[LOGO OMITTED]
U.S. GOVERNMENT SECURITIES
MONEY FUND
PRIME OBLIGATIONS FUND
MANAGED BY
Crestar Asset Management Company
ANNUAL REPORT
----------------
January 31, 1999
<PAGE>
Dear Shareholder:
The Arbor Prime Obligations Fund and the U.S. Government Securities Money Fund
continue to perform very well in the year ended January 31, 1999 relative to
both their peers and inflation. Both funds are managed by Crestar Asset
Management Company.
The Prime Obligations Fund earned a 7-day effective yield of 5.05% on January
31, 1999, and the 1-year total return of 5.46% was ranked in the top 20% of all
institutional money funds by Lipper Analytical Services. The
3-year rank was in the top 12%, and the rank since inception was in the top 13%
of its peer group.
The U.S. Government Securities Money Fund also provided strong investment
returns for its holders during the past year. The 7-day effective yield of 4.85%
on January 31, 1999 put the 1-year total return of 5.30% in the top 26% of all
government-only institutional money market funds
according to Lipper Analytical Services. The 3-year rank for the Fund was in the
top 18%, and the U.S. Government Securities Money Fund rank since inception has
been in the top 15% of its peer group.
A REVIEW OF 1998:
The past year was another one of exceptional growth accompanied by low
inflation. Real GDP increased 3.9% compared to a 21/2% historical average, and
inflation, as measured by the Consumer Price Index, increased just 1.6% in the
12 months ended December. Unlike previous years, however, the strength in the
U.S. economy was more narrowly concentrated in the consumer sector (the "front
end" of the economy), while the manufacturing sector (the "back end" of the
economy) began to experience slower growth.
In typical business cycles, excessive spending growth causes inflation to
accelerate. This forces the Federal Reserve to raise interest rates to slow the
economy and curb inflation. The current environment is quite different, however,
in that the negative economic pressures or risks are largely related to problems
in Asia, Russia and Latin America, and their impact on U.S. manufacturers. Said
another way, the U.S. economy was "rear-ended" by the Asian financial crisis in
1998. Exports from U.S. companies to those regions fell significantly last year.
In addition, U.S. manufacturers competing with Asian and Latin American
producers felt pricing pressure linked to the rising value of the dollar.
This economic stress was compounded by a world financial markets crisis brought
on by the unexpected "restructuring" of sovereign debt by Russia in early
summer. Smaller, less developed financial systems in emerging market economies
experienced a sudden flight of capital to the relative safety of U.S. Treasury
securities. The S&P 500 fell nearly 20% between July 17th and the end of August,
as investors fled the high-flying stockmarket for the fixed-income and money
markets. The flight to U.S. Treasuries pushed the yield on the 3-month Treasury
Bill as low as 3.62% by early October.
The reaction to the crisis by world central banks and the fixed-income markets
was quick and dramatic. The Federal Reserve Bank lowered interest rates three
times, from 5.50% to 4.75%, in an effort to restore liquidity to the stock and
bond markets. Between October 1st and November 30th, central banks around the
world cut interest rates over 50 times in total. President Clinton appeared on
national television to urge Congress to approve additional funding for the
International Monetary Fund.
The initial impact of these crises on the American consumer (the front end) was
very positive: home mortgage rates fell to 30-year lows, the strong dollar
increased purchasing power, and commodity prices, especially oil and gasoline,
fell. Consumers in the U.S. took advantage of their newly discovered wealth by
purchasing homes, refinancing existing mortgages, and buying new cars.
Inflation-adjusted consumption expenditures surged in the second half of 1998.
THE OUTLOOK FOR 1999:
There are two key factors affecting the outlook for 1999 -- inflation and credit
quality. We continue to believe that inflation will remain low in the year
ahead, but we are less confident that it will move significantly lower as it has
in recent years. The second factor will be driven by economic and corporate
profits growth. Many companies have "confessed" that near term earnings may not
match analysts' expectations. Some companies have merged as a means of
sustaining or creating growth and achieving new efficiencies, and layoffs have
increased. In this sense, the front end of the economy is only now beginning to
feel the negative effects of the "Asian Flu." Credit quality spreads, or the
difference between yields on Treasuries and corporate bonds and other securities
reached recession-level highs during the third quarter of last year. They remain
high despite the relative calm that has returned to the markets.
In this environment, the Federal Reserve will be closely watching the strength
in the economy and its potential impact on inflation as the year unfolds.
