[CRESTAR LOGO OMITTED]
U.S. GOVERNMENT SECURITIES
MONEY FUND
PRIME OBLIGATIONS FUND
MANAGED BY
Crestar Asset Management Company
ANNUAL REPORT
--------------------
January 31, 1998
<PAGE>
Dear Shareholder:
The Arbor Prime Obligations Fund and U.S. Government Securities Money Fund,
managed by Crestar Asset Management Company, produced both strong investment
performance and significant asset growth for the year ended January 31, 1998.
It was a good year for the Arbor money funds.
The Prime Obligations Fund assets totaled $740.8 million as of January 31, 1998,
a 55% increase from a year ago. The 7-day effective yield was 5.74%, 25 basis
points higher than the effective yield at January 31, 1997. The 1-year total
return of 5.66% ranked the Prime Obligations Fund once again in the top 5% of
all institutional money funds ranked by Lipper Analytical Services.
The U.S. Government Securities Money Fund improved its ranking in the last
fiscal year. Total assets reached $789.4 million on January 31, 1998, up 35%
from a year ago. The 7-day effective yield of 5.58% was 22 basis points higher
than the effective yield of a year ago. The 1-year total return of 5.52% allowed
the U.S. Government Securities Money Fund to move up a couple of notches,
ranking in the top 11% of all government-only institutional money market funds
in this time period according to Lipper Analytical Services.
A REVIEW OF 1997:
The economy was exceptional during the past year. Overall growth was above
average, and the rate of inflation moved lower. Consumers benefited from strong
job growth, a drop in the unemployment rate to a 24-year low, and more favorable
long-term interest rates. Consumer confidence closed the year at record high
levels, and home sales and housing starts accelerated.
The business sector recorded sharp improvement in productivity while keeping
inventories at historically low levels. Real industrial output increased over 5%
during the fiscal year, and the nation began to restore its reputation as a
world competitor. A stable dollar allowed U.S. firms to begin penetrating
overseas markets.
The strong growth in incomes and output drove the Federal deficit down sharply
through increased revenues and reduced expenditures on entitlement programs.
This development reduced the amount of federal borrowing in the markets and
helped to lower overall interest rates. This, in turn, gave the Federal Reserve
increased flexibility in conducting monetary policy.
Early in the year, the continued strength in the economy raised concerns of a
rise in both future inflation and the overnight Federal Funds rate. While the
latter was true, the former was not. Interest rates did rise significantly as
the 1-year Treasury bill yield jumped from 5.40% in early February to 6.07% by
tax time in April. Also the Federal Reserve, fearing a future rise in inflation,
raised the Federal Funds rate in late March to 51/2% from 51/4%. The upward bias
to interest rates early in the year created opportunities to modestly extend
maturities and improve yield.
Inflation, however, failed to accelerate. The growing perception that a surge in
inflation was unlikely allowed interest rates to begin a rally that lasted for
the remainder of the year. By early January, 1998, the yield on the 1-year
Treasury bill fell as low as 5.08%. Also during this period, credit quality
remained generally high and credit spreads were historically narrow.
Turbulence returned to the markets around Halloween, as a growing financial
crisis in Asia "spooked" global investors. Currencies and equity markets in the
Far East fell sharply amid concerns that speculative excesses in real estate and
unproductive government building projects might cause massive failures.
Investors became worried that the protectionist measures employed by many Asian
economies to promote their rapid growth could ultimately prove to be harmful.
Investor funds fled from the region making the crisis more severe. A "flight to
quality" caused Treasury yields to drop dramatically. The International Monetary
Fund and world political and financial leaders quickly stepped in to stem the
growing panic. The IMF developed loan packages to pump much needed liquidity
into these financial systems, but only if the countries agreed to swallow some
bitter fiscal and monetary policy medicine. Adoption of these packages has been
slow, and financial markets declined as the uncertainty continued. Credit
downgrades to the region increased and credit spreads to the region have widened
significantly. The credit exposure to the Far East in the Arbor Prime
Obligations Funds was minimal due to our concern about the region's banking
system.
