<PAGE>
BUILD YOUR FUTURE ON A
STRONG FOUNDATION.
GOLDEN OAK
Family of Funds
PROSPECTUS
MAY 31, 1999
GROWTH PORTFOLIO
VALUE PORTFOLIO
TAX-MANAGED EQUITY PORTFOLIO
INTERMEDIATE-TERM INCOME PORTFOLIO
MICHIGAN TAX FREE BOND PORTFOLIO
PRIME OBLIGATION MONEY MARKET PORTFOLIO
The Arbor Fund
Institutional Shares and Class A Shares
ADVISED BY
CITIZENS BANK
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Page 1 of 42
<PAGE>
HOW TO READ THIS PROSPECTUS
The Golden Oak Family of Funds is a mutual fund family that offers different
classes of shares in separate investment portfolios (Portfolios). The Portfolios
have individual investment goals and strategies. This prospectus gives you
important information about the Institutional Shares and Class A Shares of the
Portfolios that you should know before investing. Please read this prospectus
and keep it for future reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. IN THE INTRODUCTION, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT RISK AND RETURN WHICH IS COMMON TO EACH OF THE
PORTFOLIOS. FOR MORE DETAILED INFORMATION ABOUT EACH PORTFOLIO, PLEASE SEE:
PAGE
GOLDEN OAK GROWTH PORTFOLIO 4
GOLDEN OAK VALUE PORTFOLIO 8
GOLDEN OAK TAX-MANAGED EQUITY PORTFOLIO 12
GOLDEN OAK INTERMEDIATE-TERM INCOME PORTFOLIO 16
GOLDEN OAK MICHIGAN TAX FREE BOND PORTFOLIO 20
GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO 24
MORE INFORMATION ABOUT RISK 26
EACH PORTFOLIO'S OTHER INVESTMENTS 26
INVESTMENT ADVISER AND SUB-ADVISERS 27
PORTFOLIO MANAGERS 28
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES 32
DISTRIBUTION OF PORTFOLIO SHARES 32
DIVIDENDS AND DISTRIBUTIONS 32
TAXES 34
FINANCIAL HIGHLIGHTS 38
HOW TO OBTAIN MORE INFORMATION ABOUT THE
GOLDEN OAK FAMILY OF FUNDS Back Cover
Page 2 of 42
<PAGE>
INTRODUCTION
Each Portfolio is a mutual fund. A mutual fund pools shareholders' money and,
using professional investment managers, invests it in securities.
Each Portfolio has its own investment goal and strategies for reaching that
goal. The investment managers invest Portfolio assets in a way that they believe
will help each Portfolio achieve its goal. Still, investing in each Portfolio
involves risk and there is no guarantee that a Portfolio will achieve its goal.
An investment manager's judgments about the markets, the economy, or companies
may not anticipate actual market movements, economic conditions or company
performance, and these judgments may affect the return on your investment. In
fact, no matter how good a job an investment manager does, you could lose money
on your investment in the Portfolio, just as you could with other investments. A
PORTFOLIO SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE
FDIC OR ANY GOVERNMENT AGENCY.
The value of your investment in a Portfolio (other than the Golden Oak Prime
Obligation Money Market Portfolio) is based on the market value of the
securities the Portfolio holds. These prices change daily due to economic and
other events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities a Portfolio owns and the markets in which they trade.
The effect on a Portfolio of a change in the value of a single security will
depend on how widely the Portfolio diversifies its holdings.
THE GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO TRIES TO
MAINTAIN A CONSTANT PRICE PER SHARE OF $1.00, BUT THERE IS NO
GUARANTEE THAT THE PORTFOLIO WILL ACHIEVE THIS GOAL.
Page 3 of 42
<PAGE>
GROWTH PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Total return
Investment Focus Large capitalization U.S. common stocks
Share Price Volatility Medium
Principal Investment Strategy Investing in common stocks of established
U.S. companies that demonstrate positive
sustainable earnings growth
Investor Profile Investors who seek total return and are
willing to bear the risk of investing in
equity securities
INVESTMENT STRATEGY
The Portfolio invests primarily (at least 65% of its assets) in common stocks of
established U.S. companies with large market capitalizations (in the upper 90%
of the Frank Russell 1000 Growth Index). The Adviser has engaged
Nicholas-Applegate Capital Management as sub-adviser (Sub-Adviser) to manage the
Portfolio on a day-to-day basis. In choosing investments for the Portfolio, the
Sub-Adviser focuses on a "bottom-up" analysis that evaluates the financial
condition and competitiveness of individual companies. It uses a blend of
computer-intensive systematic disciplines and traditional fundamental research
to uncover signs of "change at the margin," positive business developments which
are not yet fully reflected in a company's stock price. The Sub-Adviser searches
for successful, improving companies that are managing change advantageously and
poised to exceed expectations.
The Sub-Adviser may sell a stock if the reason for its original purchase changes
(i.e., earnings deceleration, negative changes in expectations, decline in
fundamental quality) or a better stock is identified. Due to its investment
strategy, the Portfolio may buy and sell securities frequently. This may result
in higher transaction costs and additional capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING
Since it purchases equity securities, the Portfolio is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Portfolio's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Portfolio.
Page 4 of 42
<PAGE>
The Portfolio is also subject to the risk that its market segment, large
capitalization growth stocks, may underperform other equity market segments or
the equity markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Institutional
Shares from year to year.*
<TABLE>
<S> <C>
1994 (2.20)%
1995 14.90%
1996 22.48%
1997 28.88%
1998 42.51%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
23.80% (6.48)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 10.90%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 1000 GROWTH INDEX.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ---------------------------------------- -------------- ------------- -------------------
<S> <C> <C> <C>
Golden Oak Growth Portfolio 42.51% 20.38% 17.96%*
Russell 1000 Growth Index 38.71% 25.70% 22.84%**
* Since 2/1/93
** Since 2/28/93
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ---------------------------------------- -------------- ------------- -------------------
<S> <C> <C> <C>
Golden Oak Growth Portfolio 33.89% 18.59% 18.55%*
Russell 1000 Growth Index 38.71% 25.70% 24.30%**
* Since 6/18/93
** Since 6/30/93
</TABLE>
SIMPLY SPEAKING...
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The Russell 1000 Growth Index is a
widely-recognized, capitalization-weighted (companies with larger market
capitalizations have more influence than those with smaller market
capitalization) index of the 1000 largest U.S. companies with higher growth
rates and price-to-book ratios.
Page 5 of 42
<PAGE>
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
PORTFOLIO SHARES.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A SHARES
SHARES
- -------------------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS A PERCENTAGE OF OFFERING PRICE)* None 5.75%
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A PERCENTAGE OF NET ASSET VALUE) None None
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED DIVIDENDS AND OTHER DISTRIBUTIONS None None
(AS A PERCENTAGE OF OFFERING PRICE)
REDEMPTION FEE (AS A PERCENTAGE OF AMOUNT REDEEMED, IF APPLICABLE) None None
EXCHANGE FEE None None
- -------------------------------------------------------------------------------------- ------------------- ---------------
* This sales charge varies depending upon how much you invest. See "Purchasing Portfolio Shares."
</TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES CLASS A SHARES
- ------------------------------------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Investment Advisory Fees .74% .74%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .34% .34%
- ------------------------------------------------------------------- ----------------------- -------------------------
Total Annual Portfolio Operating Expenses 1.08% 1.33%
</TABLE>
For more information about these fees, see "Investment Adviser and Sub-Advisers"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares $110 $343 $595 $1,317
Class A Shares $703 $972 $1,262 $2,084
</TABLE>
Page 6 of 42
<PAGE>
VALUE PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Medium to large capitalization U.S. common
stocks
Share Price Volatility Medium
Principal Investment Strategy Investing in common stocks which are
undervalued relative to a company's earnings
Investor Profile Investors who seek long term capital
appreciation and who are willing to bear the
risks of investing in equity securities
INVESTMENT STRATEGY
The Portfolio invests primarily (at least 65% of its assets) in common stocks of
established U.S. companies with medium to large market capitalizations (in
excess of $3 billion). The Adviser has engaged Systematic Financial Management,
LP as sub-adviser (Sub-Adviser) to manage the Portfolio on a day-to-day basis.
In choosing investments for the Portfolio, the Sub-Adviser invests in companies
which it believes are undervalued relative to a company's historic and expected
earnings. The Sub-Adviser makes investments in these companies based on its
fundamental research and analysis of various characteristics, including
financial statements, sales and expense trends, earnings estimates, market
position of the company and industry outlook. The Sub-Adviser also looks for
"catalysts" which could positively or negatively affect prices of current and
potential Portfolio companies.
PRINCIPAL RISKS OF INVESTING
Since it purchases equity securities, the Portfolio is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Portfolio's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Portfolio.
The medium capitalization companies the Portfolio invests in may be more
vulnerable to adverse business or economic events than larger, more established
companies. In particular, these medium-sized companies may have limited product
lines, markets and financial resources, and may depend on a relatively small
management group. Therefore, medium capitalization stocks may be more volatile
than those of larger companies.
Page 7 of 42
<PAGE>
The Portfolio is also subject to the risk that its market segment, medium to
large capitalization value stocks, may underperform other equity market segments
or the equity markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
The Portfolio is a successor to a common trust fund managed by the Adviser until
June 23, 1997 and thereafter by the Sub-Adviser. The periods prior to June 23,
1997 represent the performance of the common trust fund while it was managed by
the Adviser. The Sub-Adviser uses substantially the same management strategies
to manage the Portfolio as the Adviser used to manage the common trust fund. The
past performance shown in the bar chart has been adjusted to reflect current
expenses for the Institutional Shares of the Portfolio. The Adviser's common
trust fund was not a registered mutual fund so it was not subject to the same
investment and tax restrictions as the Portfolio. If it had been, the common
trust fund's performance might have been lower.
This bar chart shows changes in the performance of the Portfolio's Institutional
Shares from year to year.*
<TABLE>
<S> <C>
1989 17.62%
1990 (8.07)%
1991 25.11%
1992 7.82%
1993 8.96%
1994 (3.27)%
1995 33.12%
1996 22.21%
1997 30.38%
1998 6.18%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
15.27% (17.06)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 4.60%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 1000 VALUE INDEX.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES 1 YEAR 5 YEARS 10 YEARS
- --------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C>
Golden Oak Value Portfolio 6.18% 16.85% 13.22%
Russell 1000 Value Index 27.02% 23.37% 19.02%
</TABLE>
Page 8 of 42
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR SINCE INCEPTION
- ----------------------------------------- -------------- -------------------
<S> <C> <C>
Golden Oak Value Portfolio (0.30)% 6.06%*
Russell 1000 Value Index 27.02% 20.84%**
</TABLE>
* Since 6/23/97
** Since 6/30/97
SIMPLY SPEAKING...
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The Russell 1000 Value Index is a widely-recognized,
capitalization-weighted (companies with larger market capitalizations have more
influence than those with smaller market capitalization) index of the 1000
largest U.S. companies with lower growth rates and price-to-book ratios.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
PORTFOLIO SHARES.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A
SHARES SHARES
- ------------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS A PERCENTAGE OF OFFERING None 5.75%
PRICE)*
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A PERCENTAGE OF NET ASSET VALUE) None None
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED DIVIDENDS AND OTHER DISTRIBUTIONS None None
(AS A PERCENTAGE OF OFFERING PRICE)
REDEMPTION FEE (AS A PERCENTAGE OF AMOUNT REDEEMED, IF APPLICABLE) None None
EXCHANGE FEE None None
- ------------------------------------------------------------------------------------- --------------- ---------------
* This sales charge varies depending upon how much you invest. See "Purchasing Portfolio Shares."
</TABLE>
Page 9 of 42
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A
SHARES SHARES
- --------------------------------------------------------------------- ---------------------- ------------------
<S> <C> <C>
Investment Advisory Fees .74% .74%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .43% .43%
- --------------------------------------------------------------------- ---------------------- ------------------
Total Annual Portfolio Operating Expenses 1.17% 1.42%
</TABLE>
* The Portfolio's total actual annual Portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
<TABLE>
<S> <C>
Golden Oak Value Portfolio -Institutional Shares 1.10%
Golden Oak Value Portfolio -Class A Shares 1.35%
</TABLE>
For more information about these fees, see "Investment Adviser and Sub-Advisers"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares $119 $372 $644 $1,420
Class A Shares $711 $998 $1,307 $2,179
</TABLE>
Page 10 of 42
<PAGE>
TAX-MANAGED EQUITY PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal High long-term after-tax returns
Investment Focus Common stock of U.S. companies
Share Price Volatility Medium
Principal Investment Strategy Investing in large U.S. companies while
attempting to maximize after-tax returns
Investor Profile Long-term investors who are looking for a
blend of performance and tax-efficiency and
are willing to accept the risks of equity
investing
INVESTMENT STRATEGY
The Portfolio invests primarily in common stocks of well-established U.S.
companies with large market capitalizations (in excess of $5 billion). The
Adviser has engaged Nicholas-Applegate Capital Management as sub-adviser
(Sub-Adviser) to manage the Portfolio on a day-to-day basis. In choosing
investments for the Portfolio, the Sub-Adviser focuses on a "bottom-up" analysis
that evaluates the financial conditions and competitiveness of individual
companies and uses a blend of computer analysis and traditional fundamental
research to uncover positive business developments which are not reflected in a
company's stock price. The Sub-Adviser searches for successful, improving
companies that are managing change advantageously and poised to exceed
expectations and it purchases stocks of such companies after evaluating expected
risk and return. The Sub-Adviser attempts to build a portfolio that maximizes
after-tax returns by monitoring the following developments to help maximize
after-tax returns: all short-term and long-term capital gains; the amount and
frequency of dividend payments; and when dividends are declared and paid.
Conversely, stocks of the Portfolio are sold after tax consequences are
considered and weighed against the potential for enhanced returns from new
investment opportunities.
PRINCIPAL RISKS OF INVESTING
Since it purchases common stocks, the Portfolio is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Portfolio's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Portfolio.
Page 11 of 42
<PAGE>
The Portfolio is non-diversified, which means that it may invest in the
securities of relatively few issuers. As a result, the Portfolio may be more
susceptible to a single adverse economic or regulatory occurrence affecting one
or more of these issuers, and may experience increased volatility due to its
investments in those securities.
Although the Portfolio seeks to maximize after-tax returns, the Portfolio's
investments in common stocks that appreciate in value may create unrealized
gains. These gains would become realized when those stocks are sold, and may
result in tax consequences for the Portfolio's shareholders. High levels of
unrealized gains, therefore, may limit the ability of the Portfolio to achieve
its goal of high after-tax returns if the Portfolio is required to sell
securities to meet shareholder redemption requests or for other reasons at a
time when doing so would have significant tax consequences for shareholders. As
of April 30, 1999, the Portfolio held securities with a market value of
$42,822,205, of which $31,740,085 represented unrealized gains.
The Portfolio is also subject to the risk that its market segment, large
capitalization stocks, may underperform other equity market segments or the
equity markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
The Portfolio is a successor to a common trust fund managed by the Adviser until
April 30, 1999 and thereafter by the Sub-Adviser. The periods prior to April 30,
1999 represent the performance of the common trust fund while it was managed by
the Adviser. The Sub-Adviser uses substantially the same management strategies
to manage the Portfolio as the Adviser used to manage the common trust fund. The
past performance shown in the bar chart has been adjusted to reflect current
expenses for the Institutional Shares of the Portfolio. The Adviser's common
trust fund was not a registered mutual fund so it was not subject to the same
investment and tax restrictions as the Portfolio. If it had been, the common
trust fund's performance might have been lower.
This bar chart shows changes in the performance of the Portfolio's Institutional
Shares from year to year.*
<TABLE>
<S> <C>
1989 29.49%
1990 (3.08)%
1991 27.70%
1992 11.13%
1993 6.38%
1994 (0.37)%
1995 34.82%
1996 22.89%
1997 25.40%
1998 26.89%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
24.54% (11.52)%
Page 12 of 42
<PAGE>
(12/31/98) (9/30/90)
</TABLE>
* The performance information shown above is based on a calendar year.
The portfolio's performance from 1/1/99 to 3/31/99 was 4.44%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE S&P 500 INDEX.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES 1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Golden Oak Tax-Managed Equity Portfolio 26.89% 21.26% 17.41%
S&P 500 Index 28.60% 24.05% 19.19%
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Golden Oak Tax-Managed Equity Portfolio 19.22% 19.48% 16.33%
S&P 500 Index 28.60% 24.05% 19.19%
</TABLE>
SIMPLY SPEAKING...
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment advisor
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The S&P 500 Index is a widely-recognized, market
value-weighted (higher market value stocks have more influence than lower market
value stocks) index of 500 stocks designed to mimic the overall equity market's
industry weightings.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
PORTFOLIO SHARES.
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES SHARES
- ------------------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS A PERCENTAGE OF OFFERING None 5.75%
PRICE)*
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A PERCENTAGE OF NET ASSET VALUE) None None
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED DIVIDENDS AND OTHER DISTRIBUTIONS None None
(AS A PERCENTAGE OF OFFERING PRICE)
REDEMPTION FEE (AS A PERCENTAGE OF AMOUNT REDEEMED, IF APPLICABLE) None None
EXCHANGE FEE None None
- ------------------------------------------------------------------------------------- ---------------- ---------------
* This sales charge varies depending upon how much you invest. See "Purchasing Portfolio Shares."
</TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A
SHARES SHARES
- ------------------------------------------------ ------------------- -------------------
<S> <C> <C>
Investment Advisory Fees .74% .74%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .36% .36%
- ------------------------------------------------ ------------------- -------------------
Total Annual Portfolio Operating Expenses 1.10% 1.35%
</TABLE>
Page 13 of 42
<PAGE>
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
estimated costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Institutional Shares $112 $350
Class A Shares $705 $978
</TABLE>
Page 14 of 42
<PAGE>
INTERMEDIATE-TERM INCOME PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Current income consistent with limited
price volatility
Investment Focus Fixed income obligations of the U.S.