However, the continuing risks related to Latin America, Asia and Russia as well
as the potential adverse effect of an interest rate hike on equity markets will
likely inject a note of caution for policy makers. We believe that the risks of
recession remain relatively low, and this will help most corporations and
consumers continue to service their debt obligations. If the economy continues
to grow and inflation remains subdued, the corporate market and other
"non-Treasury" sectors may provide, we believe, the highest returns for
investors in 1999.
On behalf of all of us who manage the Arbor Funds, thank you for the opportunity
to serve you. Please let us know if there is more we can do to help fulfill your
investment objectives.
Sincerely,
/s/ signature omitted
Ben L. Jones, CFA
President and Chief Investment Officer
Crestar Asset Management Company
<PAGE>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1999
Face
Amount Value
(000) U.S. GOVERNMENT SECURITIES MONEY FUND (000)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 87.6%
FFCB
$ 25,000 5.500%, 04/01/99 ..................................... $ 24,994
25,000 4.750%, 04/05/99 ..................................... 24,792
FHLB
25,000 4.940%, 03/18/99 ..................................... 24,846
35,000 4.700%, 04/30/99 ..................................... 34,598
35,000 4.750%, 06/04/99 ..................................... 34,432
20,000 5.630%, 06/15/99 ..................................... 20,002
10,000 4.406%, 07/02/99 ..................................... 9,815
FHLB (A)
30,000 4.850%, 02/01/99 ..................................... 30,000
35,000 4.706%, 02/03/99 ..................................... 34,997
20,000 4.847%, 02/03/99 ..................................... 19,999
FNMA
35,000 5.000%, 02/05/99 ..................................... 34,981
20,000 5.165%, 03/15/99 ..................................... 19,879
25,000 4.900%, 05/03/99 ..................................... 24,700
35,000 4.720%, 05/10/99 ..................................... 34,550
10,000 4.790%, 06/11/99 ..................................... 9,827
10,000 4.780%, 07/02/99 ..................................... 9,799
20,000 5.540%, 07/16/99 ..................................... 19,994
FNMA MTN
20,000 5.410%, 02/23/99 ..................................... 19,998
20,000 5.570%, 05/07/99 ..................................... 19,994
FNMA MTN (A)
25,500 4.782%, 02/02/99 ..................................... 25,472
FHLMC
35,000 5.090%, 02/12/99 ..................................... 34,946
20,000 5.505%, 03/12/99 19,998
FHLMC (A)
50,000 4.736%, 02/02/99 ..................................... 50,000
SLMA (A)
20,000 4.632%, 02/02/99 ..................................... 19,997
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations (Cost $602,610) ...... 602,610
- --------------------------------------------------------------------------------
CASH EQUIVALENT -- 3.6%
25,000 Financial Square Government Portfolio ..................... 25,000
- --------------------------------------------------------------------------------
Total Cash Equivalent (Cost $25,000) ............ 25,000
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 8.6%
FirstBoston Securities, 4.83%, dated 01/29/99,
matures 02/01/99, repurchase price
$25,010,063 (collateralized by various
U.S. Government Agency obligations:
25,000 total market value $25,754,893) ...................... 25,000
Greenwich Securities, 4.74%, dated 01/29/99,
matures 02/01/99, repurchase price
$22,778,436 (collateralized by various
U.S. Government Agency obligations: .................. 22,769
Merrill Lynch Securities, 4.74%, dated 01/29/99,
matures 02/01/99, repurchase price
$7,970,000 (collateralized by various
U.S. Government Agency obligations:
7,967 total market value $8,126,915) ....................... 7,967
2
<PAGE>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1999
Face
Amount Value
(000) U.S. GOVERNMENT SECURITIES MONEY FUND (concluded) (000)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (continued)
PaineWebber, 4.74%, dated 01/29/99,
matures 02/01/99, repurchase
price $3,536,707 (collateralized
by U.S. Government Agency obligation:
$ 3,535 total market value $3,610,186) ....................... $ 3,535
- --------------------------------------------------------------------------------
Total Repurchase Agreements (Cost $59,271) ...... 59,271
- --------------------------------------------------------------------------------
Total Investments--99.8% (Cost $686,881) .................. 686,881
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.2%
Other Assets and Liabilities, Net ......................... 1,150
- --------------------------------------------------------------------------------
NET ASSETS:
Portfolio Shares (unlimited authorization --
no par value) based on 688,071,153
outstanding shares of beneficial interest ............... 688,071
Distribution in excess of net investment income ........... (15)
Accumulated net realized loss on investments .............. (25)
- --------------------------------------------------------------------------------
Total Net Assets--100.0% .........................$688,031
- --------------------------------------------------------------------------------
Net Asset Value, Offering and
Redemption Price Per Share ................... $1.00
================================================================================
(A) Adjustable Rate Security -- The rate reported on the Statement of Net Assets
is the rate in effect on January 31, 1999. The date shown is the next
scheduled reset date.