THE OUTLOOK FOR 1998:
There are two key elements affecting the outlook for the new year. The first is
the ongoing problem in Asia. The second, and perhaps more important factor, is
that the U.S. economy is still strong with few imbalances that could precipitate
a recession. The crisis in Asia is expected to put downward pressure on U.S.
exports, and may trim 1998 domestic growth by as much as 1%. A resolution to
this regional concern must occur on a country-by-country basis. Overall, we look
for growth to slow to its long-term average of 2-21/2%, with little if any
acceleration in inflation.
In this climate the Federal Reserve may sit on the sidelines and keep a steady
domestic monetary policy while the Far East issues are resolved. We believe that
this suggests that the money markets will remain reasonably stable for much of
the year. Credit quality will be an ongoing focus as the Asian crisis is more
fully revealed. However, if the economy continues to grow at a moderate pace,
corporate cash flow and the ability to repay debt should remain relatively
strong.
The past year has been good for both the financial markets and the Arbor money
funds despite potential problems in the Far East. We approach the new year
cautiously optimistic. On behalf of all of us who manage the Prime Obligations
and U.S. Government Securities Money Funds, let me thank you again for the
opportunity to serve you. Please let us know if there is more we can do to help
you fulfill your investment objectives.
Sincerely,
/S/ SIGNATURE
Ben L. Jones, CFA
President and Chief Investment Officer
Crestar Asset Management Company
1
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1998
Face
Amount Value
(000) U.S. GOVERNMENT SECURITIES MONEY FUND (000)
- ------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 47.7%
FHLB
<S> <C> <C> <C>
$ 15,000 5.530%, 03/18/98 .................................................................. $ 14,899
15,000 5.960%, 06/09/98 .................................................................. 15,001
FHLMC
25,000 5.610%, 02/23/98 .................................................................. 24,915
10,000 5.715%, 03/17/98 .................................................................. 9,999
20,000 5.780%, 12/18/98 .................................................................. 20,008
FNMA
10,000 8.650%, 02/10/98 .................................................................. 10,007
5,000 5.610%, 02/20/98 .................................................................. 4,985
25,000 5.510%, 02/24/98 .................................................................. 24,999
35,000 6.000%, 04/17/98 .................................................................. 34,998
7,000 5.590%, 04/21/98 .................................................................. 7,000
5,000 6.000%, 05/14/98 .................................................................. 5,006
30,000 5.610%, 05/18/98 .................................................................. 29,518
10,000 5.840%, 06/10/98 .................................................................. 10,003
35,000 5.840%, 06/18/98 .................................................................. 34,993
50,000 5.680%, 06/19/98 .................................................................. 50,014
25,000 5.710%, 09/09/98 .................................................................. 24,987
FNMA (A)
35,000 5.590%, 04/21/98 .................................................................. 34,997
SLMA (A)
20,000 5.429%, 08/02/99 .................................................................. 19,992
- -------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Obligations (Cost $376,321) ....................... 376,321
- -------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 51.0%
First Boston Securities, 5.63%, dated 01/30/98, matures 02/02/98, repurchase price
$30,014,076 (collateralized by U.S. Government Agency Instruments:
30,000 total market value $30,901,068) .................................................... 30,000
Greenwich Securities, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$139,409,723 (collateralized by U.S. Government Agency Instruments:
139,405 total market value $142,200,723) ................................................... 139,405
JP Morgan, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$32,984,085 (collateralized by U.S. Government Agency Instruments:
32,983 total market value $33,425,730) .................................................... 32,983
Merrill Lynch Securities, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$29,808,690 (collateralized by U.S. Government Agency Instruments:
29,808 total market value $30,408,642) .................................................... 29,808
Paine Webber, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$170,578,887 (collateralized by U.S. Government Agency Instruments:
170,573 total market value $173,988,719) ................................................... 170,573
- -------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements (Cost $402,769) .................................... 402,769
- -------------------------------------------------------------------------------------------------------------------
Total Investments -- 98.7% (Cost $779,090) .............................................. 779,090
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 1.3%
Other Assets and Liabilities, Net ....................................................... 10,320
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1998
Value
U.S. GOVERNMENT SECURITIES MONEY FUND (concluded) (000)
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS:
<S> <C>
Portfolio Shares (unlimited authorization -- no par value) based on 789,435,428
outstanding shares of beneficial interest ............................................... $789,435
Accumulated net realized loss on investments .............................................. (25)
- ------------------------------------------------------------------------------------------------------------------
Total Net Assets -- 100.0% ....................................................... $789,410
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, Offering 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, 1998.