Treasury, U.S. government agencies and U.S.
corporations
Share Price Volatility Low
Principal Investment Strategy Investing in a portfolio of U.S. government
and corporate fixed income securities to
attempt to maximize return while limiting
risk
Investor Profile Conservative investors who want to receive
income with limited risk of share price
volatility
INVESTMENT STRATEGY
The Portfolio primarily invests (at least 65% of its assets) in fixed income
obligations issued by the U.S. Treasury and U.S. government agencies, including
mortgage backed securities rated in one of the top two ratings categories, and
in U.S. corporate debt rated in one of the top three ratings categories. In
selecting investments for the Portfolio, the Adviser analyzes current market
conditions and anticipated changes in bond prices to attempt to provide the
highest level of income and capital appreciation, consistent with keeping a low
level of share price fluctuation. The Adviser actively manages the maturity of
the Portfolio and purchases securities which will, on average, mature in three
to ten years. Under normal circumstances, the Adviser anticipates that the
Portfolio's dollar-weighted average maturity will be approximately nine years;
however, the Adviser may vary this average maturity substantially in
anticipation of a change in the interest rate environment. Securities will be
considered for sale in the event of or in anticipation of a credit downgrade; in
order to change the duration or sector weighting of the Portfolio; or, to
realize an aberration in a security's market valuation.
PRINCIPAL RISKS OF INVESTING
The prices the Portfolio's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers. Generally, the Portfolio's
fixed income securities will decrease in value if interest rates rise and vice
versa, and the volatility of lower rated securities is even greater than that of
higher rated securities. Also, longer-term securities are generally more
volatile, so the average maturity or duration of these securities affects risk.
Page 15 of 42
<PAGE>
Although the Portfolio's U.S. government securities are considered to be among
the safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. government agencies are
backed by the U.S. Treasury, while others are backed solely by the ability of
the agency to borrow from the U.S. Treasury or by the agency's own resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Portfolio may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
The Portfolio is also subject to the risk that its investment strategy which
focuses on U.S. government and U.S. corporate fixed income securities with
intermediate maturities, may perform differently than other mutual funds which
focus on fixed income securities with longer maturities or invest in other asset
classes.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Institutional
Shares from year to year.*
<TABLE>
<S> <C>
1994 (2.10)%
1995 13.64%
1996 2.80%
1997 7.20%
1998 9.17%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
5.60% (1.90)%
(9/30/98) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was (1.40)%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT/CORPORATE BOND INDEX.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------------------------ ----------- ------------- -------------------
<S> <C> <C> <C>
Golden Oak Intermediate-Term Income Portfolio 9.17% 6.00% 6.08%*
Lehman Brothers Intermediate Government/Corporate Bond Index 8.42% 6.59% 6.52%**
* Since 2/1/93
** Since 2/28/93
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------- -------------- ------------- -------------------
<S> <C> <C> <C>
Golden Oak Intermediate-Term Income Portfolio 4.10% 4.76% 4.88%*
Lehman Brothers Intermediate Government/Corporate Bond Index 8.42% 6.59% 6.44%**
</TABLE>
Page 16 of 42
<PAGE>
* Since 6/18/93
** Since 6/30/93
SIMPLY SPEAKING...
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The Lehman Brothers Intermediate
Government/Corporate Bond Index is a widely-recognized, market value-weighted
(higher market value bonds have more influence than lower market value bonds)
index of U.S. Treasury securities, U.S. government agency obligations, corporate
debt backed by the U. S. government, fixed-rate nonconvertible corporate debt
securities, Yankee bonds and nonconvertible debt securities issued by or
guaranteed by foreign governments and agencies. All securities in the index are
rated investment grade (BBB) or higher, with maturities of 1 to 10 years.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
PORTFOLIO SHARES.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A SHARES
SHARES
- ------------------------------------------------------------------------------------- -------------- ----------------
<S> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS A PERCENTAGE OF OFFERING None 4.50%
PRICE)*
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A PERCENTAGE OF NET ASSET VALUE) None None
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED DIVIDENDS AND OTHER DISTRIBUTIONS None None
(AS A PERCENTAGE OF OFFERING PRICE)
REDEMPTION FEE (AS A PERCENTAGE OF AMOUNT REDEEMED, IF APPLICABLE) None None
EXCHANGE FEE None None
- ------------------------------------------------------------------------------------- -------------- ----------------
* This sales charge varies depending upon how much you invest. See "Purchasing Portfolio Shares."
</TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES CLASS A SHARES
- --------------------------------------------------------------------- ---------------------- -------------------------
<S> <C> <C>
Investment Advisory Fees .50% .50%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .30% .30%
- --------------------------------------------------------------------- ---------------------- -------------------------
Total Annual Portfolio Operating Expenses .80% 1.05%
</TABLE>
* The Portfolio's total actual annual Portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
<TABLE>
<S> <C>
Golden Oak Intermediate-Term Income Portfolio -Institutional Shares .65%
Page 17 of 42
<PAGE>
Golden Oak Intermediate-Term Income Portfolio -Class A Shares .90%
</TABLE>
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares $82 $255 $444 $990
Class A Shares $552 $769 $1,003 $1,675
</TABLE>
Page 18 of 42
<PAGE>
MICHIGAN TAX FREE BOND PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Current income exempt from both
federal and Michigan state income taxes,
consistent with preservation of capital
Investment Focus Tax-free Michigan municipal securities
Share Price Volatility Medium
Principal Investment Strategy Invests in municipal obligations which pay
interest that is exempt from both federal
and Michigan state income tax
Investor Profile Conservative taxable investors who want to
receive current income exempt from federal
and Michigan state income tax and are
willing to bear the moderate risk of
investing in a portfolio of
intermediate-term securities affected by
changes in economic conditions and
governmental policies within Michigan
INVESTMENT STRATEGY
The Portfolio invests substantially all of its assets (at least 80%) in
municipal securities that generate income exempt from federal and Michigan state
income taxes. These securities include securities of municipal issuers located
in Michigan, the District of Columbia, Puerto Rico and other U.S. territories
and possessions. The Portfolio will invest most of its assets in securities that
are not subject to federal taxes, including the alternative minimum tax, but it
can purchase a limited amount of taxable securities. The Portfolio's Adviser
will purchase investment grade municipal securities and attempt to maintain an
average weighted portfolio maturity of three to ten years. The maximum maturity
for any individual security is thirty years. In selecting securities for the
Portfolio, the Adviser will consider each security's yield and total return
potential relative to other available municipal securities. Securities will be
considered for sale in the event of or in anticipation of a credit downgrade; in
order to change the duration or sector weighting of the Portfolio; or, to
realize an aberration in a security's market valuation.
PRINCIPAL RISKS OF INVESTING
The prices the Portfolio's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers,
Page 19 of 42
<PAGE>
including governments. Generally, the Portfolio's fixed income securities will
decrease in value if interest rates rise and vice versa, and the volatility of
lower rated securities is even greater than that of higher rated securities.
Also, longer-term securities are generally more volatile, so the average
maturity or duration of these securities affects risk.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Portfolio's securities.
The Portfolio is non-diversified, which means that it may invest in the
securities of relatively few issuers. As a result, the Portfolio may be more
susceptible to a single adverse economic or political occurrence affecting one
or more of these issuers, and may experience increased volatility due to its
investments in those securities.
The Portfolio's concentration of investments in securities of issuers located in
a Michigan subjects the Portfolio to economic conditions and government policies
within that state. As a result, the Portfolio will be more susceptible to
factors which adversely affect issuers of Michigan obligations than a mutual
fund which does not have as great a concentration in Michigan municipal
obligations.
The Portfolio is also subject to the risk that its market segment, Michigan
municipal debt securities, may underperform other fixed income market segments
or the fixed income markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
The periods prior to June 23, 1997, when the Portfolio began operating,
represent the performance of the Adviser's similarly managed predecessor common
trust fund. The past performance shown in the bar chart has been adjusted to
reflect current expenses for the Institutional Shares of the Portfolio. The
Adviser's common trust fund was not a registered mutual fund so it was not
subject to the same investment and tax restrictions as the Portfolio. If it had
been, the common trust fund's performance might have been lower.
This bar chart shows changes in the performance of the Portfolio's Institutional
Shares from year to year.*
<TABLE>
<S> <C>
1989 7.76%
1990 6.39%
1991 10.23%
1992 6.58%
1993 9.71%
1994 (3.06)%
1995 12.09%
1996 3.24%
1997 6.20%
1998 5.10%
Page 20 of 42
<PAGE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
4.56% (3.82)%
(3/31/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 0.66%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE MERRILL LYNCH 1-12 YEAR MUNICIPAL BOND
INDEX.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES 1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Golden Oak Michigan Tax Free Bond Portfolio 5.10% 4.60% 6.35%
Merrill Lynch 1-12 Year Municipal Bond Index 6.27% 5.76% 7.41%
<CAPTION>
CLASS A SHARES 1 YEAR SINCE INCEPTION
- ----------------------------------------------------------- ----------- -------------------
<S> <C> <C>
Golden Oak Michigan Tax Free Bond Portfolio 0.15% 2.98%*
Merrill Lynch 1-12 Year Municipal Bond Index 6.27% 7.39%**
</TABLE>
* Since 6/23/97
**Since 6/30/97
SIMPLY SPEAKING...
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The Merrill Lynch 1-12 Year Municipal Bond Index is
a widely recognized broad-based measure of the performance of the U.S. tax
exempt bond market for securities with maturities of one to twelve years.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
PORTFOLIO SHARES.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A
SHARES SHARES
- -------------------------------------------------------------------------------------- ------------- ----------------
<S> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS A PERCENTAGE OF OFFERING PRICE)* None 4.50%
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A PERCENTAGE OF NET ASSET VALUE) None None
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED DIVIDENDS AND OTHER DISTRIBUTIONS None None
(AS A PERCENTAGE OF OFFERING PRICE)
REDEMPTION FEE (AS A PERCENTAGE OF AMOUNT REDEEMED, IF APPLICABLE) None None
EXCHANGE FEE None None
- -------------------------------------------------------------------------------------- ------------- ----------------
* This sales charge varies depending upon how much you invest. See "Purchasing Portfolio Shares."
</TABLE>
Page 21 of 42
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES CLASS A SHARES
- --------------------------------------------------------------------- ---------------------- --------------------
<S> <C> <C>
Investment Advisory Fees .50% .50%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .31% .31%
- --------------------------------------------------------------------- ---------------------- --------------------
Total Annual Portfolio Operating Expenses .81% 1.06%
</TABLE>
* The Portfolio's total actual annual Portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
<TABLE>
<S> <C>
Golden Oak Michigan Tax Free Bond Portfolio -Institutional Shares .65%
Golden Oak Michigan Tax Free Bond Portfolio -Class A Shares .90%
</TABLE>
For more information about these fees, see "Investment Adviser and Sub-Advisers"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares $83 $259 $450 $1,002
Class A Shares $553 $772 $1,008 $1,686
</TABLE>
Page 22 of 42
<PAGE>
PRIME OBLIGATION MONEY MARKET PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Preserve principal value and maintain a
high degree of liquidity while providing
current income
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a broad range of short-term
high quality U.S. dollar-denominated debt
securities
Investor Profile Conservative investors who want to receive
current income through a liquid investment
INVESTMENT STRATEGY
The Portfolio invests in a broad range of short-term U.S. dollar-denominated
securities that are rated in one of the two highest rating categories by
nationally recognized rating organizations, or unrated securities that
Wellington Management Company, LLP (Sub-Adviser) determines are of comparable
quality. The Portfolio invests in short-term securities, including: (i)
commercial paper and other short-term corporate obligations of U.S. and foreign
issuers (including asset-backed securities); (ii) certificates of deposit, time
deposits, bankers' acceptances, bank notes and other obligations of U.S. and
foreign savings and loan institutions and commercial banks (including foreign
branches of such banks) that meet certain asset requirements; (iii) short-term
obligations issued by state and local governments; (iv) obligations of foreign
governments (including Canadian and Provincial Government and Crown Agency
obligations); and (v) U.S. Treasury obligations and obligations issued or
guaranteed as to principal and interest by agencies or instrumentalities of the
U.S. government. The Portfolio may also enter into fully-collateralized
repurchase agreements.
The Adviser has engaged Wellington Management Company, LLP as sub-adviser to
manage the Portfolio on a day-to-day basis. Using top-down strategy setting and
bottom-up security selection, the Sub-Adviser seeks securities with an
acceptable maturity, that are marketable and liquid, that offer competitive
yields, and that are issued by issuers that are on a sound financial footing.
The Sub-Adviser also considers factors such as the anticipated level of interest
rates and the maturity of individual securities relative to the maturity of the
Portfolio as a whole. The Portfolio follows strict SEC rules about credit
quality, maturity and diversification of its investments.
Page 23 of 42
<PAGE>
PRINCIPAL RISKS OF INVESTING
An investment in the Portfolio is subject to income risk, which is the
possibility that the Portfolio's yield will decline due to falling interest
rates. A Portfolio share is not a bank deposit and is not insured or guaranteed
by the FDIC or any government agency. In addition, although a money market
Portfolio seeks to keep a constant price per share of $1.00, you may lose money
by investing in the Portfolio.
Although the Portfolio's U.S. government securities are considered to be among
the safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. government agencies are
backed by the U.S. Treasury, while others are backed solely by the ability of
the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Institutional
Shares from year to year.*
<TABLE>
<S> <C>
1994 3.97%
1995 5.77%
1996 5.23%
1997 5.38%
1998 5.34%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
1.44% .74%
(6/30/95) (3/31/94)
</TABLE>
* The performance shown above is based on a calendar year. The Portfolio's
performance from 1/1/99 to 3/31/99 was 1.18%.
Call 1-800-545-6331 for the Portfolio's most current 7-day yield.
THIS TABLE SHOWS THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ----------------------------------------------------------- -------------- ------------- -------------------
<S> <C> <C> <C>
Golden Oak Prime Obligation Money Market Portfolio 5.34% 5.14% 4.78%*
</TABLE>
* Since 2/1/93
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR SINCE INCEPTION
- ----------------------------------------------------------- -------------- -------------------
<S> <C> <C>
Golden Oak Prime Obligation Money Market Portfolio 5.08% 4.90%*
</TABLE>
* Since 1/20/94
Page 24 of 42
<PAGE>
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
PORTFOLIO SHARES.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A
SHARES SHARES
- ------------------------------------------------------------------------------------ --------------- ----------------
<S> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS A PERCENTAGE OF OFFERING None None
PRICE)
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A PERCENTAGE OF NET ASSET VALUE) None None
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED DIVIDENDS AND OTHER None None
DISTRIBUTIONS (AS A PERCENTAGE OF OFFERING PRICE)
REDEMPTION FEE (AS A PERCENTAGE OF AMOUNT REDEEMED, IF APPLICABLE) None None
EXCHANGE FEE None None
- ------------------------------------------------------------------------------------ --------------- ----------------
</TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES CLASS A SHARES
- --------------------------------------------------------------------- ---------------------- -------------------------
<S> <C> <C>
Investment Advisory Fees .30% .30%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .30% .30%
- --------------------------------------------------------------------- ---------------------- -------------------------
Total Annual Portfolio Operating Expenses .60% .85%
</TABLE>
* The Portfolio's total actual annual Portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
<TABLE>
<S> <C>
Golden Oak Prime Obligation Money Market Portfolio -Institutional Shares .40%
Golden Oak Prime Obligation Money Market Portfolio -Class A Shares .65%
</TABLE>
For more information about these fees, see "Investment Adviser and Sub-Advisers"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares $61 $192 $335 $750
Class A Shares $87 $271 $471 $1,049
</TABLE>
Page 25 of 42
<PAGE>
<TABLE>
<CAPTION>
MORE INFORMATION ABOUT RISK
<S> <C>
EQUITY RISK - Equity securities include public and privately Golden Oak Growth Portfolio
issued equity securities, common and preferred stocks, warrants, Golden Oak Value Portfolio
rights to subscribe to common stock and convertible securities, as Golden Oak Tax-Managed Equity Portfolio
well as instruments that attempt to track the price movement of
equity indices. Investments in equity securities and equity
derivatives in general are subject to market risks that may cause
their prices to fluctuate over time. The value of securities
convertible into equity securities, such as warrants or
convertible debt, 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 a mutual
fund invests will cause a Portfolio's net asset value to
fluctuate. An investment in a portfolio of equity securities may
be more suitable for long-term investors who can bear the risk of
these share price fluctuations.
FIXED INCOME RISK - The market value of fixed income investments Golden Oak Intermediate-Term Income Portfolio
change in response to interest rate changes and other factors. Golden Oak Michigan Tax Free Bond Portfolio
During periods of falling interest rates, the values of outstanding
fixed income securities generally rise. 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. In addition
to these fundamental risks, different types of fixed income
securities may be subject to the following additional risks:
CALL RISK - During periods of falling interest rates,
certain debt obligations with high interest rates may be
prepaid (or "called") by the issuer prior to maturity.
This may cause a Portfolio's average weighted maturity to
fluctuate, and may require a Portfolio to invest the
resulting proceeds at lower interest rates.
CREDIT RISK - The possibility that an issuer will be
unable to make timely payments of either principal or
interest.
EVENT RISK - Securities may suffer declines in credit
quality and market value due to issuer restructurings or
other factors. This risk should be reduced because of a
Portfolio's multiple holdings.
Page 26 of 42
<PAGE>
MUNICIPAL ISSUER RISK - There may be economic or political changes Golden Oak Michigan Tax Free Bond Portfolio
that impact the ability of municipal issuers to repay principal
and to make interest payments on municipal securities. Changes to
the financial condition or credit rating of municipal issuers may
also adversely affect the value of the Portfolio's municipal
securities. Constitutional or legislative limits on borrowing by
municipal issuers may result in reduced supplies of municipal
securities. Moreover, certain municipal securities are backed
only by a municipal issuer's ability to levy and collect taxes.