FFCB -- Federal Farm Credit Bank
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
MTN -- Medium Term Note
SLMA -- Student Loan Marketing Association
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATEMENT OF NET ASSETS THE ARBOR FUND
January 31, 1999
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (000)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 40.9%
ELECTRICAL UTILITIES -- 2.0%
Aes Shady Point
$ 18,000 4.790%, 06/01/99 ..................................... $ 17,713
- --------------------------------------------------------------------------------
Total Electrical Utilities ....................... 17,713
- --------------------------------------------------------------------------------
ENTERTAINMENT -- 4.4%
Walt Disney
40,000 4.460%, 07/13/99 ..................................... 39,197
- --------------------------------------------------------------------------------
Total Entertainment .............................. 39,197
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 34.5%
Associates
25,000 4.800%, 06/14/99 ..................................... 24,557
CS First Boston
10,000 5.800%, 05/06/99 ..................................... 10,000
10,000 4.875%, 05/07/99 ..................................... 9,871
Den Norske
30,000 5.380%, 05/04/99 ..................................... 29,588
15,000 4.860%, 08/10/99 ..................................... 14,615
Ford Motor Credit
20,000 4.730%, 08/31/99 ..................................... 19,446
General Electric Capital
10,000 5.410%, 02/22/99 ..................................... 9,968
30,000 4.730%, 08/19/99 ..................................... 29,216
General Motors Acceptance
45,000 4.670%, 10/20/99 ..................................... 43,476
Goldman Sachs
10,000 5.480%, 02/09/99 ..................................... 9,988
30,000 5.000%, 04/20/99 ..................................... 29,675
Merrill Lynch
10,000 5.470%, 02/26/99 ..................................... 9,962
30,000 4.820%, 06/17/99 ..................................... 29,454
Morgan Stanley Dean Witter
35,000 5.170%, 03/26/99 ..................................... 34,734
- --------------------------------------------------------------------------------
Total Financial Services ......................... 304,550
- --------------------------------------------------------------------------------
Total Commercial Paper (Cost $361,460) ........... 361,460
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 16.4%
BANKING -- 5.7%
First Union Bank (A)
20,000 5.427%, 02/17/99 ..................................... 20,000
PNC Bank (A)
10,000 4.790%, 02/01/99 ..................................... 9,997
20,000 4.800%, 02/01/99 ..................................... 19,997
- --------------------------------------------------------------------------------
Total Banking .................................... 49,994
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 9.6%
Associates MTN
5,000 6.750%, 06/28/99 ..................................... 5,017
Bear Stearns MTN
15,000 5.100%, 02/18/99 ..................................... 15,000
10,000 5.700%, 03/02/99 ..................................... 10,000
15,000 5.715%, 07/30/99 ..................................... 15,000
4
<PAGE>
STATEMENT OF NET ASSETS (continued) THE ARBOR FUND
January 31, 1999
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (continued) (000)
- --------------------------------------------------------------------------------
Beta Finance (A)
$ 25,000 4.850%, 02/01/99 ..................................... $ 25,000
CS First Boston (A)
15,000 4.860%, 02/01/99 ..................................... 15,000
- --------------------------------------------------------------------------------
Total Financial Services ......................... 85,017
- --------------------------------------------------------------------------------
INDUSTRIAL -- 1.1%
PHH MTN (A)
10,000 4.860%, 02/01/99 ..................................... 10,000
- --------------------------------------------------------------------------------
Total Industrial ................................. 10,000
- --------------------------------------------------------------------------------
Total Corporate Bonds (Cost $145,011) ............ 145,011
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.6%
FHLB (A)
45,000 4.840%, 02/01/99 ..................................... 45,000
FHLMC
10,000 4.935%, 06/04/99 ..................................... 9,838