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
SLMA -- Student Loan Marketing Association
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1998
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (000)
- ------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 18.4%
BANKING -- 4.0%
Goldman Sachs
<S> <C> <C> <C>
$20,000 5.640%, 05/08/98 .................................................................... $ 19,699
10,000 5.820%, 06/12/98 .................................................................... 9,794
- ------------------------------------------------------------------------------------------------------------------
Total Banking .................................................................... 29,493
- ------------------------------------------------------------------------------------------------------------------
ELECTRICAL UTILITIES -- 1.4%
Aes Shady Point
10,000 5.620%, 02/10/98 .................................................................... 9,986
- ------------------------------------------------------------------------------------------------------------------
Total Electrical Utilities ....................................................... 9,986
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 13.0%
Ford Motor Credit
15,000 5.630%, 06/30/98 .................................................................... 14,660
10,000 5.710%, 10/02/98 .................................................................... 9,630
General Electric Capital
30,000 5.680%, 02/13/98 .................................................................... 29,943
General Motors Acceptance
5,000 5.875%, 03/30/98 .................................................................... 4,998
2,000 7.000%, 04/15/98 .................................................................... 2,002
5,000 7.250%, 04/15/98 .................................................................... 5,011
10,000 7.500%, 05/18/98 .................................................................... 10,038
Merrill Lynch
15,000 5.750%, 02/06/98 .................................................................... 14,988
5,000 5.850%, 09/04/98 .................................................................... 4,831
- ------------------------------------------------------------------------------------------------------------------
Total Financial Services ......................................................... 96,101
- ------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $135,580) ........................................... 135,580
- ------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 18.8%
BANKING -- 9.0%
Bank of New York
15,000 6.000%, 03/24/98 .................................................................... 14,999
FCC National Bank (A)
25,000 5.610%, 07/31/98 .................................................................... 24,995
PHH MTN (A)
20,000 5.690%, 11/25/98 .................................................................... 19,998
PNC Bank (A)
7,000 5.650%, 04/24/98 .................................................................... 7,000
- ------------------------------------------------------------------------------------------------------------------
Total Banking .................................................................... 66,992
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 7.8%
Bear Stearns (A)
7,000 5.720%, 04/06/98 .................................................................... 7,000
8,000 5.650%, 07/24/98 .................................................................... 8,000
Bear Stearns MTN
10,000 6.100%, 06/09/98 .................................................................... 10,000
CS First Boston (A)
5,000 5.700%, 04/03/98 .................................................................... 5,000
18,000 5.700%, 04/07/98 .................................................................... 18,000
Merrill Lynch (A)
10,000 5.690%, 05/18/98 .................................................................... 10,000
- ------------------------------------------------------------------------------------------------------------------
Total Financial Services ......................................................... 58,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1998
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (continued) (000)
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 2.0%
IBM (A)
<S> <C> <C> <C>
$15,000 5.605%, 10/23/98 .................................................................. $ 14,993
- ------------------------------------------------------------------------------------------------------------------