In addition, the Portfolio's concentration of investments in
issuers located in a single state makes the Portfolio more
susceptible to adverse political or economic developments
affecting that state. The Portfolio also may be riskier than
mutual funds that buy securities of issuers in numerous states.
YEAR 2000 RISK - The Portfolios depend on the smooth functioning All Portfolios
of computer systems in almost every aspect of their business.
Like other mutual funds, businesses and individuals around the
world, the Portfolios could be adversely affected if the computer
systems used by its service providers do not properly process
dates on and after January 1, 2000, and distinguish between the
year 2000 and the year 1900. The Portfolios have asked their
service providers whether they expect to have their computer
systems adjusted for the year 2000 transition, and are seeking
assurances from each service provider that they are devoting
significant resources to prevent material adverse consequences to
the Portfolios. While it is likely that such assurances will be
obtained, the Portfolios and their shareholders may experience
losses if these assurances prove to be incorrect, or as a result
of year 2000 computer difficulties experienced by issuers of
portfolio securities or third parties, such as custodians, banks,
broker-dealers or others with which the Portfolios do business.
</TABLE>
Page 27 of 42
<PAGE>
EACH PORTFOLIO'S OTHER INVESTMENTS
This prospectus describes the Portfolios' primary strategies, and the Portfolios
will normally invest in the types of securities described in this prospectus.
However, in addition to the investments and strategies described in this
prospectus, each Portfolio also may invest in other securities, use other
strategies and engage in other investment practices. These investments and
strategies, as well as those described in this prospectus, are described in
detail in our Statement of Additional Information.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, each Portfolio may invest up to
100% of its assets in cash or money market instruments that would not ordinarily
be consistent with a Portfolio's objectives (other than the Golden Oak Prime
Obligation Money Market Portfolio). A Portfolio will do so only if the Adviser
or Sub-Adviser believes that the risk of loss outweighs the opportunity for
capital gains or higher income. Of course, the Portfolio cannot guarantee that
any Portfolio will achieve its investment goal.
INVESTMENT ADVISER AND SUB-ADVISERS
The Investment Adviser makes investment decisions for each of the Portfolios,
other than the Portfolios which utilize a sub-adviser, and continuously reviews,
supervises and administers the Portfolios' respective investment programs. The
Investment Adviser oversees the Sub-Advisers to ensure compliance with the
sub-advised Portfolios' investment policies and guidelines, and monitors each
Sub-Adviser's adherence to its investment style. The Board of Trustees of The
Arbor Fund supervises the Adviser and Sub-Advisers and establishes policies that
the Adviser and Sub-Advisers must follow in their management activities.
Citizens Bank serves as the Adviser to the Portfolios. Citizens Bank has managed
bank common funds, pension plan assets and personal trust assets since 1927. As
of January 1, 1999, Citizens Bank had approximately $3.5 billion in assets under
management. For the fiscal year ended January 31, 1999, Citizens Bank received
advisory fees as a percentage of average daily net assets of:
<TABLE>
<S> <C>
GOLDEN OAK GROWTH PORTFOLIO .34%
GOLDEN OAK VALUE PORTFOLIO .29%
GOLDEN OAK INTERMEDIATE-TERM INCOME PORTFOLIO .35%
GOLDEN OAK MICHIGAN TAX FREE BOND PORTFOLIO .34%
GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO .025%
</TABLE>
Citizens Bank is entitled to receive .34% of the Golden Oak Tax-Managed Equity
Portfolio's average daily net assets for its investment advisory services, but
may receive less due to waivers.
Nicholas-Applegate Capital Management (Nicholas-Applegate) manages the Golden
Oak Growth Portfolio and the Golden Oak Tax-Managed Equity Portfolio on a
day-to-day basis. Nicholas-Applegate selects, buys and sells securities for the
Portfolios under the supervision of the Adviser and the Board of Trustees. For
the fiscal year ended January 31, 1999, Nicholas-Applegate received sub-advisory
fees as a percentage of average daily net assets of:
Page 28 of 42
<PAGE>
<TABLE>
<S> <C>
GOLDEN OAK GROWTH PORTFOLIO .40%
</TABLE>
Nicholas-Applegate is also entitled to receive .40% of the Golden Oak
Tax-Managed Equity Portfolio's average daily net assets for its services, but
may receive less due to waivers.
Systematic Financial Management, L.P. (Systematic) manages the Golden Oak Value
Portfolio on a day-to-day basis. Systematic selects, buys and sells securities
for the Portfolio under the supervision of the Adviser and the Board of
Trustees. For the fiscal year ended January 31, 1999, Systematic received
sub-advisory fees as a percentage of average daily net assets of:
<TABLE>
<S> <C>
GOLDEN OAK VALUE PORTFOLIO .45%
</TABLE>
Wellington Management Company, LLP (WMC) manages the Golden Oak Prime Obligation
Money Market Portfolio on a day-to-day basis. WMC selects, buys and sells
securities for the Portfolio under the supervision of the Adviser and the Board
of Trustees. WMC and its predecessor organizations have provided investment
advisory services to investment companies since 1928 and investment counseling
clients since 1960. For the fiscal year ended January 31, 1999, WMC received
sub-advisory fees as a percentage of average daily net assets of:
<TABLE>
<S> <C>
GOLDEN OAK PRIME OBLIGATION MONEY MARKET PORTFOLIO .075%
</TABLE>
PORTFOLIO MANAGERS
Christopher W. Wheeler serves as Vice President and Trust Officer of Citizens
Bank. He has managed the Golden Oak Intermediate-Term Income Portfolio since
February, 1996. He has managed the Adviser's fixed income Portfolios and trust
accounts since 1993.
Richard C. Cross serves as Vice President and Trust Officer of Citizens Bank. He
has managed the Golden Oak Michigan Tax Free Bond Portfolio since October, 1997.
He has more than 17 years of investment experience. Prior to joining Citizens
Bank, Mr. Cross had significant experience in managing fixed income investments.
Larry Speidell, CFA and Partner, serves as the director of Nicholas-Applegate's
global/systematic portfolio management and research group. Portfolios are
managed by a team with lead portfolio managers having full discretion over final
buy and sell decisions. Mr. Speidell has over 25 years of investment experience.
Prior to joining Nicholas-Appelgate in 1994, Mr. Speidell was with Batterymarch
Financial Management and Putnam Management Company.
John Kane is a Partner and a Portfolio Manager for Nicholas-Applegate's U.S.
Systematic Team. He is the lead Portfolio Manager for the Golden Oak Growth
Portfolio and the Golden Oak Tax-Managed Equity Portfolio. He has more than 30
years of investment experience. Before joining Nicholas-Applegate in 1994, Mr.
Kane had 25 years of experience with ARCO Investment Management Company and
General Electric Company.
Gyanendra Kumar Joshi serves as Senior Managing Director of Systematic. He has
managed the Golden Oak Value Portfolio since June, 1997. He has more than 26
years of investment experience. Prior to joining Systematic, Mr. Joshi served as
Managing Director of Mitchell Hutchins Institutional Investors.
Page 29 of 42
<PAGE>
Kevin McCreesh, CFA serves as Managing Director and Senior Portfolio Manager of
Systematic Investment Management. Mr. McCreesh co-manages the Golden Oak Value
Portfolio with Mr. Joshi and has been part of the investment team with Mr. Joshi
since 1990 at Systematic and at Mitchell Hutchins Institutional Investors.
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES
This section tells you how to buy, sell (sometimes called "redeem") and exchange
Institutional Shares and Class A Shares of the Portfolios.
The classes have different expenses and other characteristics.
INSTITUTIONAL SHARES
- No sales charge
- No 12b-1 fees or shareholder fees
- $1,000,000 minimum initial investment
CLASS A SHARES
- Front-end sales charge
- 12b-1 fees
- $1,000 minimum initial investment
For some investors the minimum initial investment may be lower.
Institutional Shares are for financial institutions investing for their own or
their customers' accounts. For information on how to open an account and set up
procedures for placing transactions call 1-800-808-4920.
Class A Shares are for individual and institutional investors.
HOW TO PURCHASE PORTFOLIO SHARES
You may purchase shares directly by:
- - Mail (Class A only)
- - Telephone
- - Wire
- - Direct Deposit, or
- - Automated Clearing House (ACH).
To purchase shares directly from us, please call 1-800-808-4920. Unless you
arrange to pay by wire or through direct deposit or ACH, write your check,
payable in U.S. dollars, to "Golden Oak Family of Funds" and include the name of
the appropriate Portfolio(s) on the check. You cannot purchase Institutional
Shares by check. A Portfolio cannot accept third-party checks, credit cards,
credit card checks or cash.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Portfolio shares for their customers. If
you invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for
Page 30 of 42
<PAGE>
investing directly. Your institution may charge a fee for its services, in
addition to the fees charged by the Portfolio. You will also generally have to
address your correspondence or questions regarding a Portfolio to your
institution.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange and, for the
Golden Oak Prime Obligation Money Market Portfolio, the Federal Reserve are open
for business (a Business Day). Shares cannot be purchased by Federal Reserve
Wire on days when either the New York Stock Exchange or the Federal Reserve is
closed.
A Portfolio may reject any purchase order if it determines that accepting the
order would not be in the best interests of the Portfolio or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Portfolio receives your purchase order plus, in
the case of Class A Shares, the applicable front-end sales charge.
Each Portfolio (except the Golden Oak Prime Obligation Money Market), calculates
its NAV once each Business Day at the regularly-scheduled close of normal
trading on the New York Stock Exchange (normally, 4:00 p.m. Eastern time). So,
for you to receive the current Business Day's NAV, generally a Portfolio must
receive your purchase order before 4:00 p.m. Eastern time.
The Golden Oak Prime Obligation Money Market Portfolio calculates its NAV once
each Business Day at 12:00 noon Eastern time. So, for you to be eligible to
receive dividends declared on the day you submit your purchase order, generally
the Portfolio must receive your order before 12:00 noon Eastern time and federal
funds (readily available funds) before 12:00 noon Eastern time.
HOW WE CALCULATE NAV
NAV for one Portfolio share is the value of that share's portion of all of the
net assets in the Portfolio.
In calculating NAV, a Portfolio generally values its investment portfolio at
market price (except the Golden Oak Prime Obligation Money Market Portfolio). If
market prices are unavailable or a Portfolio thinks that they are unreliable,
fair value prices may be determined in good faith using methods approved by the
Board of Trustees.
In calculating NAV for the Golden Oak Prime Obligation Money Market Portfolio,
we generally value the Portfolio's investment portfolio using the amortized cost
valuation method, which is described in detail in our Statement of Additional
Information. If this method is determined to be unreliable during certain market
conditions or for other reasons, the Portfolio may value its securities at
market price or fair value prices may be determined in good faith using methods
approved by the Board of Trustees.
Page 31 of 42
<PAGE>
MINIMUM PURCHASES
To purchase shares for the first time, you must invest in any Portfolio at
least:
<TABLE>
<CAPTION>
CLASS DOLLAR AMOUNT
<S> <C>
Institutional Shares $1,000,000
Class A Shares $1,000 ($500 minimum for an IRA)
</TABLE>
Your subsequent investments in Class A Shares of any Portfolio must be made in
amounts of at least $50. There is no minimum for subsequent investments in
Institutional Shares.
A Portfolio may accept investments of smaller amounts for either class of shares
at it discretion.
SYSTEMATIC INVESTMENT PLAN (CLASS A ONLY)
If you have a checking or savings account, you may purchase Class A Shares
automatically through regular deductions from your account. Once your account
has been opened, you may begin regularly scheduled investments of at least $50 a
month. Purchases of Class A Shares made through the Systematic Investment Plan
are subject to the applicable sales charge.
SALES CHARGES
FRONT-END SALES CHARGES - CLASS A SHARES
The offering price of Class A Shares is the NAV next calculated after a
Portfolio receives your request, plus the front-end sales load.
The amount of any front-end sales charge included in your offering price varies,
depending on the amount of your investment:
<TABLE>
<CAPTION>
YOUR SALES CHARGE YOUR SALES CHARGE AS
IF YOUR INVESTMENT IS: AS A PERCENTAGE OF A PERCENTAGE OF YOUR
OFFERING PRICE NET INVESTMENT
- ------------------------------------- ----------------------------------- -------------------- -----------------------
<S> <C> <C> <C>
Growth Portfolio Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50% 4.71%
Value Portfolio $100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.60% 2.67%
Tax-Managed Equity $500,000 but less than $1,000,000 2.00% 2.04%
Portfolio $1,000,000 and over 0.00% 0.00%
- ------------------------------------- ----------------------------------- -------------------- -----------------------
Intermediate-Term Income Less than $100,000 4.50% 4.71%
Portfolio $100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.60% 2.67%
Michigan Tax Free Bond $500,000 but less than $1,000,000 2.00% 2.04%
Portfolio $1,000,000 and over 0.00% 0.00%
</TABLE>
There is no sales charge imposed on shares of the Golden Oak Prime Obligation
Money Market Portfolio.
Page 32 of 42
<PAGE>
WAIVER OF FRONT-END SALES CHARGE -CLASS A SHARES
No sales charge is imposed on shares of a Portfolio:
- - issued in plans of reorganization, such as mergers involving the
Portfolios;
- - 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);
- - 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;
- - sold to Trustees and officers of The Arbor Fund and employees of the Adviser
and its affiliates;
- - sold to agency, custody and fiduciary accounts of the Adviser and its
affiliates; or
- - purchased in connection with any asset allocation plan established by the
Adviser.
REDUCED SALES CHARGES --CLASS A SHARES
RIGHTS OF ACCUMULATION. In calculating the appropriate sales charge rate, this
right allows you to add the value of the Class A Shares you already own to the
amount that you are currently purchasing. The Portfolio will combine the value
of your current purchases with the current value of any Class A Shares you
purchased previously for (i) your account, (ii) your spouse's account, (iii) a
joint account with your spouse, or (iv) your minor children's trust or custodial
accounts. A fiduciary purchasing shares for the same fiduciary account, trust or
estate may also use this right of accumulation. The Portfolio will only consider
the value of Class A Shares purchased previously that were sold subject to a
sales charge. TO BE ENTITLED TO A REDUCED SALES CHARGE BASED ON SHARES ALREADY
OWNED, YOU MUST ASK US FOR THE REDUCTION AT THE TIME OF PURCHASE. You must
provide the Portfolio with your account number(s) and, if applicable, the
account numbers for your spouse and/or children (and provide the children's
ages). The Portfolio may amend or terminate this right of accumulation at any
time.
LETTER OF INTENT. You may purchase Class A Shares at the sales charge rate
applicable to the total amount of the purchases you intend to make over a
13-month period. In other words, a Letter of Intent allows you to purchase Class
A Shares of a Portfolio over a 13-month period and receive the same sales charge
as if you had purchased all the shares at the same time. The Portfolio will only
consider the value of Class A Shares sold subject to a sales charge. As a
result, Class A Shares purchased with dividends or distributions will not be
included in the calculation. To be entitled to a reduced sales charge based on
shares you intend to purchase over the 13-month period, you must send the
Portfolio a Letter of Intent. In calculating the total amount of purchases you
may include in your letter purchases made up to 90 days before the date of the
Letter. The 13-month period begins on the date of the first purchase, including
those purchases made in the 90-day period before the date of the Letter. Please
note that the purchase price of these prior purchases will not be adjusted.
You are not legally bound by the terms of your Letter of Intent to purchase the
amount of your shares stated in the Letter. The Letter does, however, authorize
the Portfolio to hold in escrow 5.0% of the total amount you intend to purchase.
If you do not complete the total intended purchase at the end of the 13-month
period, the Portfolio's transfer agent will redeem the necessary portion of the
escrowed shares to make up the difference between the reduced rate sales
Page 33 of 42
<PAGE>
charge (based on the amount you intended to purchase) and the sales charge that
would normally apply (based on the actual amount you purchased).
COMBINED PURCHASE/QUANTITY DISCOUNT PRIVILEGE. When calculating the appropriate
sales charge rate, the Portfolio will combine same day purchases of Class A
Shares (that are subject to a sales charge) made by you, your spouse and your
minor children (under age 21). This combination also applies to Class A Shares
you purchase with a Letter of Intent.
GENERAL INFORMATION ABOUT SALES CHARGES
Your securities dealer is paid a commission when you buy your shares and is paid
a servicing fee as long as you hold your shares. Your securities dealer or
servicing agent may receive different levels of compensation depending on which
Class of shares you buy.
From time to time, some financial institutions, including brokerage firms
affiliated with the Adviser, may be reallowed up to the entire sales charge.
Firms that receive a reallowance of the entire sales charge may be considered
underwriters for the purpose of federal securities law.
The Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs for dealers, which will be paid for by the
Distributor from any sales charge it receives or from any other source available
to it. Under any such program, the Distributor may provide incentives, in the
form of cash or other compensation, including merchandise, airline vouchers,
trips and vacation packages, to dealers selling shares of the Portfolios.
HOW TO SELL YOUR PORTFOLIO SHARES
Holders of Institutional Shares may sell shares by following procedures
established when they opened their account or accounts. If you have questions,
call 1-800-808-4920.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.
If you own your shares directly, you may sell your shares on any Business Day by
contacting the Portfolio directly by mail or telephone at 1-800-808-4920.
If you would like to sell $50,000 or more of your shares, or would like the
proceeds sent to a third-party or an address other than your own, please notify
the Portfolio in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
SYSTEMATIC WITHDRAWAL PLAN (CLASS A ONLY)
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals of at least $50 from any Portfolio. The proceeds
of each withdrawal will be mailed to you by check or, if you have a checking or
savings account with a bank, electronically transferred to your account.
