Fund" and "Trustees of The Arbor
Fund" refer respectively to the Trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated which is hereby referred to and a copy of which is on file at the
office of the State Secretary of the Commonwealth of Massachusetts and at the
principal office of the Trust. The obligations of "The Arbor Fund" entered into
in the name or on behalf thereof by any of the Trustees, officers,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Shareholders, officers,
representatives or agents of the Trust personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Trust must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Trust.
13. Miscellaneous. This Agreement replaces any prior or contemporaneous
agreements between the parties hereto regarding the Institutional Tax Free
Portfolio with respect to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto and their respective successors and
shall be governed by Delaware law.
14. Counterparts. This Agreement may be executed in counterparts by
the parties hereto, each of which shall constitute an original counterpart,
and all of which, together, shall constitute one Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE ARBOR FUND
By:___________________________________
Title:
PNC INSTITUTIONAL
MANAGEMENT CORPORATION
By:___________________________________
Title:
7
<PAGE>
Exhibit 5(u)
THE ARBOR FUND
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT executed as of August 31, 1995 by and between Citizens
Commercial & Savings Bank, a Michigan bank ("Citizens") and Nicholas-Applegate
Capital Management, a California limited partnership and registered investment
adviser ("Sub-Adviser").
WHEREAS, the Adviser is the investment adviser for The Golden Oak
Family of Funds, each a series of The Arbor Fund, an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act") (the Trust"); and
WHEREAS, Citizens desires to retain the Sub-Adviser as its agent to
furnish investment advisory services for the Golden Oak Diversified Growth Fund,
a diversified investment portfolio of the Trust (the "Fund").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Appointment. Citizens hereby appoints the Sub-Adviser to provide
certain sub-investment advisory services to the Fund for the period and on the
terms set forth in this Agreement. The Sub-Adviser accepts such appointment
and agrees to furnish the services herein set forth for the compensation herein
provided.
2. Delivery of Documents. Citizens has furnished the Sub-Adviser with
copies properly certified or authenticated of each of the following:
(a) The Trust's Agreement and Declaration of Trust, as filed
with the Secretary of State of the Commonwealth of Massachusetts on
July 24, 1992, and all amendments thereto or restatements thereof (such
Declaration, as presently in effect and as it shall from time to time
be amended or restated, is herein called the "Declaration of Trust");
(b) The Trust's By-Laws and amendments thereto;
(c) Resolutions of the Trust's Board of Trustees authorizing
the appointment of the Sub-Adviser and approving this Agreement;
(d) The Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission
(the "SEC") and all amendments thereto;
(e) The Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act") (File No. 33-50718)
and under the 1940 Act as filed with the SEC and all amendments thereto
insofar as such Registration Statement and such amendments relate to
the Fund; and
(f) The Trust's most recent prospectus and Statement of
Additional Information for the Fund (such prospectus and Statement of
Additional Information, as presently in effect, and all amendments and
supplements thereto are herein collectively called the "Prospectus").
Citizens will furnish the Sub-Adviser from time to time with
copies of all amendments of or supplements to the foregoing.
3. Management. Subject always to the supervision of the Trust's Board
of Trustees and Citizens, the Sub-Adviser will furnish an investment program in
<PAGE>
respect of, and make investment decisions for, all assets of the Fund and place
all orders for the purchase and sale of securities, all on behalf of the Fund.
In the performance of its duties, the Sub-Adviser will satisfy its fiduciary
duties to the Fund (as set forth in Section 8, below), and will monitor the
Fund's investments, and will comply with the provisions of the Trust's
Declaration of Trust and By-Laws, as amended from time to time, and the stated
investment objectives, policies and restrictions of the Fund. The Sub-Adviser
shall manage the Fund in its systematic large-cap (i.e. entities with a
capitalization in excess of Two Billion ($2,000,000,000) Dollars), growth style.
The Sub-Adviser and Citizens will each make its officers and employees available
to the other from time to time at reasonable times to review investment policies
of the Fund and to consult with each other regarding the investment affairs of
the Fund. The Sub-Adviser shall also make itself reasonably available to the
Board of Trustees at such times as the Board of Trustees shall request.