Total Industrial ............................................................... 14,993
- ------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $139,985) ......................................... 139,985
- ------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT/BANK NOTES -- 23.9%
Bankers Trust
15,000 5.970%, 08/28/98 .................................................................. 14,998
5,000 5.835%, 10/05/98 .................................................................. 4,995
Bankers Trust (A)
10,000 5.650%, 09/04/98 .................................................................. 9,997
Barclays Bank (A)
22,000 5.620%, 02/19/98 .................................................................. 22,000
CS First Boston
5,000 5.920%, 12/14/98 .................................................................. 5,000
First of America Bank
10,000 5.940%, 08/31/98 .................................................................. 9,996
Key Bank NA (A)
30,000 5.700%, 12/16/98 .................................................................. 30,000
Nationsbank
30,000 5.510%, 04/23/98 .................................................................. 30,000
Norinchukin Bank
20,000 5.740%, 04/09/98 .................................................................. 20,000
Societe Generale
10,000 5.870%, 03/03/98 .................................................................. 10,000
5,000 5.970%, 09/15/98 .................................................................. 4,999
15,000 5.850%, 12/17/98 .................................................................. 14,990
- ------------------------------------------------------------------------------------------------------------------
Total Certificates of Deposit/Bank Notes (Cost $176,975) ....................... 176,975
- ------------------------------------------------------------------------------------------------------------------
INSURANCE FUNDING AGREEMENTS -- 9.5%
General American Life GIC (A) (B)
35,000 6.140%, ............................................................................ 35,000
Integrity Life Insurance GIC (A) (B)
35,000 6.140%, ............................................................................ 35,000
- ------------------------------------------------------------------------------------------------------------------
Total Insurance Funding Agreements (Cost $70,000) .............................. 70,000
- ------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 29.2%
Greenwich Securities, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$80,749,743 (collateralized by U.S. Government Agency Instruments:
80,747 total market value $82,362,184) .................................................... 80,747
JP Morgan, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$32,278,919 (collateralized by U.S. Government Agency Instruments:
32,278 total market value $32,923,283) .................................................... 32,278
Paine Webber, 5.60%, dated 01/30/98, matures 02/02/98, repurchase price
$103,452,206 (collateralized by U.S. Government Agency Instruments:
103,450 total market value $105,518,585) ................................................... 103,450
- ------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements (Cost $216,475) .................................... 216,475
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (concluded) THE ARBOR FUND
January 31, 1998
Value
PRIME OBLIGATIONS FUND (concluded) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Total Investments -- 99.8% (Cost $739,015) ................................................ $739,015
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.2%
Other Assets and Liabilities, Net ......................................................... 1,822
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Portfolio Shares (unlimited authorization -- no par value) based
on 740,839,182 outstanding shares of beneficial interest ................................ 740,839
Undistributed net investment income ....................................................... 1
Accumulated net realized loss on investments .............................................. (3)
- -------------------------------------------------------------------------------------------------------------------
Total Net Assets -- 100.0% ....................................................... $740,837
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, Offering 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, 1998.
(B) The contract has no stated maturity date, but may be terminated unconditionally by the fund at anytime upon at least
7 days notice to the issuer.