Page 34 of 42
<PAGE>
CHECK WRITING SERVICE (PRIME OBLIGATION MONEY MARKET PORTFOLIO - CLASS A SHARES
ONLY)
If you own Class A Shares of the Prime Obligation Money Market Portfolio you may
redeem shares 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. The
check may be made payable to any person, and 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) for 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 your
Portfolio account, you may not use a check to close your account.
CHECK WRITING SERVICE
(PRIME OBLIGATIONS PORTFOLIO--CLASS B ONLY)
If you own Class B Shares of the Prime Obligations Portfolio you may redeem
shares 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.
The check may be payable to any person and 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) for 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 your
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.
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within 7 days after we receive your
request. Your proceeds can be wired to your bank account (subject to a $10 fee)
or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK OR
THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS
CLEARED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise (and for the protection of the
Portfolio's remaining shareholders) we might pay all or part of your redemption
proceeds in liquid securities with a market value equal to the redemption price
(redemption in kind). It is highly unlikely that your shares would ever be
redeemed in kind, but if they were you would probably have to pay transaction
costs to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below the required minimum, the Portfolio may
redeem your shares. The account balance minimums are:
<TABLE>
<CAPTION>
CLASS DOLLAR AMOUNT
<S> <C>
Institutional Shares $1,000,000
Class A Shares $1,000
</TABLE>
But, a Portfolio will always give you at least 60 days' written notice to give
you time to add to your account and avoid the involuntary redemption of your
shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Portfolio may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in our Statement of Additional Information.
Page 35 of 42
<PAGE>
HOW TO EXCHANGE YOUR SHARES
You may exchange your shares on any Business Day by contacting us directly by
mail or telephone.
You may also exchange shares through your financial institution by mail or
telephone.
IF YOU RECENTLY PURCHASED SHARES BY CHECK OR THROUGH ACH, YOU MAY NOT BE ABLE TO
EXCHANGE YOUR SHARES UNTIL YOUR CHECK HAS CLEARED (WHICH MAY TAKE UP TO 15 DAYS
FROM YOUR DATE OF PURCHASE). This exchange privilege may be changed or canceled
at any time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Portfolio shares. So, your sale price and purchase price will be based on the
NAV next calculated after the Portfolio receives your exchange request.
CLASS A SHARES
You may exchange Class A Shares of any Portfolio for Class A Shares of any other
Portfolio. If you exchange shares that you purchased without a sales charge or
with a lower sales charge into a Portfolio with a sales charge or with a higher
sales charge, the exchange is subject to an incremental sales charge (e.g., the
difference between the lower and higher applicable sales charges). If you
exchange shares into a Portfolio with the same, lower or no sales charge there
is no incremental sales charge for the exchange.
AUTOMATIC EXCHANGE OF YOUR SHARES
If your account balance for Institutional Shares drops below $1,000,000 because
of redemptions, your shares will be automatically exchanged for Class A Shares.
You will not be charged the applicable Class A sales charge for an automatic
exchange. But, a Portfolio will always give you at least 30 days' written notice
to give you time to add to your account and avoid the automatic exchange of your
shares.
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Portfolio shares over the telephone is
extremely convenient, but not without risk. Although the Portfolio has certain
safeguards and procedures to confirm the identity of callers and the
authenticity of instructions, the Portfolio is not responsible for any losses or
costs incurred by following telephone instructions we reasonably believe to be
genuine. If you or your financial institution transact with the Portfolio over
the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF PORTFOLIO SHARES
Each Portfolio has adopted a distribution plan that allows the Portfolio to pay
distribution and service fees for the sale and distribution of Class A Shares,
and for services provided to Class A
Page 36 of 42
<PAGE>
shareholders. Because these fees are paid out of a Portfolio's assets
continuously, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
Distribution fees, as a percentage of average daily net assets are 0.25% for
Class A Shares.
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio distributes its income as follows:
<TABLE>
<S> <C>
Golden Oak Growth Portfolio Quarterly
Golden Oak Value Portfolio Quarterly
Golden Oak Tax-Managed Equity Portfolio Quarterly
Golden Oak Intermediate-Term Income Portfolio Monthly
Golden Oak Michigan Tax Free Bond Portfolio Monthly
Golden Oak Prime Obligation Money Market Portfolio Monthly
</TABLE>
Each Portfolio makes distributions of capital gains, if any, at least annually.
If you own Portfolio shares on a Portfolio's record date, you will be entitled
to receive the distribution.
You will receive dividends and distributions in the form of additional Portfolio
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Portfolio in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the
Portfolio receives your written notice. To cancel your election, simply send the
Portfolio written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax issues
that affect the Portfolios and their shareholders. This summary is based on
current tax laws, which may change.
Each Portfolio will distribute substantially all of its income and capital
gains, if any. The dividends and distributions you receive may be subject to
federal, state and local taxation, depending upon your tax situation. Income
distributions are generally taxable at ordinary income tax rates. Capital gains
distributions are generally taxable at the rates applicable to long-term capital
gains. EACH SALE OR EXCHANGE OF PORTFOLIO SHARES IS A TAXABLE EVENT.
The Golden Oak Michigan Tax Free Bond Portfolio intends to distribute income
that is exempt from both federal taxes and Michigan state taxes. The Portfolio
may invest a portion of its assets in securities that generate taxable income
for federal or state income taxes. Any capital gains distributed by the
Portfolio may be taxable.
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.
Page 37 of 42
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about Institutional
Shares and Class A Shares of each Portfolio. This information is intended to
help you understand each Portfolio's financial performance for the past five
years, or, if shorter, the period of the Portfolio's operations. Some of this
information reflects financial information for a single Portfolio share. The
total returns in the tables represent the rate that you would have earned (or
lost) on an investment in a Portfolio, assuming you reinvested all of your
dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP, independent public accountants. Their report, along
with each Portfolio's financial statements, appears in the annual report that
accompanies our Statement of Additional Information. You can obtain the annual
report, which contains more performance information, at no charge by calling
1-800-545-6331.
Page 38 of 42
<PAGE>
Financial Highlights
For a Share Outstanding Throughout the Period
For the Periods Ended January 31,
<TABLE>
<CAPTION>
NET REALIZED NET
ASSET AND DISTRIBUTIONS FROM DISTRIBUTIONS FROM ASSET
VALUE NET UNREALIZED NET NET VALUE
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT REALIZED END TOTAL
OF PERIOD INCOME ON INVESTMENTS INCOME GAIN OF PERIOD RETURN+
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH PORTFOLIO INSTITUTIONAL CLASS
1999 $12.66 $ 0.02 $ 5.88 $(0.02) $(2.38) $16.16 51.98%
1998 12.66 -- 3.12 -- (3.12) 12.66 25.85
1997 10.26 -- 2.44 (0.01) (0.03) 12.66 23.79
1996 10.00 0.07 1.74 (0.07) (1.48) 10.26 18.81
1995 10.82 0.08 (0.64) (0.08) (0.18) 10.00 (5.24)
GROWTH PORTFOLIO CLASS A
1999 $12.51 $ 0.02 $ 5.74 $-- $(2.38) $15.89 51.45%
1998 12.57 (0.01) 3.07 -- (3.12) 12.51 25.56
1997 10.20 (0.03) 2.43 -- (0.03) 12.57 23.56
1996 9.96 0.04 1.72 (0.04) (1.48) 10.20 18.43
1995 10.81 0.05 (0.67) (0.05) (0.18) 9.96 (5.76)
VALUE PORTFOLIO INSTITUTIONAL CLASS
1999 $ 9.33 $ 0.04 $ 0.90 $(0.04) $(1.06) $9.17 12.63%
1998(1) 10.00 0.04 0.86 (0.04) (1.53) 9.33 9.15
VALUE PORTFOLIO CLASS A
1999 $ 9.32 $ 0.03 $ 0.87 $(0.02) $(1.06) $9.14 12.19%
1998(1) 10.00 0.02 0.86 (0.03) (1.53) 9.32 8.97
INTERMEDIATE-TERM INCOME PORTFOLIO INSTITUTIONAL CLASS
1999 $10.04 $ 0.60 $ 0.29 $(0.60) $(0.01) $10.32 8.60%
1998 9.83 0.56 0.21 (0.56) -- 10.04 8.07
1997 10.15 0.54 (0.32) (0.54) -- 9.83 2.31
1996 9.52 0.56 0.63 (0.56) -- 10.15 12.83
1995 10.19 0.50 (0.67) (0.50) -- 9.52 (1.61)
INTERMEDIATE-TERM INCOME PORTFOLIO CLASS A
1999 $10.04 $ 0.57 $ 0.28 $(0.57) $(0.01) $10.31 8.23%
1998 9.83 0.53 0.21 (0.53) -- 10.04 7.78
1997 10.15 0.52 (0.32) (0.52) -- 9.83 2.05
1996 9.52 0.54 0.63 (0.54) -- 10.15 12.54
1995 10.19 0.48 (0.67) (0.48) -- 9.52 (1.85)
MICHIGAN TAX FREE BOND PORTFOLIO INSTITUTIONAL CLASS
1999 $10.24 $ 0.48 $ 0.10 $(0.48) $(0.01) $10.33 5.40%
1998(1) 10.00 0.27 0.26 (0.27) (0.02) 10.24 5.35
<CAPTION>
RATIO OF
NET
RATIO OF INVESTMENT
NET RATIO OF EXPENSES INCOME TO
ASSETS RATIO OF NET INVESTMENT TO AVERAGE AVERAGE
END EXPENSES INCOME NET ASSETS NET ASSETS PORTFOLIO
OF PERIOD TO AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
(000) NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GROWTH PORTFOLIO INSTITUTIONAL CLASS
1999 $49,497 1.08% 0.10% 1.08% 0.10% 70.60%
1998 36,240 1.07 0.03 1.07 0.03 131.54
1997 32,973 1.10 0.04 1.11 0.03 130.69
1996 24,775 1.10 0.62 1.17 0.55 189.48
1995 32,931 1.10 0.74 1.24 0.60 84.00
GROWTH PORTFOLIO CLASS A
1999 $1,540 1.33% (0.21)% 1.33% (0.21)% 70.60%
1998 307 1.32 (0.21) 1.32 (0.21) 131.54
1997 226 1.35 (0.20) 1.36 (0.21) 130.69
1996 193 1.35 0.30 1.42 0.23 189.48
1995 125 1.35 0.49 1.49 0.35 84.00
VALUE PORTFOLIO INSTITUTIONAL CLASS
1999 $ 46,484 1.10% 0.44% 1.17% 0.37% 172.09%
1998(1) 30,922 1.10* 0.72* 1.28* 0.54* 90.97
VALUE PORTFOLIO CLASS A
1999 $ 1,100 1.35% 0.20% 1.42% 0.13% 172.09%
1998(1) 51 1.35* 0.31* 1.53* 0.13* 90.97
INTERMEDIATE-TERM INCOME PORTFOLIO INSTITUTIONAL CLASS
1999 $148,165 0.65% 5.46% 0.80% 5.31% 76.46%
1998 125,936 0.65 5.66 0.80 5.51 60.78
1997 116,689 0.65 5.48 0.80 5.33 34.67
1996 104,270 0.65 5.68 0.84 5.49 121.47
1995 80,064 0.65 5.21 0.86 5.00 141.51
INTERMEDIATE-TERM INCOME PORTFOLIO CLASS A
1999 $2,175 0.90% 5.15% 1.05% 5.00% 76.46%
1998 64 0.90 5.40 1.05 5.25 60.78
1997 84 0.90 5.20 1.05 5.05 34.67
1996 210 0.90 5.49 1.09 5.30 121.47
1995 314 0.90 4.96 1.11 4.75 141.51
MICHIGAN TAX FREE BOND PORTFOLIO INSTITUTIONAL CLASS
1999 $ 90,115 0.65% 4.32% 0.81% 4.16% 6.55%
1998(1) 85,556 0.65* 4.41* 0.82* 4.24* 9.77
</TABLE>
Page 39 of 42
<PAGE>
Financial Highlights
For a Share Outstanding Throughout the Period
For the Periods Ended January 31,
<TABLE>
<CAPTION>
NET REALIZED NET
ASSET AND DISTRIBUTIONS FROM DISTRIBUTIONS FROM ASSET
VALUE NET UNREALIZED NET NET VALUE
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT REALIZED END TOTAL
OF PERIOD INCOME ON INVESTMENTS INCOME GAIN OF PERIOD RETURN+
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MICHIGAN TAX FREE BOND PORTFOLIO CLASS A
1999 $10.24 $ 0.46 $ 0.10 $(0.46) $(0.01) $10.33 5.17%
1998(1) 10.00 0.27 0.26 (0.27) (0.02) 10.24 5.31
PRIME OBLIGATION MONEY MARKET PORTFOLIO INSTITUTIONAL CLASS
1999 $ 1.00 $0.06 $ -- $(0.06) $ -- $ 1.00 5.30%
1998 1.00 0.05 -- (0.05) -- 1.00 5.41
1997 1.00 0.05 -- (0.05) -- 1.00 5.21
1996 1.00 0.06 -- (0.06) -- 1.00 5.74
1995 1.00 0.04 -- (0.04) -- 1.00 4.21
PRIME OBLIGATION MONEY MARKET PORTFOLIO CLASS A
1999 $ 1.00 $0.05 $ -- $(0.05) $ -- $ 1.00 5.03%
1998 1.00 0.05 -- (0.05) -- 1.00 5.15
1997 1.00 0.05 -- (0.05) -- 1.00 4.95
1996 1.00 0.05 -- (0.05) -- 1.00 5.47
1995 1.00 0.04 -- (0.04) -- 1.00 3.95
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
NET RATIO OF EXPENSES INCOME TO
ASSETS RATIO OF NET INVESTMENT TO AVERAGE AVERAGE
END EXPENSES INCOME NET ASSETS NET ASSETS PORTFOLIO
OF PERIOD TO AVERAGE TO AVERAGE (EXCLUDING (EXCLUDING TURNOVER
(000) NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MICHIGAN TAX FREE BOND PORTFOLIO CLASS A
1999 $229 0.90% 4.07% 1.06% 3.91% 6.55%
1998(1) 10 0.90* 4.15* 1.07* 3.98* 9.77
PRIME OBLIGATION MONEY MARKET PORTFOLIO INSTITUTIONAL CLASS
1999 $153,649 0.40% 5.17% 0.60% 4.97%
1998 127,977 0.40 5.29 0.59 5.10
1997 94,508 0.40 5.08 0.68 4.80
1996 107,409 0.40 5.60 0.70 5.30
1995 109,076 0.40 4.20 0.68 3.92
PRIME OBLIGATION MONEY MARKET PORTFOLIO CLASS A
1999 $ 6,525 0.65% 4.92% 0.85% 4.72%
1998 6,381 0.65 4.99 0.84 4.80
1997 71,686 0.65 4.83 0.93 4.55
1996 75,293 0.65 5.31 0.95 5.01
1995 21,018 0.65 3.95 0.93 3.67
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
*Annualized
+Total return does not reflect the sales charge on Class A shares.
(1)Commenced operations June 23, 1997. Total return is for the period indicated
and has not been annualized.
Page 40 of 42
<PAGE>
THE GOLDEN OAK FAMILY OF FUNDS
INVESTMENT ADVISER
Citizens Bank
328 S. Saginaw Street
Flint, Michigan 48502
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, DC 20036
More information about the Golden Oak Family of Funds is available without
charge through the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated May 31, 1999, includes detailed information about the Golden Oak
Family of Funds. The SAI is on file with the SEC and is incorporated by
reference into this prospectus. This means that the SAI, for legal purposes, is
a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list each Portfolio's holdings and contain information from the
Portfolio's managers about strategies, and recent market conditions and trends
and their impact on Portfolio performance. The reports also contain detailed
financial information about the Portfolios.
TO OBTAIN MORE INFORMATION:
BY TELEPHONE: Call 1-800-545-6331
Page 41 of 42
<PAGE>
BY MAIL: Write to us
Golden Oak Family of Funds
c/o The Arbor Fund
P.O. Box 419947
Kansas City, Missouri 64141-6947
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-annual reports,
as well as other information about the Golden Oak Family of Funds or The Arbor
Fund, from the SEC's website ("HTTP://WWW.SEC.GOV"). You may review and copy
documents at the SEC Public Reference Room in Washington, DC (for information
call 1-800-SEC-0330). You may request documents by mail from the SEC, upon
payment of a duplicating fee, by writing to: Securities and Exchange Commission,
Public Reference Section, Washington, DC 20549-6009. The Arbor Fund's Investment
Company Act registration number is 811-7102.
Page 42 of 42
<PAGE>
GOLDEN OAK FAMILY OF FUNDS
TRUST:
THE ARBOR FUND
PORTFOLIOS:
GOLDEN OAK GROWTH PORTFOLIO
GOLDEN OAK VALUE PORTFOLIO
GOLDEN OAK TAX-MANAGED EQUITY 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 Growth, Golden Oak Value, Golden
Oak Tax-Managed Equity, 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, 1999. A Prospectus may be obtained by calling
1-800-545-6331.