The Sub-Adviser represents and warrants that it is in
compliance with all applicable rules and regulations of the SEC pertaining to
its investment advisory activities and agrees that it:
(a) will use the same skill and care in providing such
services as it uses in providing services to fiduciary accounts for
which it has investment responsibilities;
(b) will conform with all applicable rules and regulations
of the SEC pertaining to its investment advisory activities;
(c) will place orders pursuant to its investment
determinations for the Fund either directly with the issuer or with any
broker or dealer. In placing orders with brokers or dealers, the
Sub-Adviser will attempt to obtain the best combination of prompt
execution of orders in an effective manner and at the most favorable
price. Consistent with this obligation, when the execution and price
offered by two or more brokers or dealers are comparable, the
Sub-Adviser may, in its discretion, purchase and sell portfolio
securities to and from brokers and dealers who provide the Sub-Adviser
with research advice and other services. In no instance will portfolio
securities be purchased from or sold to Citizens, the Sub-Adviser, SEI
Financial Services Company or any affiliated person of either the
Trust, Citizens, SEI Financial Services Company or the Sub-Adviser,
except as may be permitted under the 1940 Act;
(d) will report regularly to Citizens and will make
appropriate persons available for the purpose of reviewing at
reasonable times with representatives of Citizens and the Board of
Trustees the management of the Fund, including, without limitation,
review of the general investment strategy of the Fund, the performance
of the Fund in relation to standard industry indices, interest rate
considerations and general conditions affecting the marketplace and
will provide various other reports from time to time as reasonably
requested by Citizens;
(e) will maintain books and records with respect to the
Trust's securities transactions and will furnish Citizens and the
Trust's Board of Trustees such periodic and special reports as the
Board of Trustees or Citizens may request;
(f) will act upon instructions from Citizens not inconsistent
with the fiduciary duties hereunder; and
(g) will treat confidentially and as proprietary information
of the Trust all such records and other information relative to the
Trust maintained by the Sub-Adviser, and will not use such records and
<PAGE>
information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by the Trust, which approval shall not be
unreasonably withheld and may not be withheld where the Sub-Adviser may
be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
The Sub-Adviser shall have the right to execute and deliver, or cause
its nominee to execute and deliver, all proxies and notices of meetings and
other notices affecting or relating to the securities of the Fund.
4. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Adviser hereby agrees that all records which it
maintains for the Fund, on behalf of the Trust are the property of the Trust and
further agrees to surrender promptly to the Trust any of such records upon the
Trust's request. The Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
5. Expenses. During the term of this Agreement, the Sub-Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement.
6. Compensation. For the services to be provided by the Sub-Adviser
pursuant to this Agreement, Citizens will pay the Sub-Adviser, and the
Sub-Adviser agrees to accept as full compensation therefor, a sub-advisory fee
at an annual rate of .40% of the average daily net assets of the Fund. This fee
will be computed daily and paid to the Sub-Adviser quarterly.
7. Services to Others. Citizens understands, and has advised the
Trust's Board of Trustees, that the Sub-Adviser now acts, and may in the future
act, as an investment adviser to fiduciary and other managed accounts, and as
investment adviser, sub-investment adviser, and/or administrator to other
investment companies. Citizens has no objection to the Sub-Adviser's acting in
such capacities, provided that whenever the Fund and one or more other
investment companies advised by the Sub-Adviser have available funds for
investment, investments suitable and appropriate for each will be allocated in
accordance with a formula believed by the Sub-Adviser to be equitable to each
company. Citizens recognizes, and has advised the Trust's Board of Trustees,
that in some cases this procedure may adversely affect the size of the position
that the Fund may obtain in a particular security. In addition, Citizens
understands, and has advised the Trust's Board of Trustees, that the persons
employed by the Sub-Adviser to assist in the Sub-- Adviser's duties under this
Agreement will not devote their full time to such service and nothing contained
in this Agreement will be deemed to limit or restrict the right of the
Sub-Adviser or any of its affiliates to engage in and devote time and attention
to other businesses or to render services of whatever kind or nature.
8. Standard of Care. Each of Citizens and Sub-Adviser shall discharge
its duties under this Agreement with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. The parties recognize that
the opinions, recommendations and actions of Sub-Adviser will be based on advice
and information deemed to be reliable but not guaranteed by or to Sub-Adviser.
The federal securities laws impose liabilities under certain circumstances on
persons who act in good faith, and therefore nothing herein shall in any way
constitute a waiver or limitation of any rights which Citizens may have against
Sub-Adviser under any federal securities laws based on negligence and which
cannot be modified in advance by contract.
<PAGE>
9. Indemnification. Each of Citizens and Sub-Advisor agrees to
indemnify each other against any claim, loss or liability (including reasonable
attorney's fees) arising as a result of the failure to meet the standard of care
set forth in the first sentence of Paragraph 8 hereof.