GIC -- Guaranteed Investment Contract
MTN -- Medium Term Note
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS THE ARBOR FUND
For the Year Ended January 31, 1998
(IN THOUSANDS)
----------------------------------
U.S. GOVERNMENT PRIME
SECURITIES OBLIGATIONS
MONEY FUND FUND
- -----------------------------------------------------------------------------------------------------------------
Investment Income:
<S> <C> <C>
Interest Income ............................................................ $38,644 $32,853
- -----------------------------------------------------------------------------------------------------------------
Expenses:
Management Fees ............................................................ 553 461
Waiver of Management Fees .................................................. (243) (210)
Investment Advisory Fees ................................................... 1,382 1,148
Waiver of Advisory Fees .................................................... (906) (704)
Custodian Fees ............................................................. 208 188
Transfer Agent Fees ........................................................ 206 170
Professional Fees .......................................................... 32 28
Registration Fees .......................................................... 75 35
Insurance Expense .......................................................... 7 6
Directors Fees ............................................................. 9 8
Printing Fees .............................................................. 7 7
Pricing Fees ............................................................... 1 --
Amortization of Deferred Organizational Costs .............................. 32 3
Other ...................................................................... 19 8
- -----------------------------------------------------------------------------------------------------------------
Total Expenses ........................................................... 1,382 1,148
- -----------------------------------------------------------------------------------------------------------------
Net Investment Income ...................................................... 37,262 31,705
- -----------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments .................................... 3 (3)
- -----------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations ........................... $37,265 $31,702
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS THE ARBOR FUND
(IN THOUSANDS)
-------------------------------------------------------
U.S. GOVERNMENT PRIME
SECURITIES OBLIGATIONS
MONEY FUND FUND
- ------------------------------------------------------------------------------------------------------------------
02/01/97 02/01/96 02/01/97 02/01/96
TO 01/31/98 TO 01/31/97 TO 01/31/98 TO 01/31/97
- ------------------------------------------------------------------------------------------------------------------
Investment Activities:
<S> <C> <C> <C> <C>
Net Investment Income ................................. $ 37,262 $ 24,573 $ 31,705 $ 22,297
Net Realized Gain (Loss) on Investments ............... 3 (14) (3) 1
- ------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations ......... 37,265 24,559 31,702 22,298
- ------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ................................. (37,262) (24,573) (31,704) (22,297)
Capital Gains ......................................... -- -- -- (1)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions ................................. (37,262) (24,573) (31,704) (22,298)
- ------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (all at $1.00 per share):
Proceeds from Shares Issued ........................... 7,090,197 4,726,903 6,369,124 4,883,808
Reinvestment of Distributions ......................... 9,939 1,621 5,066 846
Cost of Shares Redeemed ...............................(6,897,460) (4,656,649) (6,110,786) (4,789,851)
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
from Capital Share Transactions ....................... 202,676 71,875 263,404 94,803
- ------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets ........................ 202,679 71,861 263,402 94,803
- ------------------------------------------------------------------------------------------------------------------
Net Assets: Beginning of Period .......................... 586,731 514,870 477,435 382,632
- ------------------------------------------------------------------------------------------------------------------
Net Assets: End of Period ................................ $ 789,410 $ 586,731 $ 740,837 $ 477,435
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE ARBOR FUND
For a Share Outstanding Throughout the Period or Year
RATIO RATIO OF
RATIO OF EXPENSES NET INCOME
NET ASSET DISTRIBUTIONS NET NET RATIO OF NET TO AVERAGE TO AVERAGE
VALUE NET FROM ASSET VALUE ASSETS OF EXPENSES INCOME NET ASSETS NET ASSETS
BEGINNING INVESTMENT NET INVESTMENT END TOTAL END OF PERIOD TO AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING
OF PERIOD INCOME INCOME OF PERIOD RETURN (000) NET ASSETS NET ASSETS WAIVERS) WAIVERS)
- ----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------
U.S. GOVERNMENT SECURITIES MONEY FUND
- --------------------------------------
For the Year Ended January 31,:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $1.00 0.05 (0.05) $1.00 5.52% $789,410 0.20% 5.39% 0.37% 5.22%
1997 $1.00 0.05 (0.05) $1.00 5.29% $586,731 0.20% 5.17% 0.37% 5.00%
1996 $1.00 0.06 (0.06) $1.00 5.88% $514,870 0.20% 5.72% 0.37% 5.55%
1995(1) $1.00 0.03 (0.03) $1.00 4.98%* $579,422 0.20%* 4.98%* 0.38%* 4.80%*
- -----------------------
PRIME OBLIGATIONS FUND
- -----------------------
For the Year Ended January 31,:
1998 $1.00 0.06 (0.06) $1.00 5.66% $740,837 0.20% 5.52% 0.36% 5.36%
1997 $1.00 0.05 (0.05) $1.00 5.45% $477,435 0.20% 5.33% 0.38% 5.15%
1996(2) $1.00 0.02 (0.02) $1.00 5.82%* $382,632 0.20%* 5.61%* 0.40%* 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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE ARBOR FUND
January 31, 1998
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 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 Funds 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 and recorded daily and paid monthly to shareholders. Any net
realized capital gains on sales of securities are distributed to
shareholders at least annually.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The Financial
Statements have been prepared in conformity with generally accepted
accounting principles which require management to make certain estimates
and assumptions at the date of the financial statements. Actual results may
differ from these estimates.