TABLE OF CONTENTS
THE PORTFOLIOS AND THE TRUST S-3
INVESTMENT OBJECTIVES AND POLICES S-3
DESCRIPTION OF PERMITTED INVESTMENTS S-9
INVESTMENT LIMITATIONS S-27
THE ADVISER S-30
THE SUB-ADVISERS S-32
THE ADMINISTRATOR S-34
THE DISTRIBUTOR S-35
THE TRANSFER AGENT S-37
THE CUSTODIAN S-37
LEGAL COUNSEL S-37
May 31, 1999
GOK-F-013-02
S-1
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS S-37
TRUSTEES AND OFFICERS OF THE TRUST S-37
COMPUTATION OF YIELD S-41
CALCULATION OF TOTAL RETURN S-43
PURCHASE AND REDEMPTION OF SHARES S-43
LETTER OF INTENT S-44
DETERMINATION OF NET ASSET VALUE S-44
TAXES S-46
TRADING PRACTICES AND BROKERAGE S-50
DESCRIPTION OF SHARES S-54
SHAREHOLDER LIABILITY S-54
LIMITATION OF TRUSTEES' LIABILITY S-55
5% AND 25% SHAREHOLDERS S-55
EXPERTS S-56
FINANCIAL STATEMENTS S-56
DESCRIPTION OF RATINGS A-1
S-2
<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. Six of these portfolios were established by The Arbor Fund
(the"Trust"), 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 (Institutional and Class A) which provide for variations in
distribution costs, voting rights and dividends. Except for differences between
Institutional and Class A 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
Institutional and Class A shares of the Golden Oak Growth (formerly, the Golden
Oak Diversified Growth Portfolio) (the "Growth Portfolio"), Golden Oak Value
(the "Value Portfolio"), Golden Oak Tax-Managed Equity (the "Tax-Managed
Portfolio"), Golden Oak Intermediate-Term Income (the "Intermediate-Term Income
Portfolio"), Golden Oak Michigan Tax Free Bond (the "Michigan Portfolio") and
Golden Oak Prime Obligation Money Market (the "Prime Obligation Portfolio")
Portfolios (each a "Portfolio" and collectively, the "Portfolios") of the Trust.
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.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives 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.
THE GROWTH PORTFOLIO -- The investment objective of the 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 65% 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
S-3
<PAGE>
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. Nicholas-Applegate Capital Management (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, have accelerating
earnings growth, rising analyst estimates of earnings growth, strong fundamental
quality and positive price behavior. However, there is no assurance that the
Sub-Adviser will be able to accurately 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.
The Portfolio may invest up to 15% of its net assets in illiquid securities,
including restricted securities other than Section 4(2) commercial paper
("Illiquid Securities"). 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 Portfolio's 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 Adviser or Sub-Adviser to present minimal credit
risk, and commercial paper rated in the two highest short-term rating categories
(collectively, "Money Market Instruments")), and may hold a portion of its
assets in cash. To the extent the Portfolio is engaged in defensive investing,
the Portfolio will not be pursuing its investment objective.
THE VALUE PORTFOLIO -- The investment objective of the Value Portfolio is to
seek long-term capital appreciation. There is no assurance that the Portfolio
will achieve its investment objective.
The Portfolio attempts to achieve its investment objective by investing
primarily in common stocks, warrants, rights to purchase common stocks,
preferred stocks and securities convertible into common stocks (together,
"equity securities"). The Portfolio will be as fully invested as practicable
(and in no event less than 65%) in equity securities and will focus on equity
securities which are undervalued relative to a company's earnings. Systematic
Financial Management, L.P. (the "Sub-Adviser") will invest in equity securities
of companies based on an analysis of various
S-4
<PAGE>
fundamental characteristics, including balance sheet items, underlying sales and
expense trends, earnings estimates, market position of the company and industry
outlook. The Portfolio may also invest in American Depositary Receipts and enter
into repurchase agreements. Although it has no present intention to do so, the
Portfolio reserves the ability to write and purchase options for hedging
purposes. Although the Portfolio intends to be as fully invested as practicable
in equity securities, the Portfolio may invest in up to 15% of its assets in the
money market instruments described below.
The Portfolio may invest up to 15% of its net assets in Illiquid Securities.
THE TAX-MANAGED PORTFOLIO -- The Tax-Managed Portfolio has an investment
objective of maximizing long term capital appreciation on an after-tax basis.
The Tax-Managed Portfolio is best suited for the long term equity investor who
has a moderate risk orientation. The Tax-Managed Portfolio seeks to minimize
taxes and is targeted to long term investors seeking the optimum blend of
performance and tax efficiency. There is no assurance that the Tax-Managed
Portfolio will achieve its investment objective.
The Tax-Managed Portfolio primarily invests in common stocks and is designed to
have risk characteristics similar to those of the S&P 500 Index. As with any
equity fund, the value of the Tax-Managed Portfolio's investments varies from
day to day in response to the activities of the individual companies and general
market and economic conditions. To the extent the Tax-Managed Portfolio invests
in non-US securities, the risks and volatility are magnified since the
performance of non-US stocks depends upon changes in international currency
values, different political and regulatory environments, and the overall
political and economic conditions in countries where the Tax-Managed Portfolio
invests.
Under normal conditions, the Tax-Managed Portfolio expects to be fully invested
in common stocks (and will be at least 65% 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 Tax-Managed 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 Tax-Managed Portfolio may invest up to 10% of its net
assets in American Depositary Receipts, including American Depositary Shares and
New York Shares. The Tax-Managed 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 Tax-Managed Portfolio's net
assets as of the time such options are entered into by the Tax-Managed
Portfolio. Nicholas-Applegate Capital Management (the "Sub-Adviser") will engage
in such transactions only as hedging transactions and not for speculative
purposes.
The Tax-Managed Portfolio may invest up to 15% of its net assets in illiquid
securities, including
S-5
<PAGE>
restricted securities other than Section 4(2) commercial paper ("Illiquid
Securities"). Restricted securities, including Rule 144A Securities and Section
4(2) commercial paper, that meet the criteria established by the Board of
Trustees or the Trust will be considered illiquid.
For temporary defensive purposes during periods when the Tax-Managed Portfolio's
Sub-Adviser determines that market conditions warrant, the Tax-Managed 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 Adviser or
Sub-Adviser to present minimal credit risk, and commercial paper rated in the
two highest short-term rating categories (collectively, "Money Market
Instruments"), and may hold a portion of its assets in cash. To the extent the
Tax-Managed Portfolio is engaged in temporary defensive investment, the
Tax-Managed Portfolio will not be pursuing its investment objective.
The Tax-Managed Portfolio reserves the right to engage in securities lending but
has no present intention to do so.
The Tax-Managed Portfolio's portfolio turnover will be generally moderate and
most likely below 50%, however turnover may be influenced by specific company
fundamentals, market environments and investment opportunities.
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)
bills, notes receipts and bonds issued by United States Treasury and STRIPs of
such obligations that are transferable through the Federal Book-Entry System
("US Treasury Obligations"); (ii) obligations issued or guaranteed as to
principal and interest by the United States Government, its agencies or
instrumentalities; (iii) 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; (iv) 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; (v) 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;
S-6
<PAGE>
and (vi) 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 in one of the top two categories by S&P or
Moody's; (iv) receipts evidencing separately traded interest and principal
component parts of United States Government obligations ("STRIPS"); (v) taxable
municipal securities rated A or better by S&P or Moody's or of comparable
quality at the time of purchase as determined by the Adviser; (vi) corporate
bonds and debentures rated BBB by S&P or Moody's or of comparable quality at the
time of purchase as determined by the Adviser; and (vii) repurchase agreements
involving such securities. The Portfolio will limit its purchase of corporate
securities rated BBB by S&P or Moody's (or of comparable quality) to 10% of its
total assets. 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, although there are no restrictions on the maturity of any
single instrument.
The Portfolio may invest up to 15% of its net assets in Illiquid Securities.
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.
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, 1999, the
Portfolio's annual turnover rate was approximately 142%. 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
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
S-7
<PAGE>
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 that meet the
following criteria: (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 may invest up to 15% of its net assets in Illiquid Securities.
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."
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").
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
S-8
<PAGE>
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 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, including
asset-backed securities rated in the two highest short-term rating categories at
the time of investment or, if not rated, as determined by Wellington Management
Company, LLP (the "Sub-Adviser") to be of comparable quality; (iv) obligations
of U.S. and foreign savings and loan institutions and commercial banks
(including foreign branches of such banks) that have total assets of $1 billion
or more as shown on their most recently published financial statements; (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 and foreign issuers with commercial paper 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 nationally recognized statistical ratings organizations ("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 Portfolio's Sub-Adviser to be of comparable quality; and (x)
to the extent permitted by applicable law, shares of other investment companies.
The Portfolio may invest up to 10% of its net assets in Illiquid Securities.
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.
DESCRIPTION OF PERMITTED INVESTMENTS
AMERICAN DEPOSITARY RECEIPTS ("ADRs")
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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
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.
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BANK OBLIGATIONS
The Trust is not prohibited from investing in obligations of banks which are
clients of SEI Investments Company ("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.
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
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.
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.
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
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portfolio securities will not affect cash income derived from these securities
but will affect a Portfolio's net asset value. Bonds rated BBB by S&P or Moody's
are to be considered as investment medium grade obligations. Such debt rated BBB
has an adequate capacity to pay interest and repay principal although it is more
vulnerable to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. Such securities are considered
to have speculative characteristics.
FOREIGN SECURITIES
The Growth, Value, Tax-Managed, Intermediate-Term Income and Prime Obligation
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 and other short-term
corporate obligations, foreign securities and Europaper. In addition, the
Growth, Intermediate-Term Income and Value 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. 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. In addition, 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 prevailing in the foreign currency exchange market or through forward
foreign currency exchange contracts.
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FUTURES CONTRACTS AND OPTIONS
The Tax-Managed, Intermediate-Term Income and Michigan 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. A Portfolio will only sell futures
contracts
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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 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
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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 consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
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.
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. 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 a 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 Prime Obligation and Intermediate-Term Income Portfolios may invest in
securities issued by U.S. Government agencies or instrumentalities such as the
Government National Mortgage
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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 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.
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
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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 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 Michigan 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 Michigan 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
Michigan 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 Michigan 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 its 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
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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 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.
The State's economy could be affected adversely 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.
The principal revenues sources for the State's General Fund are taxes from
sales, personal income, single business, and excise taxes. Under the State
Constitution, expenditures from the General Fund are not permitted to exceed
available revenues. The principal expenditures from the General Fund are
directed towards education, public protection, mental and public health, and
social services.
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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 or average of the prior three calendar years, whichever is greater, and
this fixed percentage equals the percentage of the 1978-79 fiscal year state
government revenues to total calendar 1977 State personal income (which was
9.49%). 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. Any excess of less than 1% may be transferred to the
Budget Stabilization Fund.
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.
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. Challenges to the ability of local units to levy
such taxes 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 Portfolio may, when deemed appropriate by its Sub-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.
OPTIONS
The Growth, Michigan and Intermediate-Term Income Portfolios may write call
options on a covered basis only. The Michigan and the 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 Tax-Managed and Value Portfolios 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
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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
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take place in the underlying markets that cannot be reflected in the option
markets.
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 or Sub-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 Growth Portfolio and the Tax-Managed Portfolio may
write covered call options on its securities provided the aggregate value of
such options does not exceed 10% of the Portfolios' net assets as of the time
such options are entered into by the Portfolios. The advantage to a Portfolio of
writing covered calls is that the Portfolio receives a premium which is
additional income. However, if the security rises in value, the Portfolios 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.
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
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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. A 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 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 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. A money market fund may invest up to 25%
of its assets in "first tier" securities of a single issuer for a period of up
to three business days. The securities that money market funds may acquire may
be supported by credit enhancements, such as demand features or guarantees. The
SEC regulations limit the percentage of securities that a money market fund may
hold for which a single issuer provides credit enhancements.
RESTRICTED SECURITIES
The Value Portfolio, Tax-Managed Portfolio and Prime Obligation 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 Portfolios may invest up to 10%
and 15%, respectively, of their net assets in illiquid securities, including
restricted securities. 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
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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
The 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 (including any collateral
received in connection with such loans). 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.
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
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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.
SEPARATELY TRADED INTEREST AND PRINCIPAL SECURITIES ("STRIPS")
The Prime Obligation, Intermediate-Term Income and Value Portfolios may invest
in ("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 or Sub-Adviser will only
purchase STRIPS for the Prime Obligation 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 Prime Obligation Portfolio.
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 with a withdrawal penalty or that mature in more
than seven days are considered to be illiquid securities.
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, Fannie Mae and the United States Postal Service. Some of these securities
are supported by the full faith and credit of the United States Treasury. 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.
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.
U.S. TREASURY OBLIGATIONS
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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
STRIPS.
VARIABLE AMOUNT MASTER DEMAND NOTES
The Prime Obligation, Intermediate-Term Income and Michigan 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.
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 SECURITIES
The Prime Obligation, Intermediate-Term Income and Michigan 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
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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.
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.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
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
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and 8 below, which are non-fundamental policies only for the Value 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.
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 or the Tax-Managed Portfolio. As a money
market fund, the Prime Obligation Portfolio is subject to additional
diversification requirements.
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.
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.
4. Acquire more than 10% of the voting securities of any one issuer.
5. Invest in companies for the purpose of exercising control.
6. 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
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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.
7. 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.
8. 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.
9. 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.
10. 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.
11. Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder. The Prime
Obligation 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.
12. 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
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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 illiquid securities in an amount exceeding, in the
aggregate, 15% of a portfolio's net assets (10% for the Prime Obligation
Portfolio).
No Portfolio may invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
The foregoing percentages, except with respect to borrowings and illiquid
securities, 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
Citizens Bank (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 Advisory Agreement also
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 Trust and the Adviser have employed Wellington Management Company, LLP as
the investment sub-adviser to the Prime Obligation Portfolio, Systematic
Financial Management, L.P. as the investment sub-adviser to the Value Portfolio
and Nicholas-Applegate Capital Management as the investment sub-adviser to the
Growth Portfolio and the Tax-Managed Portfolio to manage the Portfolios on a
day-to-day basis, in each case subject to the supervision of the Adviser and the
Trustees. 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, 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 $4.5 billion in assets and 124 banking offices in
Michigan and Illinois. As of January 31, 1999, the Adviser's total assets under
management were $3.5 billion. 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.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an
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annual rate based on the average daily net assets of each Portfolio as follows:
Growth Portfolio, .34%; Value Portfolio, .29% on the first $50 million, .39% on
the next $50 million, and .34% on any amount above $100 million; Tax-Managed
Portfolio, .34%; Intermediate-Term Income Portfolio, .50%; Michigan Portfolio,
.50%; and Prime Obligation Portfolio, .225% on the first $500 million, and .28%
in excess of $500 million. The Adviser has voluntarily agreed to waive a portion
of its fees in order to limit the total operating expenses of Institutional and
Class A shares of the Growth, Value, Tax-Managed, Intermediate-Term Income,
Michigan and Prime Obligation Portfolios (exclusive of distribution expenses
charged to Class A shares) to not more than 1.10%, 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, 1999, the Growth,
Value, Intermediate-Term Income, Michigan Tax Free Bond and Prime Obligation
Portfolios paid the Adviser an advisory fee of .34%, .29%, .35%, .34% and .025%
respectively, of each Portfolio's average daily net assets.
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 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" (a "RIC") 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, 1997, January 31, 1998 and January 31,
1999, the Portfolios paid the following advisory fees to Citizens Bank:
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers(000)
--------------- ---------------
Portfolio 1997 1998 1999 1997 1998 1999
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Growth Portfolio............................ $207 $121 $142 $ 3 $ 1 $0
Golden Oak Value Portfolio............................. * $ 45 $107 * $ 5 $2
Golden Oak Intermediate-Term Income Portfolio.......... $372 $425 $467 $167 $189 $194
Golden Oak Michigan Tax Free Bond Portfolio............ * $168 $301 * $ 84 $141
S-31
<PAGE>
Golden Oak Prime Obligation Money Market Portfolio......... $ 40 $34 $38 $468 $277 $273
</TABLE>
- -----------------------
* Not in operation during such period.
THE SUB-ADVISERS
Wellington Management Company, LLP (a "Sub-Adviser" or "WMC") serves as the
investment sub-adviser for the Prime Obligation Portfolio, Systematic Financial
Management, L.P. (a "Sub-Adviser" or "Systematic Financial") serves as
investment sub-adviser for the Value Portfolio and Nicholas-Applegate Capital
Management (a "Sub-Adviser" or "Nicholas-Applegate") serves as investment
sub-adviser for the 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
appropriate 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 COMPANY, LLP
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 April 30, 1999, WMC
had discretionary management authority with respect to approximately $221
billion of assets. WMC and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Wellington Management Company, LLP, 75
State Street, Boston, MA 02109, is a Massachusetts limited liability
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 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 WMC manages for the Trust including
assets of funds other than the Prime Obligation Portfolio. The fee paid by the
Portfolio is based on its proportionate share of "managed assets". For the
fiscal year ended January 31, 1999 the Portfolio paid WMC an advisory fee, as a
percentage of average daily net assets, of .075%.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, Wellington Management received the following sub-advisory fees from the
Portfolio:
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers(000)
-------------- ----------------
Portfolio 1997 1998 1999 1997 1998 1999
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
S-32
<PAGE>
Golden Oak Prime Obligation Money Market Portfolio......... $127 $104 $104 $0 $0 $0
</TABLE>
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
Nicholas-Applegate serves as the investment sub-adviser for the Growth Portfolio
and the Tax-Managed 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 1987, investment companies. As of
January 31, 1999, Nicholas-Applegate had discretionary management authority with
respect to approximately $32 billion of assets. Nicholas-Applegate is controlled
by its general partner, Nicholas-Applegate Capital Management Holdings, L.P., a
California limited partnership, which is controlled by a corporation which, in
turn, is controlled by a corporation controlled by Arthur E. Nicholas. The
principal business address of Nicholas-Applegate is 600 West Broadway, 29th
Floor, San Diego, California 92101.
For the services provided and the expenses incurred pursuant to the Sub-Advisory
Agreement, Nicholas-Applegate is entitled to receive from the Portfolios a fee,
calculated daily and paid monthly, at an annual rate of .40% of the average
daily net assets of each Portfolio. For the fiscal year ended January 31, 1999,
the Growth Portfolio paid the Sub-Adviser an advisory fee of .40% of its average
daily net assets.
The Tax-Managed Portfolio commenced operations on May 11, 1999, and had not paid
any fees or had any type of return as of the fiscal year ended January 31, 1999.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, Nicholas-Applegate received the following sub-advisory fees from the
Growth Portfolio*:
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers(000)
-------------- ----------------
Portfolio 1997 1998 1999 1997 1998 1999
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Growth Portfolio............................ $132 $144 $167 $0 $0 $0
- ------------------------
</TABLE>
* Prior to August 1997, the Adviser paid sub-advisory fees to
Nicholas-Applegate.