FNMA
30,000 5.165%, 03/15/99 ..................................... 29,819
- --------------------------------------------------------------------------------
Total U.S. Government Agency Obligations (Cost $84,657) ........... 84,657
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT/BANK NOTES -- 11.4%
Bankers Trust (A)
10,000 4.850%, 02/01/99 ..................................... 9,999
Barclay's Bank
15,000 5.645%, 03/02/99 ..................................... 14,999
First Union
20,000 5.660%, 04/15/99 ..................................... 20,000
NationsBank
30,000 4.880%, 10/18/99 ..................................... 30,000
Societe Generale
5,000 5.670%, 03/11/99 ..................................... 5,000
Swiss Bank
21,000 5.750%, 05/07/99 ..................................... 20,999
- --------------------------------------------------------------------------------
Total Certificates of Deposit/Bank Notes (Cost $100,997) ........ 100,997
- --------------------------------------------------------------------------------
INSURANCE FUNDING AGREEMENTS -- 10.2%
General American Life Insurance GIC (A) (B)
45,000 5.780% ............................................... 45,000
Integrity Life Insurance GIC (A) (B)
45,000 5.780% ............................................... 45,000
- --------------------------------------------------------------------------------
Total Insurance Funding Agreements (Cost $90,000) ............... 90,000
- --------------------------------------------------------------------------------
TAXABLE MUNICIPAL BOND -- 5.1%
Tampa Bay Devil Rays (A)
45,000 4.950%, 02/01/99 ..................................... 45,000
- --------------------------------------------------------------------------------
Total Taxable Municipal Bond (Cost $45,000) ..................... 45,000
- --------------------------------------------------------------------------------
CASH EQUIVALENT -- 4.5%
40,000 Financial Square Money Market Portfolio ................... 40,000
- --------------------------------------------------------------------------------
Total Cash Equivalent (Cost $40,000) ............................ 40,000
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 6.7%
Greenwich Securities, 4.74%, dated 01/29/99,
matures 02/01/99, repurchase price
$15,595,837 (collateralized by various
U.S.Government Agency obligations:
15,590 total market value $15,902,250) ...................... 15,590
5
<PAGE>
STATEMENT OF NET ASSETS (concluded) THE ARBOR FUND
January 31, 1999
Face
Amount Value
(000) PRIME OBLIGATIONS FUND (concluded) (000)
- --------------------------------------------------------------------------------
Merrill Lynch Securities, 4.74%, dated 01/29/99,
matures 02/01/99, repurchase price $19,498,071
(collateralized by various U.S.
Government Agency obligations:
$ 19,490 total market value $19,881,374) ......................$ 19,490
Paine Webber, 4.74%, dated 01/29/99, matures
02/01/99, repurchase price $24,718,282
(collateralized by various U.S. Government
Agency obligations: total market
24,708 value $25,206,710) ................................... 24,708
- --------------------------------------------------------------------------------
Total Repurchase Agreements (Cost $59,788) ....... 59,788
- --------------------------------------------------------------------------------
Total Investments-- 104.8% (Cost $926,913) ................ 926,913
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (4.8%)
Other Assets and Liabilities, Net ......................... (42,423)
- --------------------------------------------------------------------------------
NET ASSETS:
Portfolio Shares (unlimited authorization --
no par value) based on 884,505,593 outstanding
shares of beneficial interest ........................... 884,506
Distribution in excess of net investment income ........... (13)
Accumulated net realized loss on investments .............. (3)
- --------------------------------------------------------------------------------
Total Net Assets-- 100.0% ...............................$884,490
- --------------------------------------------------------------------------------
Net Asset Value, Offering and Redemption Price Per share $1.00
================================================================================
(A) Adjustable Rate Security -- The rate reported on the Statement of Net Assets
is the rate in effect on January 31, 1999. The date shown is the next
scheduled reset date.