3. Administration, Transfer Agent and Distribution Agreements:
SEI Fund Resources (the "Administrator"), a Delaware business trust, serves as
administrator to the Funds. SEI Investments Management Corporation, a
wholly-owned subsidiary of SEI Investments Company, is the owner of all
beneficial interest in the Administrator. The Trust and the Administrator have
entered into an administration agreement dated August 1, 1994. Under terms of
the Administration Agreement, the Administrator is
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded) THE ARBOR FUND
January 31, 1998
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
Crestar Asset Management Company (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, 1997 to January 31, 1998, the
Administrator received net administration fees totaling approximately .05% 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.
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 Investments Distribution Co. (the "Distributor"), a
wholly-owned subsidiary of SEI Investments Company 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. For the year ended
January 31, 1998, the Funds paid commissions of $207,284 to affiliated
broker-dealers.
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, 1997 to
January 31, 1998, the Advisor received net fees totaling approximately .07% and
.08% 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 of $24,600 for organizational
work performed by a law firm of which two officers and a trustee of the Trust
are partners.
Certain officers and a trustee of the Trust are also officers of the
Administrator and/or Distributor. Such officers and trustee 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 397 days 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.
7. Capital Loss Carryovers:
As of January 31, 1998, the U.S. Government Securities Money Fund had a capital
loss carryover, to the extent provided in the regulations, for Federal Income
tax purposes as follows:
$11,641 expiring in 2004
$13,848 expiring in 2005
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
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
U.S. Government Securities Money Fund and Prime Obligations Fund (separately
managed portfolios of The Arbor Fund, hereafter referred to as the "Fund") at
January 31, 1998, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, 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, 1998 by correspondence with the custodian and guaranteed investment contract
issuers, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 13, 1998
12
<PAGE>
NOTICE TO SHAREHOLDERS THE ARBOR FUND
January 31, 1998
For shareholders that do not have a January 31, 1998 tax year end, this notice
is for informational purposes only. For shareholders with a January 31, 1998 tax
year end, please consult your tax advisor as to the pertinence of this notice.
For the fiscal year ended January 31, 1998, each portfolio is designating the
following items with regard to distributions paid during the year.
<TABLE>
<CAPTION>
(A) (B) (C)
LONG TERM ORDINARY INCOME TOTAL
CAPITAL GAINS DISTRIBUTIONS DISTRIBUTIONS
PORTFOLIO (TAX BASIS) (TAX BASIS) (TAX BASIS)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Securities Money Fund .... 0% 100% 100%
Prime Obligations Fund ................... 0% 100% 100%
================================================================================================
(D) (E) (F)
QUALIFYING TAX EXEMPT FOREIGN
PORTFOLIO DIVIDENDS(1) INTEREST TAX CREDIT
- ------------------------------------------------------------------------------------------------
U.S. Government Securities Money Fund .... 0% 0% 0%
Prime Obligations Fund ................... 0% 0% 0%
================================================================================================
<FN>
(1) Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
* Items (A) and (B) are based on a percentage of each portfolio's total distributions.
** Items (D), (E) and (F) are based on a percentage of ordinary income distributions of each portfolio.
</FN>
</TABLE>
None of the Arbor Funds satisfy California's, Connecticut's, or New York's
statutory requirements to pass through income from Federal obligations.
Accordingly, the pro rata portion of income from Federal obligations will not be
exempt from these states' respective income tax.
13
<PAGE>
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the Funds. The report is not
authorized for distribution to prospective investors in the Funds unless
preceded or accompanied by an effective prospectus. Shares in the Funds are not
deposits or obligations of, or guaranteed or endorsed by Crestar Bank, the
parent corporation of the Funds' investment adviser. Such shares are also not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency.