SYSTEMATIC FINANCIAL MANAGEMENT, L.P.
Systematic Financial serves as the investment sub-adviser for the Value
Portfolio. Systematic Financial was established in 1982 and has Managed
portfolios on a discretionary basis since inception. Systematic Financial's
clients include foundations, pension funds, public retirement systems and
Taft-Hartley plans as well as other institutional investors and individuals.
Systematic Financial's value strategy, which was originally developed by our
Chief Investment Officer, has been employed since the early 1980's. Systematic
Financial is a Delaware limited partnership. The principal business address of
Systematic Financial Management, L.P. is 300
S-33
<PAGE>
Frank W. Burr Blvd. Glenpointe East, 7th Floor Teaneck, NJ 07666.
For the services provided and the expenses incurred pursuant to the Sub-Advisory
Agreement, Systematic Financial is entitled to receive from the Portfolio a fee,
calculated daily and paid monthly, at an annual rate of .45% of the first $50
million, .35% of the next $50 million and .40% of any amount above $100 million
of the average daily net assets of the Portfolio. For the fiscal year ended
January 31, 1999, the Portfolio paid the Sub-Adviser an advisory fee of .45% of
its average daily net assets.
For the fiscal years ended January 31, 1998 and January 31, 1999, Systematic
Financial received the following sub-advisory fees from the Portfolio:
<TABLE>
<CAPTION>
Portfolio Fees Paid (000) Fee Waivers(000)
- --------- --------------- ----------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Golden Oak Value Portfolio..................... $78 $169 $0 $0
</TABLE>
THE ADMINISTRATOR
SEI Investments Mutual Funds Services (the "Administrator") serves as
administrator to the Portfolios 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 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.
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 Growth, Value, Tax-Managed, Intermediate-Term Income, Michigan and
Prime Obligation Portfolios. The Value Portfolio and the Michigan Portfolio are
also subject to a minimum fee of $50,000.
For the fiscal year ended January 31, 1999, each Portfolio paid the
Administrator an administration fee (shown as a percentage of average daily net
assets) of .20%.
The Administration Agreement shall remain in effect with respect to the Golden
Oak Family of Funds until May 19, 2002, and thereafter shall continue in effect
for successive two-year periods subject to annual review by the Trustees.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a
wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the
owner of all beneficial interest in the Administrator. SEI Investments and its
subsidiaries and affiliates, including the Administrator, are leading providers
of funds evaluation services, trust accounting systems, and
S-34
<PAGE>
brokerage and information services to financial institutions, institutional
investors, and money managers. The Administrator and its affiliates also serve
as administrator or sub-administrator to the following other mutual funds: The
Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select Funds,
ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784 Funds(R), CNI Charter
Funds, CrestFunds, Inc., CUFUND, The Expedition Funds, First American Funds,
Inc., First American Investment Funds, Inc., First American Strategy Funds,
Inc., HighMark Funds, Huntington Funds, The Nevis Fund, Inc., Oak Associates
Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds,
SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI
Classic Funds, STI Classic Variable Trust, TIP Funds and UAM Funds, Inc. II.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, the Administrator received the following fees:
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers(000)
-------------- ---------------
Portfolio 1997 1998 1999 1997 1998 1999
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Growth Portfolio............................ $ 57 $ 72 $84 $ 0 $ 0 $0
Golden Oak Value Portfolio............................. * $ 35 $78 * $ 26 $0
Golden Oak Tax-Managed Equity Portfolio................ * * * * * *
Golden Oak Intermediate-Term Income Portfolio.......... $215 $246 $264 $ 0 $ 0 $0
Golden Oak Michigan Tax Free Bond Portfolio............ * $101 $177 * $ 0 $0
Golden Oak Prime Obligation Money Market Portfolio..... $339 $270 $277 $ 0 $ 7 $0
</TABLE>
- ------------------------
* Not in operation during such period.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor" or "SIDC"), a wholly-owned
subsidiary of SEI Investments, and the Trust are parties to a distribution
agreement (the "Distribution Agreement"), which applies to both Institutional
and Class A 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 60 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 Institutional shares. Class A has a distribution plan (the
"Class A Distribution Plan").
CLASS A DISTRIBUTION PLAN
S-35
<PAGE>
The Distribution Agreement and the Class A Distribution Plan adopted by the
Class A shareholders provides that the Class A 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 A shareholders or their customers who
beneficially own Class A shares. The Class A 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 or payments made to financial institutions and
intermediaries. The Trust intends to operate the Class A Plan in accordance with
its terms and with the NASD rules concerning sales charges.
The Distribution Agreement is renewable annually and may be terminated by the
Distributor, the Qualified Trustees (defined below), 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 A 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 A 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 A
Distribution Plan or any agreements related to it ("Qualified Trustees"). The
Class A Distribution Plan requires that quarterly written reports of amounts
spent under the Class A Distribution Plan and the purposes of such expenditures
be furnished to and reviewed by the Trustees. The Class A 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.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, the Portfolios paid the following distribution fees:
<TABLE>
<CAPTION>
Distribution Fees Paid
----------------------
Portfolio 1997 1998 1999
- --------- ---- ---- ----
<S> <C> <C> <C>
Golden Oak Growth Portfolio.................................... $515 $669 $1,632
Golden Oak Value Portfolio..................................... * $38 $909
Golden Oak Tax-Managed Equity Portfolio........................ * * *
Golden Oak Intermediate-Term Income Portfolio.................. $310 $183 $1,716
Golden Oak Michigan Tax Free Bond Portfolio.................... * $57 $309
Golden Oak Prime Obligation Money Market Portfolio............. $168,512 $101,244 $16,636
</TABLE>
- ------------------------
* Not in operation during such period.
S-36
<PAGE>
The following Portfolios imposed a front-end sales charge upon their Class A
Shares in the amounts shown for the fiscal years ended January 31, 1997, 1998
and 1999:
<TABLE>
<CAPTION>
Dollar Amount of Load
Retained by the
Dollar Amount of Load Administrator
--------------------- -------------
Portfolio/Class 1997 1998 1999 1997 1998 1999
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Golden Oak Growth Portfolio -- Class A................. $116 $363 $1,073 $0 $0 $0
Golden Oak Value Portfolio -- Class A.................. * $4,885 $644 * $0 $0
Golden Oak Intermediate-Term Income
Portfolio -- Class A................................... $191 $6,800 $390 $0 $0 $0
Golden Oak Michigan Tax Free Bond
Portfolio -- Class A.................................. * $16,945 $1,036 * $0 $0
Golden Oak Prime Obligation Money Market
Portfolio -- Class A.................................. N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------------------
* Not in operation during such period.
The Prime Obligation Portfolio offers Class A Shares without a sales charge, and
therefore, no information is provided with respect to that Portfolio.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore 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 CUSTODIAN
First Union National Bank, 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.
LEGAL COUNSEL
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.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the independent accountants of the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other
S-37
<PAGE>
positions with the named companies during that period. Unless otherwise noted,
the business address of each Trustee and each Executive Officer is SEI
Investments Company, Oaks, Pennsylvania 19456. Certain officers of the Trust
also serve as officers of some or all of the following: The Achievement Funds
Trust, The Advisors' Inner Circle Fund, Alpha Select Funds, ARK Funds, Armada
Funds, Bishop Street Funds, Boston 1784 Funds(R), CNI Charter Funds, CrestFunds,
Inc., CUFUND, The Expedition Funds, First American Funds, Inc., First American
Investment Funds, Inc., First American Strategy Funds, Inc., HighMark Funds,
Huntington Funds, The Nevis Fund, Inc., Oak Associates Funds, The Parkstone
Group of Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The
Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, STI Classic Funds, STI Classic Variable Trust, and TIP Funds, each of
which is an open-end management investment company Managed by SEI Investments
Mutual Funds Services or its affiliates and distributed by SEI Investments
Distribution Co.
ROBERT A. NESHER (DOB 08/17/46) -- Chairman of the Board of Trustees* --
Currently performs various services on behalf of SEI Investments for which Mr.
Nesher is compensated. Executive Vice President of SEI Investments, 1986-1994.
Director and Executive Vice President of the Administrator and the Distributor,
1981-1994. Trustee of The Advisors' Inner Circle Fund, Bishop Street Funds,
Boston 1784 Funds(R), The Expedition Funds, Oak Associates Funds, Pillar Funds,
SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust and SEI Tax Exempt Trust.
JOHN T. COONEY (DOB 01/20/27) -- Trustee** -- Vice Chairman of Ameritrust Texas
N.A., 1989-1992, and MTrust Corp., 1985-1989. Trustee of The Advisors' Inner
Circle Fund, The Expedition Funds and Oak Associates Funds.
WILLIAM M. DORAN (DOB 05/26/40) -- Trustee* -- 1701 Market Street, Philadelphia,
PA 19103. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel to the Trust,
SEI Investments, the Administrator and the Distributor. Director of SEI
Investments since 1974; Secretary of SEI Investments since 1978. Trustee of The
Advisors' Inner Circle Fund, The Expedition Funds, Oak Associates Funds, SEI
Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust and SEI Tax Exempt Trust.
ROBERT A. PATTERSON (DOB 11/05/27) -- Trustee** -- Pennsylvania State
University, Senior Vice President, Treasurer (Emeritus); Financial and
Investment Consultant, Professor of Transportation since 1984; Vice
President-Investments, Treasurer, Senior Vice President (Emeritus), 1982-1984.
Director, Pennsylvania Research Corp.; Member and Treasurer, Board of Trustees
of Grove City College. Trustee of The Advisors' Inner Circle Fund, The
Expedition Funds and Oak Associates Funds.
S-38
<PAGE>
EUGENE B. PETERS (DOB 06/03/29) -- Trustee** -- 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. Trustee of The Advisors' Inner Circle
Fund, The Expedition Funds and Oak Associates Funds.
JAMES M. STOREY (DOB 04/12/31) -- Trustee** -- Partner, Dechert Price & Rhoads,
September 1987 - December 1993; Trustee of The Advisors' Inner Circle Fund, The
Expedition Funds, Oak Associates Funds, SEI Asset Allocation Trust, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI Liquid
Asset Trust and SEI Tax Exempt Trust.
GEORGE J. SULLIVAN, JR. (DOB 11/13/42) -- Trustee**-- Chief Executive Officer,
Newfound Consultants Inc. since April 1997. General Partner, Teton Partners,
L.P., June 1991- December 1996; Chief Financial Officer, Noble Partners, L.P.,
March 1991-December 1996; Treasurer and Clerk, Peak Asset Management, Inc.,
since 1991; Trustee, Navigator Securities Lending Trust, since 1995. Trustee of
The Advisors' Inner Circle Fund, The Expedition Funds, Oak Associates Funds, SEI
Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust and SEI Tax Exempt Trust.
MARK E. NAGLE (DOB 10/20/59) -- President, Chief Executive Officer, Controller
and Chief Financial Officer -- President and Senior Vice President of Fund
Accounting and Administration of the Administrator since 1998. Vice President of
Fund Accounting and Administration of the Administrator 1996-1998. Vice
President of the Distributor since December 1997. Vice President, Fund
Accounting, BISYS Fund Services, September 1995 - November 1996. Senior Vice
President and Site Manager, Fidelity Investments, 1981 - September 1995.
TODD B. CIPPERMAN (DOB 02/14/66) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator and
the Distributor since 1995. Associate, Dewey Ballantine (law firm), 1994-1995.
Associate, Winston & Strawn (law firm), 1991-1994.
JAMES R. FOGGO (DOB 06/30/64) -- Vice President and Assistant Secretary -- Vice
President and Assistant Secretary of SEI Investments since 1998. Associate, Paul
Weiss, Rifkind, Wharton & Garrison (law firm), 1998. Associate, Baker & McKenzie
(law firm), 1995-1998. Associate, Battle Fowler L.L.P. (law firm), 1993-1995.
Operations Manager, The Shareholder Services Group, Inc., 1986-1990.
LYDIA A. GAVALIS (DOB 06/05/64) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator and
the Distributor since
S-39
<PAGE>
1998. Assistant General Counsel and Director of Arbitration, Philadelphia Stock
Exchange, 1989-1998.
KATHY HEILIG (DOB 12/21/58) -- Vice President and Assistant Secretary --
Treasurer of SEI Investments since 1997; Vice President of SEI Investments since
1991. Vice President and Treasurer of the Administrator since 1997. Assistant
Controller of SEI Investments and Vice President of the Distributor since 1995;
Director of Taxes of SEI Investments, 1987 to 1991. Tax Manager, Arthur Andersen
LLP prior to 1987.
JOSEPH M. O'DONNELL (DOB 11/13/54) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator and
the Distributor since 1998. Vice President and General Counsel, FPS Services,
Inc., 1993-1997. Staff Counsel and Secretary, Provident Mutual Family of Funds,
1990-1993.
KEVIN P. ROBINS (DOB 04/15/61) -- Vice President and Assistant Secretary --
Senior Vice President and General Counsel of SEI Investments, the Administrator
and the Distributor since 1994. Assistant Secretary of SEI Investments since
1992; Secretary of the Administrator since 1994. Vice President, General Counsel
and Assistant Secretary of the Administrator and the Distributor, 1992- 1994.
Associate, Morgan, Lewis & Bockius LLP (law firm), 1988-1992.
LYNDA J. STRIEGEL (DOB 10/30/48) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator and
the Distributor since 1998. Senior Asset Management Counsel, Barnett Banks,
Inc., 1997-1998. Partner, Groom and Nordberg, Chartered, 1996-1997. Associate
General Counsel, Riggs Bank, N.A., 1991-1995.
JOHN H. GRADY, JR. (DOB 06/01/61) -- Secretary -- 1701 Market Street,
Philadelphia, PA 19103, Partner since 1995, Morgan, Lewis & Bockius LLP (law
firm), counsel to the Trust, SEI Investments, the Administrator and the
Distributor.
- ---------------------
*Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Trust as that term is defined in the 1940 Act.
**Messrs. Cooney, Patterson, Peters, Storey and Sullivan serve as members of 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, 1999, the Trust paid the unaffiliated Trustees
aggregate fees of $25,257.
COMPENSATION TABLE
S-40
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Pension or From Registrant and
Retirement Estimated Fund Complex Paid to
Aggregate Benefits Accrued Annual Trustees for the Fiscal
Name of Person, Position Compensation as Part of Fund Benefits Upon Year Ended January 31,
- ------------------------ From Registrant Expenses Retirement 1999 (1)
--------------- -------- ---------- ----
<S> <C> <C> <C> <C>
John T. Cooney, Trustee $5,303 N/A N/A $28,250
**Frank E. Morris, Trustee $3,940 N/A N/A $21,500
Robert Patterson, Trustee $5,338 N/A N/A $29,250
Eugene B. Peters, Trustee $5,338 N/A N/A $29,250
James M. Storey, Trustee $5,338 N/A N/A $29,250
William M. Doran, Trustee* $0 N/A N/A $0
Robert A. Nesher, Trustee* $0 N/A N/A $0
</TABLE>
- ------------------------------
(1) Total Compensation for service on one board.
* A Trustee who is an "interested person" as defined by the 1940 Act.
** Retired 12/31/98.
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 Prime Obligation 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 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
S-41
<PAGE>
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) (to the power of 365/7) - 1. The current and the effective yields
reflect the reinvestment of net income earned daily on portfolio assets.
The yield of the 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.
For the 7-day period ended January 31, 1999, the Prime Obligation Portfolio's
yield was 4.81% for Institutional and 4.56% for Class A and the effective yield
was 4.93% for Institutional and 4.67% for Class A.
The yield of a non-Money Market 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](to the power of 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.
The Michigan Portfolio may also advertise a "tax-equivalent yield," which is a
calculated by determining the rate of return that would have to be achieved on a
fully taxable instrument 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 non-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, 1999, the Portfolios' yields and
tax-equivalent yields were as follows:
<TABLE>
<CAPTION>
Yields Tax-Equivalent Yields
------ ---------------------
Portfolio Institutional Class A Institutional Class A
- ---------
<S> <C> <C> <C> <C>
Golden Oak Growth Portfolio.................. N/A N/A N/A N/A
Golden Oak Value Portfolio................... 0.43% 0.21% N/A N/A
Golden Oak Intermediate Term Income
Portfolio.................................... 5.00% 4.75% N/A N/A
Golden Oak Michigan Tax Free Bond Portfolio.. 3.49% 3.24% 6.23% 5.79%
</TABLE>
S-42
<PAGE>
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, each Portfolio, other than the Prime Obligation 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 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)(to the power
of 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, 1999 and for the one, five and ten year periods
ended January 31, 1999 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
Portfolio Class One Year Five Year Ten Year Since Inception**
- --------- ----- -------- --------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Golden Oak Growth Portfolio.......... Institutional 51.98% 21.66% N/A 19.47%
Class A (without load) 51.45% 21.27% N/A 21.42%
Class A (with load) 42.78% 19.89% N/A 20.15%
Golden Oak Value Portfolio........... Institutional 12.63% N/A * 13.63%
Class A (without load) 12.19% N/A * 13.24%
Class A (with load) 5.73% N/A * 9.16%
Golden Oak Intermediate-Term Income Institutional 8.60% 5.29% N/A 6.10%
Portfolio............................ Class A (without load) 8.23% 5.63% N/A 5.75%
Class A (with load) 3.39% 4.66% N/A 4.88%
Golden Oak Michigan Tax Free Bond Institutional 5.40% N/A * 6.69%
Portfolio............................ Class A (without load) 5.17% N/A * 6.53%
Class A (with load) 0.46% N/A * 3.54%
</TABLE>
* Not in operation during such period.