10. Duration and Termination. This Agreement will become effective as
of the date hereof provided that it has been approved by vote of a majority of
the outstanding voting securities of the Fund in accordance with the
requirements under the 1940 Act, and, unless sooner terminated as provided
herein, will continue in effect for two years.
Thereafter, if not terminated, this Agreement will continue in
effect for the Fund for successive periods of 12 months, each ending on the day
preceding the anniversary of the Agreement's effective date of each year,
provided that such continuation is specifically approved at least annually (a)
by the vote of a majority of those members of the Trust's Board of Trustees who
are not interested persons of the Trust, the Sub-Adviser, or Citizens, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the vote of a majority of the Trust's Board of Trustees or by the vote of a
majority of all votes attributable to the outstanding shares of the Fund.
Notwithstanding the foregoing, this Agreement may be terminated as to the Fund
at any time, without the payment of any penalty, on sixty (60) days' written
notice by Citizens or by the Sub-Adviser. This Agreement will immediately
terminate in the event of its assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities", "interested persons" and
"assignment" have the same meaning of such terms in the 1940 Act.)
This Agreement will terminate automatically if the investment
advisory agreement between the Trust and Citizens is terminated.
11. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
12. Multiple Originals. This Agreement may be executed in two or more
counterparts, each of which when so executed shall be deemed to be an original,
but such counterparts shall together constitute but one and the same document.
13. Custody. All securities and other assets of the Fund shall be
maintained with a custodian designated by Citizens. Sub-Adviser shall have no
responsibility or liability with respect to any custodial function.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties hereto and will be governed by the laws of the state of Michigan.
Sub-Adviser shall notify Citizens of any changes in its partners within a
reasonable time.
The names "The Arbor Fund" and "Trustees of The Arbor Fund" refer
respectively to the Trust created by, and the Trustees, as trustees but not
individually or personally, acting from time to time under, the Declaration of
Trust, to which reference is hereby made and a copy of which is on file at the
office of the Secretary of State of the Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of "The Arbor Fund" entered in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually but only in such capacities and are not binding upon any of the
<PAGE>
Trustees, shareholders or representatives of the Trust personally, but bind only
the assets of the Trust. Persons dealing with the Fund must look solely to the
assets of the Trust belonging to the Fund for the enforcement of any claims
against the Trust.*
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
CITIZENS COMMERCIAL & SAVINGS BANK
By: /s/ Stephen I. Swett
----------------------------------------------
Name: Stephen I. Swett
--------------------------------------------
Title: Executive Vice President, Sr. Trust Officer
-------------------------------------------
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
By: /s/ E. Blake Moore, Jr.
----------------------------------------------
Name: E. Blake Moore, Jr.
--------------------------------------------
Title: General Counsel
-------------------------------------------
* The name "Nicholas-Applegate" is a registered trademark of the Sub-Adviser,
and any use or continued use of the name by Citiznes or the Fund beyond the term
of this Agreement is subject to the Sub-Adviser's continuing consent, in its
sole discretion.
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 14 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated March
8, 1996, relating to the financial statements of the Golden Oak Diversified
Growth, Golden Oak Intermediate-Term Income and Golden Oak Prime Obligation
Money Market Portfolios of The Arbor Fund which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the headings "Experts" and "Financial
Statements" in the Statement of Additional Information and to the references to
us under the headings "Financial Highlights" and "General Information" in the
Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 27, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 14 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated March
8, 1996, relating to the financial statements of the California Tax-Exempt and
Institutional Tax Free Portfolios of The Arbor Fund which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Financial Statements" in the Statement of Additional Information and to the
references to us under the headings "Financial Highlights" and "General
Information" in the Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 27, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 14 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated March
8, 1996, relating to the financial statements of the OVB Capital Appreciation,
OVB Emerging Growth, OVB Government Securities, OVB West Virginia Tax-Exempt
Income and OVB Prime Obligations Portfolios of The Arbor Fund which appears in
such Statement of Additional Information, and to the incorporation by reference
of our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Financial Statements" in the Statement of Additional Information and to the
references to us under the headings "Financial Highlights" and "General
Information" in the Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 27, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 14 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated March
8, 1996, relating to the financial statements of the U.S. Government Securities
Money Fund and Prime Obligations Fund of The Arbor Fund which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Financial Statements" in the Statement of Additional Information and to the
references to us under the headings "Financial Highlights" and "General
Information" in the Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 27, 1996
<PAGE>
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