(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
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS THE ARBOR FUND
For the Year Ended January 31, 1999
(IN THOUSANDS)
------------------------------
U.S. GOVERNMENT PRIME
SECURITIES OBLIGATIONS
MONEY FUND FUND
- --------------------------------------------------------------------------------
Investment Income:
Interest Income $35,773 $44,755
- --------------------------------------------------------------------------------
Expenses:
Management Fees 529 646
Waiver of Management Fees (220) (268)
Investment Advisory Fees 1,323 1,616
Waiver of Advisory Fees (629) (689)
Custodian Fees 265 290
Transfer Agent Fees 198 240
Professional Fees 27 22
Registration Fees 1 1
Insurance Expense 5 3
Directors Fees 1 1
Printing Fees 32 27
Pricing Fees 1 1
Amortization of Deferred Organizational Costs 4 3
Other 1 1
- --------------------------------------------------------------------------------
Total Expenses 1,538 1,894
- --------------------------------------------------------------------------------
Net Investment Income 34,235 42,861
- --------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations $34,235 $42,861
================================================================================
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
--------------------------------------------------------
02/01/98 02/01/97 02/01/98 02/01/97
TO 01/31/99 TO 01/31/98 TO 01/31/99 TO 01/31/98
- -------------------------------------------------------------------------------------------------------------------
Investment Activities:
<S> <C> <C> <C> <C>
Net Investment Income $ 34,235 $ 37,262 $ 42,861 $ 31,705
Net Realized Gain (Loss) on Investments -- 3 -- (3)
- -------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations 34,235 37,265 42,861 31,702
- -------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income (34,250) (37,262) (42,874) (31,704)
Capital Gains -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions (34,250) (37,262) (42,874) (31,704)
- -------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (all at $1.00 per share):
Proceeds from Shares Issued 6,897,369 7,090,197 7,764,540 6,369,124
Reinvestment of Distributions 13,467 9,939 10,074 5,066
Cost of Shares Redeemed (7,012,200) (6,897,460) (7,630,948) (6,110,786)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
from Capital Share Transactions (101,364) 202,676 143,666 263,404
- -------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (101,379) 202,679 143,653 263,402
- -------------------------------------------------------------------------------------------------------------------
Net Assets: Beginning of Period 789,410 586,731 740,837 477,435
- -------------------------------------------------------------------------------------------------------------------
Net Assets: End of Period $ 688,031 $ 789,410 $ 884,490 $ 740,837
===================================================================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
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>
1999 $1.00 0.05 (0.05) $1.00 5.30% $688,031 0.23% 5.18% 0.36% 5.05%
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,:
1999 $1.00 0.05 (0.05) $1.00 5.46% $884,490 0.23% 5.31% 0.35% 5.19%
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
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE ARBOR FUND
January 31, 1999
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 permit 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 Investments Mutual Fund Services
(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 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 did not exceed an annual rate
of .20% of average daily net assets through June 1, 1998 and .25% of average
daily net assets thereafter. During the period from February 1, 1998 to January
31, 1999, the Administrator received net administration fees totaling
approximately .05% and .05% 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.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded) THE ARBOR FUND
January 31, 1999
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, 1999, the Funds paid commissions of $178,468 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, 1998 to
January 31, 1999, the Advisor received net fees totaling approximately .10% and
.11% 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.
The acquisition of Crestar by SunTrust was completed on December 31, 1998. On
January 28, 1999, the Arbor Fund filed an exemptive application with the
Securities and Exchange Commission to permit the combination (the "Proposed
Combination") of each of the Funds with two of the STI Classic Funds (mutual
funds that are served by investment advisers that are subsidiaries of SunTrust).
On February 22, 1999, the Board of Trustees of the Funds unanimously approved
the Proposed Combinations and recommended that the shareholders of the Funds
approve the Proposed Combinations. The Proposed Combinations are intended to be
a tax free reorganization. The Board of Trustees of the Funds also anticipates
holding a special meeting of the shareholders in May of 1999 so that the
shareholders of the Funds can vote on the Proposed Combinations. Shareholders of
the Funds will receive additional written materials about the Proposed
Combinations through the mail. The Proposed Combinations are still subject to
certain regulatory approvals and the approval of the shareholders of the Funds.
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, 1999, 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
As of January 31, 1999, the Prime Obligations Fund had a capital loss carryover,
to the extent provided in the regulations, for Federal Income tax purposes as
follows:
$3,520 expiring in 2007
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 "Trust") at
January 31, 1999, the results of each of their operations for the year then
ended, the changes in each of their net assets for the two years in the period
then ended and the financial highlights for each of the 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 Trust'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, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 15, 1999
12
<PAGE>
NOTICE TO SHAREHOLDERS THE ARBOR FUND
January 31, 1999
For shareholders that do not have a January 31, 1999 tax year end, this notice
is for informational purposes only. For shareholders with a January 31, 1999 tax
year end, please consult your tax advisor as to the pertinence of this notice.
For the fiscal year ended January 31, 1999, each portfolio is designating the
following items with regard to distributions paid during the year.
(A) (B) (C)
LONG TERM ORDINARY INCOME TOTAL
CAPITAL GAINS DISTRIBUTIONS DISTRIBUTIONS
PORTFOLIO (TAX BASIS) (TAX BASIS) (TAX BASIS)
- --------------------------------------------------------------------------------
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%
================================================================================
(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.
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.