** Intermediate-Term Income and Growth Portfolios Institutional Shares
commenced operations February 1, 1993. Golden Oak Prime Obligation
Money Market Portfolio Class A Shares commenced operations January 20,
1994. Golden Oak Intermediate-Term Income and Growth Portfolios Class A
Shares commenced operations June 18, 1993. Golden Oak Michigan Tax Free
Bond and Golden Oak Value Portfolios Class A and Institutional Shares
commenced operations June 23, 1997.
PURCHASE AND REDEMPTION OF SHARES
S-43
<PAGE>
Purchases and redemptions may be made through the Distributor on a day on which
the New York Stock Exchange is open for business. Shares of the Portfolios are
offered on a continuous basis. Currently, the holidays observed by the Trust and
the New York Stock Exchange are as follows: New Year's Day, Presidents' Day,
Martin Luther King Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
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 a 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 a Portfolio for any period
during which the New York Stock Exchange, the Adviser, the applicable
Sub-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 Prime Obligation Portfolio is calculated
separately for each class of the Portfolio by adding the value of securities and
other assets, subtracting liabilities attributable to that class and dividing by
the number of outstanding shares of that class. Securities will be valued by the
amortized cost method, which involves valuing a security at its
S-44
<PAGE>
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 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 Intermediate-Term Income, Michigan, Growth and Value
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
S-45
<PAGE>
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 federal income tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Portfolios' prospectus. 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. Shareholders are urged to
consult with their tax advisors with specific reference to their own tax
situation, including their state and local tax liabilities.
FEDERAL INCOME TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following general discussion of certain 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.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Portfolio intends to qualify and elect to be treated as a RIC as defined
under Subchapter M of the Code. By following such a policy, each Portfolio
expects to eliminate or reduce to a nominal amount the federal taxes to which
they may be subject.
In order to qualify as a RIC, a Portfolio must distribute at least 90% of its
net investment income (that generally includes dividends, taxable interest, and
the excess of net short-term capital gains over net long-term capital losses
less operating expenses) and at least 90% of its net tax exempt interest income,
for each tax year, if any, to its shareholders and also must meet several
additional requirements. Included 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) 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 (iii) 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.
S-46
<PAGE>
The Prime Obligation, Intermediate-Term Income and Value Portfolios may make
investments in securities (such as STRIPS) that bear "original issue discount"
or "acquisition discount" (collectively, "OID Securities"). The holder of such
securities is deemed to have received interest income even though no cash
payments have been received. Accordingly, OID Securities may not produce
sufficient current cash receipts to match the amount of distributable net
investment income the Portfolios must distribute to satisfy the Distribution
Requirement. In some cases, the Portfolios may have to borrow money or dispose
of other investments in order to make sufficient cash distributions to satisfy
the Distribution Requirement.
Although each Portfolio intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year,
each Portfolio will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If the Portfolios fail to qualify for any taxable year as a RIC, all of their
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
a Portfolio's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
PORTFOLIO DISTRIBUTIONS
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of a
Portfolio's earnings and profits. Each Portfolio anticipates that it will
distribute substantially all of its investment company taxable income for each
taxable year.
Each Portfolio intends to distribute to shareholders its excess of net long-term
capital gains over net short-term capital losses ("net capital gains"). Such
distributions are taxable to shareholders who are individuals at a maximum rate
of 20%, regardless of the length of time the shareholder has held their
Portfolio Shares. If any such gains are retained, however, a Portfolio will pay
federal income tax thereon.
In the case of corporate shareholders, distributions (other than capital gains
distributions) from a RIC generally qualify for the dividends-received deduction
to the extent of the gross amount of qualifying dividends received by a
Portfolio for the year. Generally, and subject to certain limitations, a
dividend will be treated as a qualifying dividend if it has been received from a
domestic corporation. Accordingly, it is not expected that any Intermediate-Term
Income Portfolio, Michigan Portfolio or Prime Obligation Portfolio distribution
will qualify for the corporate dividends-received deduction. Conversely,
distributions from the Growth Portfolio and the Value Portfolio generally will
qualify for the corporate dividends-received deduction.
S-47
<PAGE>
Ordinarily, investors should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
October, November, or December of one year, but paid in January of the following
year, will be deemed for tax purposes to have been received by the shareholder
and paid by the Portfolio in the year in which the dividends were declared.
In certain cases, a Portfolio will be required to withhold, and remit to the
United States Treasury, 31% of any distributions paid to a shareholder who (1)
has failed to provide a correct taxpayer identification number, (2) is subject
to backup withholding by the Internal Revenue Service, or (3) has failed to
certify to the Portfolio that such shareholder is not subject to backup
withholding.
Each Portfolio will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Portfolio
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
SALE OR EXCHANGE OF PORTFOLIO SHARES
Generally, gain or loss on the sale or exchange of a Portfolio Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. 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 that 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). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
FEDERAL EXCISE TAX
If a Portfolio fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Portfolio will be subject to a nondeductible
4% Federal excise tax on the undistributed amounts. Each Portfolio intends to
make sufficient distributions to avoid imposition of this tax, or to retain, at
most its net capital gains and pay tax thereon.
S-48
<PAGE>
STATE AND LOCAL 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. Depending upon state and
local law, distributions by the Portfolios to shareholders and the ownership of
Shares may be subject to state and local taxes. Shareholders are urged to
consult their tax advisors as to the consequences of these and other state and
local tax rules affecting an investment in the Portfolios.
ADDITIONAL TAX INFORMATION CONCERNING THE MICHIGAN PORTFOLIO
The Portfolio intends to qualify to pay "exempt interest dividends" to its
shareholders by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consist of obligations the interest on which is exempt from federal income tax.
As long as this and certain other requirements are met, dividends derived from
the Portfolio's net tax-exempt interest income will be "exempt interest
dividends" that are excluded from your gross income for federal income tax
purposes. Exempt interest dividends may, however, have collateral federal income
tax consequences, including alternative minimum tax consequences, as discussed
below.
The percentage of income that constitutes "exempt-interest dividends" will be
determined for each year for the Portfolio and will be applied uniformly to all
dividends declared with respect to the Portfolio during that year. This
percentage may differ from the actual percentage for any particular day.
Exempt-interest dividends may be subject to the alternative minimum tax imposed
by Section 55 of the Code (the "Alternative Minimum Tax"). The Alternative
Minimum Tax is imposed at a rate of up to 28% in the case of non-corporate
taxpayers and at the rate of 20% in the case of corporate taxpayers, to the
extent it exceeds the taxpayer's regular tax liability. The Alternative Minimum
Tax may be affected by the receipt of exempt-interest dividends 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. The
Portfolio intends, when possible, to avoid investing in private activity bonds.
Second, in the case of exempt-interest dividends received by corporate
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they are derived from private
activity bonds, will be included in the corporation's "adjusted current
earnings," as defined in Section 56(g) of the Code, in calculating the
corporation's alternative minimum taxable income for purposes of determining the
Alternative Minimum Tax.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry Shares of the Portfolio will not be deductible for federal income tax
purposes. The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by
S-49
<PAGE>
an amount equal to a portion of exempt-interest dividends received or accrued
during any taxable year. Foreign corporations engaged in a trade or business in
the United States will be subject to a "branch profits tax" on their "dividend
equivalent amount" for the taxable year, which will include exempt-interest
dividends. Certain Subchapter S corporations may also be subject to taxes on
their "passive investment income," which could include exempt-interest
dividends. Up to 85% of the Social Security benefits or railroad retirement
benefits received by an individual during any taxable year will be included in
the gross income of such individual if the individual's "modified adjusted gross
income" (which includes exempt-interest dividends) plus one-half of the Social
Security benefits or railroad retirement benefits received by such individual
during that taxable year exceeds the base amount described in Section 86 of the
Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
Shares. "Substantial user" is defined generally as including a "non-exempt
person" who regularly uses in trade or business a part of such a facility.
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.
Issuers of bonds purchased by the 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 such covenants.
The Portfolio may not be a suitable investment for tax-exempt shareholders and
plans because such shareholders and plans would not gain any additional benefit
from the receipt of exempt-interest dividends.
TRADING PRACTICES AND BROKERAGE
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(s) is responsible
for placing the orders to execute transactions for the Portfolios. 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(s) generally seek
reasonably competitive spreads or commissions, the Trust will not
S-50
<PAGE>
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(s) 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.
The Adviser and/or Sub-Adviser(s) select 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 Adviser's and/or a 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 a 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 a 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(s) may allocate out of all commission business
generated by all of the funds and accounts under management by the Adviser
and/or Sub-Adviser(s), 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(s) 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.
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<PAGE>
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-Adviser(s) 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(s). 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, 1998 and January 31, 1999, the Portfolios
paid the following brokerage commissions with respect to portfolio transactions:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
% of Total
% of Total Brokerage
Total $ Amount Brokerage Transactions
of Brokerage Commissions Effected
Total $ Amount of Commission Paid to Through
Brokerage Paid to Affiliated Affiliated
Commissions Paid Affiliates Brokers Brokers
- ----------------------------------------------------------------------------------------------------------------
Portfolio 1998 1999 1998 1999 1998 1999 1998 1999
- --------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Golden Oak $98,901 $52,495 $0 $20,430 0% 39.91% 0% 41.77%
Growth
Portfolio
- ----------------------------------------------------------------------------------------------------------------
Golden Oak N/A $3,410 $0 $0 0% 0% 0% 0%
Intermediate-
Term Income
Portfolio
- ----------------------------------------------------------------------------------------------------------------
Golden Oak N/A $0 $0 $0 0% 0% 0% 0%
Michigan Tax
Free Bond
Portfolio
- ----------------------------------------------------------------------------------------------------------------
Golden Oak N/A $0 $0 $0 0% 0% 0% 0%
Prime
Obligation
Money Market
Portfolio
- ----------------------------------------------------------------------------------------------------------------
Golden Oak $39,007 $141,248 $0 $62,129 0% 44.12% 0% 37.34%
Value
Portfolio
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------
Total Brokerage
Commissions
Paid to SIDC in
Connection With Total $ Amount of
Repurchase Brokerage
Agreement Commissions Paid
Transactions for Research
- -----------------------------------------------------------
Portfolio 1998 1999 1998 1999
- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Golden Oak $985 $1,308 $17,844 $39,308
Growth
Portfolio
- -----------------------------------------------------------
Golden Oak $2,854 $3,410 $0 $0
Intermediate-
Term Income
Portfolio
- -----------------------------------------------------------
Golden Oak N/A $0 $0 $0
Michigan Tax
Free Bond
Portfolio
- -----------------------------------------------------------
Golden Oak N/A $0 $0 $0
Prime
Obligation
Money Market
Portfolio
- -----------------------------------------------------------
Golden Oak N/A $438 $36,715 $66,900
Value
Portfolio
- -----------------------------------------------------------
</TABLE>
- -------------------------
* Had not commenced operations as of the end of the fiscal year.
For the fiscal year ended January 31, 1997, the Portfolios paid the following
brokerage commissions with respect to portfolio transactions:
S-52
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Total $ Amount of
Total $ Amount of Brokerage
Brokerage Commission Paid
Commission Paid to Affiliates
Portfolio 1997 1997
- --------- ---- ----
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Golden Oak Growth Portfolio $81,924 $0
- ---------------------------------------------------------------------------------------------------
Golden Oak Intermediate-Term Income Portfolio $0 $0
- ---------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax Free Bond Portfolio * *
- ---------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation Money Market Portfolio $0 $0
- ---------------------------------------------------------------------------------------------------
Golden Oak Value Portfolio * *
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Had not commenced operations as of the end of the fiscal year.
The Adviser and/or Sub-Adviser(s) 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(s) and the
Trust's Board of Directors that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Adviser
and/or Sub-Adviser(s) may give consideration to sales of shares of the Adviser
and/or Sub-Adviser(s) 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(s) 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
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(s) 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
S-53
<PAGE>
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
The Trust is required to identify any securities of its "regular brokers or
dealers" (as such term is defined in the 1940 Act) which the Trust has acquired
during its most recent fiscal year. As of January 31, 1999, the following
Portfolios held securities of the Trust's "regular brokers or dealers" as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Dollar
Name of Amount at
Portfolio Broker/Dealer Type of Security Held FYE
- --------- ------------- --------------------- ---
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Golden Oak Growth Portfolio Morgan Stanley Repurchase Agreement $3,303,081
- -----------------------------------------------------------------------------------------------------------------------
Golden Oak Michigan Tax Free Bond Portfolio N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Golden Oak Value Portfolio Morgan Stanley Repurchase Agreement $1,039,731
- -----------------------------------------------------------------------------------------------------------------------
Golden Oak Intermediate-Term Income Portfolio Morgan Stanley Repurchase Agreement $17,134,794
- -----------------------------------------------------------------------------------------------------------------------
Golden Oak Prime Obligation Money Market Portfolio Prudential Commercial Paper $3,996,440
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
S-54
<PAGE>
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 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% AND 25% SHAREHOLDERS
As of May 5, 1999, the following persons were the only persons who were record
owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or
more of the shares of the Portfolios. Persons who owned of record or
beneficially more than 25% of a Fund's outstanding shares may be deemed to
control the Fund within the meaning of the Act. 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.
Golden Oak Prime Obligation Money Market Portfolio--Institutional: Citizens
Bank, c/o Trust Operations 332021, 101 N. Washington Ave., Saginaw, MI
48607-1206, 98.45%.
Golden Oak Prime Obligation Money Market Portfolio--Class A: Bruce B. Mackey
Tr., Bruce B. Mackey Trust, 3181 Tri Park Drive, Grand Blanc, MI 48439-7088,
11.89%; D & N Bending Corp., 101 E. Pond Drive, Romeo, MI 48065-4903, 6.20%.
Golden Oak Michigan Tax Free Bond Portfolio--Institutional: Citizens Bank, c/o
Trust Operations 332021, 101 N. Washington Ave., Saginaw, MI 48607-1206, 99.82%.
Golden Oak Michigan Tax Free Bond Portfolio--Class A: Dana A. Czmer, FBO the
Dana A. Czmer Trust, 532 Ashwood, Flushing, MI 48433-1329, 9.92%; SEI Trust
Corporation, FBO Citizens Bank, attn: Mutual Fund Administrator, One Freedom
Valley Dr., Oaks, PA 19456, 54.26%; John W. Ennest, The John W. Ennest Trust,
5412 Pepper Mill, Grand Blanc, MI 48439-1947, 5.83%; Donaldson Lufkin Jenrette,
Securities Corporation Inc., P.O. Box 2052, Jersey City, NJ 07303-2052, 28.18% .
Golden Oak Intermediate-Term Income Portfolio--Institutional: Citizens Bank, c/o
Trust Operations 332021, 101 N. Washington Ave., Saginaw, MI 48607-1206, 99.98%.
Golden Oak Intermediate-Term Income Portfolio--Class A: SEI Trust Corporation,
FBO
S-55
<PAGE>
Citizens Bank, attn: Mutual Fund Administrator, One Freedom Valley Dr., Oaks, PA
19456, 92.66%.
Golden Oak Growth Portfolio--Institutional: Citizens Bank, c/o Trust Operations
332021, 101 N. Washington Ave., Saginaw, MI 48607-1206, 99.94%.
Golden Oak Growth Portfolio--Class A: SEI Trust Corporation, FBO Citizens Bank,
attn: Mutual Fund Administrator, One Freedom Valley Dr., Oaks, PA 19456, 73.51%.
Golden Oak Value Portfolio--Institutional: Citizens Bank, c/o Trust Operations
332021, 101 N. Washington Ave., Saginaw, MI 48607-1206, 99.78%.
Golden Oak Value Portfolio--Class A: SEI Trust Corporation, FBO Citizens Bank,
attn: Mutual Fund Administrator, One Freedom Valley Dr., Oaks, PA 19456, 89.80%.
EXPERTS
The financial statements incorporated by reference into this Statement of
Additional Information have been incorporated by reference in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
The audited financial statements of the Portfolios for the fiscal year ended
January 31, 1999, and the Report of Independent Accountants of
PricewaterhouseCoopers LLP dated March 15, 1999 relating to the financial
statements, including the financial highlights of the Portfolios are
incorporated herein by reference.
S-56
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category and indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
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.
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.
A-1
<PAGE>
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:
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- 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
A-2
<PAGE>
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 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
A-3
<PAGE>
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.
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.
A-4
<PAGE>
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.
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
A-5
<PAGE>
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.
A-6
<PAGE>
MAY 31, 1999
THE OVB FUNDS
THE ARBOR FUND
Class A Shares and Class B Shares
PROSPECTUS
EQUITY INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
PRIME OBLIGATIONS PORTFOLIO
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Page 1 of 40
<PAGE>
HOW TO READ THIS PROSPECTUS
The OVB Family of Funds is a mutual fund family that offers different classes of
shares in separate investment portfolios (Portfolios). The Portfolios have
individual investment goals and strategies. This prospectus gives you important
information about the Class A Shares and Class B Shares of the Portfolios that
you should know before investing. Please read this prospectus and keep it for
future reference.
Class A Shares and Class B Shares have different expenses and other
characteristics, allowing you to choose the class that best suits your needs.
You should consider the amount you want to invest, how long you plan to have it
invested, and whether you plan to make additional investments.
CLASS A SHARES
- No sales charges
- No 12b-1 fees or shareholder fees
- $100,000 minimum initial investment
CLASS B SHARES
- No sales charges
- 12b-1 fees
- $1,000 minimum initial investment
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. IN THE INTRODUCTION, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT RISK AND RETURN WHICH IS COMMON TO EACH OF THE
PORTFOLIOS. FOR MORE DETAILED INFORMATION ABOUT EACH PORTFOLIO, PLEASE SEE:
PAGE
OVB EQUITY INCOME PORTFOLIO 4
OVB CAPITAL APPRECIATION PORTFOLIO 8
OVB GOVERNMENT SECURITIES PORTFOLIO 12
OVB WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO 16
OVB PRIME OBLIGATIONS PORTFOLIO 20
MORE INFORMATION ABOUT RISK 24
EACH PORTFOLIO'S OTHER INVESTMENTS 26
INVESTMENT ADVISER AND SUB-ADVISER 26
PORTFOLIO MANAGERS 27
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES 28
DISTRIBUTIONS OF PORTFOLIO SHARES 32
DIVIDENDS AND DISTRIBUTIONS 32
TAXES 32
FINANCIAL HIGHLIGHTS 34
HOW TO OBTAIN MORE INFORMATION ABOUT THE
OVB FAMILY OF FUNDS Back Cover
Page 2 of 40
<PAGE>
INTRODUCTION
Each Portfolio is a mutual fund. A mutual fund pools shareholders' money and,
using professional investment managers, invests it in securities.
Each Portfolio has its own investment goal and strategies for reaching that
goal. The investment managers invest Portfolio assets in a way that they believe
will help a Portfolio achieve its goal. Still, investing in each Portfolio
involves risk and there is no guarantee that a Portfolio will achieve its goal.
An investment manager's judgments about the markets, the economy, or companies
may not anticipate actual market movements, economic conditions or company
performance, and these judgments may affect the return on your investment. In
fact, no matter how good a job an investment manager does, you could lose money
on your investment in the Portfolio, just as you could with other investments. A
PORTFOLIO SHARE IS NOT A BANK DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE
FDIC OR ANY GOVERNMENT AGENCY.
The value of your investment in a Portfolio (other than the OVB Prime
Obligations Portfolio) is based on the market value of the securities the
Portfolio holds. These prices change daily due to economic and other events that
affect particular companies and other issuers. These price movements, sometimes
called volatility, may be greater or lesser depending on the types of securities
a Portfolio owns and the markets in which they trade. The effect on a Portfolio
of a change in the value of a single security will depend on how widely the
Portfolio diversifies its holdings.
THE OVB PRIME OBLIGATIONS PORTFOLIO TRIES TO MAINTAIN A CONSTANT PRICE PER SHARE
OF $1.00, BUT THERE IS NO GUARANTEE THAT A PORTFOLIO WILL ACHIEVE THIS GOAL.
Page 3 of 40
<PAGE>
EQUITY INCOME PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Current income, with a secondary goal of moderate
capital appreciation
Investment Focus Large capitalization U.S. common stocks which pay
dividends
Share Price Volatility Medium
Principal Investment Investing in a Portfolio which will provide price
Strategy movement similar to the Standard & Poor's 500
Composite Index, but with less volatility and a
significantly higher dividend stream
Investor Profile Investors seeking current income and moderate
capital appreciation who are willing to bear the
risk of modest share price volatility
INVESTMENT STRATEGY
The Portfolio invests primarily (at least 65% of its assets) in common stocks of
U.S. companies with large market capitalizations (in excess of $5 billion) that
regularly pay dividends. The Portfolio invests in established companies
operating in a broad range of industries based on their ability to grow both
earnings and dividends. In selecting investments for the Portfolio, the Adviser
attempts to choose stocks of companies that are positioned to benefit from
competitive advantages that arise from ownership of valuable business
franchises, trademarks and brand names, control of distribution networks,
significant market shares in key products, or other company specific attributes.
The Adviser also considers the quality of management as evidenced by an
established track record of enhancing shareholder value. The Adviser buys stocks
with a long-term view and attempts to hold its positions and keep portfolio
turnover low.
PRINCIPAL RISKS OF INVESTING
Since it purchases common stocks, the Portfolio is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Portfolio's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Portfolio.
Page 4 of 40
<PAGE>
The Portfolio is also subject to the risk that its market segment, large
capitalization dividend-paying common stocks, may underperform other equity
market segments or the equity markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Class A
Shares from year to year.*
<TABLE>
<S> <C>
1997 23.02%
1998 13.77%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
12.52% (7.45)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 0.66%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE S&P 500/BARRA VALUE INDEX AND THE
LIPPER EQUITY INCOME AVERAGE.
<TABLE>
<CAPTION>
SINCE
CLASS A SHARES 1 YEAR INCEPTION
- -----------------------------------------------------------------
<S> <C> <C>
OVB Equity Income Portfolio 13.77% 19.87%*
S&P 500/Barra Value Index 14.68% 25.59%**
Lipper Equity Income Average 10.89% 21.66%**
* Since 8/1/96
** Since 8/31/96
<CAPTION>
SINCE
CLASS B SHARES 1 YEAR INCEPTION
- -----------------------------------------------------------------
<S> <C> <C>
OVB Equity Income Portfolio 13.50% 19.61%*
S&P 500/Barra Value Index 14.68% 25.59%**
Lipper Equity Income Average 10.89% 21.66%**
* Since 8/1/96
** Since 8/31/96
</TABLE>
Page 5 of 40
<PAGE>
SIMPLY SPEAKING . . .
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The S&P 500/Barra Value Index is a
widely-recognized, capitalization-weighted (companies with larger market
capitalizations have more influence than those with smaller market
capitalizations) index of the stocks in the S&P 500 Index. The index is
constructed by dividing the stocks in the S&P 500 Index by price-to-book ratios,
and includes securities of companies with lower price-to-book ratios.
WHAT IS AN AVERAGE?
An average is a composite of mutual funds with similar investment goals. The
Lipper Equity Income Average is a widely-recognized average of mutual funds that
seek relatively high current income and growth of income through investing in
dividend-paying equity securities.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
- ---------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .74% .74%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .35% .35%
- ---------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.09% 1.34%
</TABLE>
* The Portfolio's total actual annual portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
OVB Equity Income Portfolio -Class A .96%
OVB Equity Income Portfolio -Class B 1.21%
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Portfolio Shares."
Page 6 of 40
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares $111 $347 $601 $1,329
Class B Shares $136 $425 $734 $1,613
</TABLE>
Page 7 of 40
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Long-term growth of capital
Investment Focus Medium to large capitalization U.S. common stocks
Share Price Volatility High
Principal Investment Investing in securities of medium to large sized
Strategy companies that have an established record of
growth and continue to present significant
growth potential
Investor Profile Investors seeking long-term growth of
capital who are willing to accept the volatility
that comes with an actively managed portfolio of
medium to large sized growth companies
INVESTMENT STRATEGY
The Portfolio invests primarily (at least 65% of its assets) in common stocks of
U.S. companies with medium to large market capitalizations (in excess of $1
billion). In selecting investments for the Portfolio, the Adviser will consider
growth factors such as a company's new products, changes in management, and
business restructurings. The Adviser will also search for companies that have
established records of earnings and sales growth over a period of at least three
years that it believes are poised to meet or exceed these figures going forward.
These companies generally will have lower amounts of long-term debt
(representing less than 40% of the company's capitalization); have attractive
price/earnings ratios in relation to a company's 3 to 5-year earnings per share
growth rate; and have stock prices which have outperformed Standard & Poor's 500
Composite Index (S&P 500) over the previous six months. The Adviser will attempt
to avoid overweighting the Portfolio's position in any specific market sector
(such as technology, consumer staples, etc.) beyond 150% of the weighting that
sector has in the S&P 500.
The Adviser may sell a stock if a company fails to meet earnings or revenue
expectations or becomes overvalued (i.e., high price/earnings ratio relative to
its earnings growth). The Adviser may also sell a stock to change the
Portfolio's weighting in a particular company or industry sector, or if better
opportunities are available. Due to its investment strategy, the Portfolio may
buy and sell securities frequently. This may result in higher transaction costs
and additional capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING
Since it purchases common stocks, the Portfolio is subject to the risk that
stock prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Portfolio's equity
securities may fluctuate drastically from day-to-day.
Page 8 of 40
<PAGE>
Individual companies may report poor results or be negatively affected by
industry and/or economic trends and developments. The prices of securities
issued by such companies may suffer a decline in response. These factors
contribute to price volatility, which is the principal risk of investing in the
Portfolio.
The medium capitalization companies the Portfolio invests in may be more
vulnerable to adverse business or economic events than larger, more established
companies. In particular, these medium-sized companies may have limited product
lines, markets and financial resources, and may depend on a relatively small
management group. Therefore, medium capitalization stocks may be more volatile
than those of larger companies.
The Portfolio is also subject to the risk that its market segment, large and
medium capitalization growth stocks, may underperform other equity market
segments or the equity markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
The periods prior to December 1, 1993 when the Portfolio began operating,
represent the performance of the Adviser's similarly managed predecessor common
trust fund. The past performance shown in the bar chart has been adjusted to
reflect current expenses for the Class A Shares of the Portfolio. The Adviser's
common trust fund was not a registered mutual fund so it was not subject to the
same investment and tax restrictions as the Portfolio. If it had been the common
trust fund's performance might have been lower.
This bar chart shows changes in the performance of the Portfolio's Class A
Shares from year to year.*
<TABLE>
<S> <C>
1994 (5.45)%
1995 33.34%
1996 16.17%
1997 27.02%
1998 35.05%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
29.02% (13.74)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 11.04%.
Page 9 of 40
<PAGE>
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE S&P 500 INDEX.
<TABLE>
<CAPTION>
SINCE
CLASS A SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OVB Capital Appreciation Portfolio 35.05% 20.23% 20.61%*
S&P 500 Index 28.60% 24.05% 24.05%**
* Since 12/1/93
** Since 12/31/93
<CAPTION>
SINCE
CLASS B SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OVB Capital Appreciation Portfolio 34.63% 19.90% 19.88%*
S&P 500 Index 28.60% 24.05% 24.05%*
* Since 12/31/93
</TABLE>
SIMPLY SPEAKING . . .
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The S&P 500 Index is a widely-recognized, market
value-weighted (higher market value stocks have more influence than lower market
value stocks) index of 500 stocks designed to mimic the overall equity market's
industry weightings.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .95% .95%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .33% .33%
- -------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.28% 1.53%
</TABLE>
* The Portfolio's total actual annual portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
<TABLE>
<S> <C>
OVB Capital Appreciation Portfolio -Class A 1.02%
OVB Capital Appreciation Portfolio -Class B 1.27%
</TABLE>
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Shares."
Page 10 of 40
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares $130 $406 $702 $1,545
Class B Shares $156 $483 $834 $1,824
</TABLE>
Page 11 of 40
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Current income consistent with the preservation of
capital
Investment Focus Fixed income obligations of the U.S. Treasury and
U.S. government agencies
Share Price Volatility Low
Principal Investment Investing in U.S. Treasury obligations and U.S.
Strategy government agency obligations to attempt to
maximize income
Investor Profile Fixed income investors who want to receive strong
current income while not sacrificing liquidity
INVESTMENT STRATEGY
The Portfolio invests principally (at least 65% of its assets) in fixed income
obligations issued by the U.S. Treasury and U.S. government agencies, including
mortgage backed securities. The Portfolio may also invest in taxable municipal
securities that are rated in one of the top two ratings categories. In selecting
investments for the Portfolio, the Adviser analyzes current market conditions
and anticipated changes in bond prices to attempt to obtain the highest possible
yield with minimal credit risk. The Adviser actively manages the maturity of the
Portfolio which ranges between three and ten years. Under normal circumstances,
the Adviser anticipates that the Portfolio's dollar-weighted average maturity
will be approximately five years; however, the Adviser may vary this average
maturity substantially in anticipation of a change in the interest rate
environment.
PRINCIPAL RISKS OF INVESTING
The prices of the Portfolio's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers. Generally, the Portfolio's
fixed income securities will decrease in value if interest rates rise and vice
versa. Also, longer-term securities are generally more volatile, so the average
maturity or duration of these securities affects risk.
Although the Portfolio's U.S. government securities are considered to be among
the safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. government agencies are
backed by the U.S. Treasury, while
Page 12 of 40
<PAGE>
others are backed solely by the ability of the agency to borrow from the U.S.
Treasury or by the agency's own resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Portfolio may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes to the financial condition or credit rating of municipal
issuers may also adversely affect the value of the Portfolio's securities.
The Portfolio is also subject to the risk that its investment strategy which
focuses on fixed income obligations of the U.S. government, may perform
differently from other mutual funds which target other fixed income market
segments or invest in other asset classes.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
The periods prior to December 1, 1993, when the Portfolio began operating,
represent the performance of the Adviser's similarly managed predecessor common
trust fund. The past performance shown in the bar chart has been adjusted to
reflect current expenses for the Class A Shares of the Portfolio. The Adviser's
common trust fund was not a registered mutual fund so it was not subject to the
same investment and tax restrictions as the Portfolio. If it had been, the
common trust fund's performance might have been lower.
This bar chart shows changes in the performance of the Portfolio's Class A
Shares from year to year.*
<TABLE>
<S> <C>
1994 (5.06)%
1995 19.41%
1996 2.31%
1997 9.26%
1998 8.14%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
6.36% (3.64)%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was (1.02)%.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT/CORPORATE BOND INDEX.
<TABLE>
SINCE
CLASS A SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Page 13 of 40
<PAGE>
OVB Government Securities Portfolio 8.14% 6.50% 6.47%*
Lehman Brothers Intermediate
Government/Corporate Bond Index 9.47% 7.30% 7.30%**
* Since 12/1/93
** Since 12/31/93
<CAPTION>
SINCE
CLASS B SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OVB Government Securities Portfolio 7.87% 6.26% 6.25%*
Lehman Brothers Intermediate
Government/Corporate Bond Index 9.47% 7.30% 7.30%**
* Since 12/30/93
** Since 12/31/93
</TABLE>
SIMPLY SPEAKING . . .
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The Lehman Brothers Intermediate
Government/Corporate Bond Index is a widely-recognized, market value-weighted
(higher market value bonds have more influence than lower market value bonds)
index of U.S. Treasury securities, U.S. government agency obligations, corporate
debt backed by the U.S. government, fixed-rate nonconvertible corporate debt
securities, Yankee bonds, and nonconvertible debt securities issued by or
guaranteed by foreign governments and agencies. All securities in the Index are
rated investment grade (BBB) or higher, with maturities from 1 to 10 years.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE PORTFOLIO.
Page 14 of 40
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .75% .75%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .36% .36%
- -------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.11% 1.36%
</TABLE>
* The Portfolio's total actual annual portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
OVB Government Securities Portfolio -Class A .83%
OVB Government Securities Portfolio -Class B 1.08%
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares $113 $353 $612 $1,352
Class B Shares $138 $431 $745 $1,635
</TABLE>
Page 15 of 40
<PAGE>
WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Current income exempt from federal and West
Virginia income taxes consistent with
preservation of capital
Investment Focus Tax-exempt West Virginia municipal securities
Share Price Volatility Low
Principal Investment Invests in high quality municipal obligations
Strategy which produce interest that is exempt from
federal income tax and West Virginia income tax
Investor Profile Conservative taxable investors who want to
receive current income exempt from federal and
West Virginia state income tax and are
willing to bear the risk of investing in a
portfolio of securities affected by changes in
economic conditions and governmental policies
within West Virginia
INVESTMENT STRATEGY
The Portfolio invests substantially all of its assets in high quality municipal
securities that generate income exempt from federal and West Virginia state
income taxes. These securities include securities of municipal issuers located
in West Virginia, the District of Columbia and other U.S. territories and
possessions. The Portfolio will invest most of its assets in securities that are
not subject to federal taxes, including the alternative minimum tax, but it can
purchase a limited amount of taxable securities. The Portfolio's Adviser will
generally purchase municipal securities rated in one of the two highest ratings
categories and attempt to maintain an average weighted portfolio maturity of 12
to 18 years. In selecting securities for the Portfolio, the Adviser will
consider each security's yield and total return potential relative to other
available municipal securities.
PRINCIPAL RISKS OF INVESTING
The prices of the Portfolio's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Portfolio's fixed income securities will decrease in value if
interest rates rise and vice versa. Also, longer-term securities are generally
more volatile, so the average maturity or duration of these securities affects
risk.
Page 16 of 40
<PAGE>
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Portfolio's securities.
The Portfolio is non-diversified, which means that it may invest in the
securities of relatively few issuers. As a result, the Portfolio may be more
susceptible to a single adverse economic or political occurrence affecting one
or more of these issuers, and may experience increased volatility due to its
investments in those securities.
The Portfolio's concentration of investments in securities of issuers located in
West Virginia subjects the Portfolio to economic conditions and government
policies within that state. As a result, the Portfolio will be more susceptible
to factors which adversely affect issuers of West Virginia obligations than a
mutual fund which does not have as great a concentration in West Virginia
municipal obligations.
The Portfolio is also subject to the risk that its market segment, West Virginia
municipal debt securities, may underperform other fixed income market segments
or the fixed income markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
The periods prior to December 1, 1993, when the Portfolio began operating,
represent the performance of the Adviser's similarly managed predecessor common
trust fund. The past performance shown in the bar chart has been adjusted to
reflect current expenses for the Class A Shares of the Portfolio. The Adviser's
common trust fund was not a registered mutual fund so it was not subject to the
same investment and tax restrictions as the Portfolio. If it had been, the
common trust fund's performance might have been lower.
This bar chart shows changes in the performance of the Portfolio's Class A
Shares from year to year.*
<TABLE>
<S> <C>
1994 (4.97)%
1995 16.03%
1996 3.65%
1997 8.93%
1998 5.35%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
6.68% (4.83)%
(3/31/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 0.57%.
Page 17 of 40
<PAGE>
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS MUNICIPAL BOND INDEX.
<TABLE>
<CAPTION>
SINCE
CLASS A SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OVB West Virginia Tax-Exempt Income Portfolio 5.35% 5.57% 5.78%*
Lehman Brothers Municipal Bond Index 6.48% 6.23% 6.23%**
* Since 12/1/93
** Since 12/31/93
<CAPTION>
SINCE
CLASS B SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OVB West Virginia Tax-Exempt Income Portfolio 5.09% 5.29% 5.36%*
Lehman Brothers Municipal Bond Index 6.48% 6.23% 6.23%**
* Since 12/17/93
** Since 12/31/93
</TABLE>
SIMPLY SPEAKING...
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower. The Lehman Brothers Municipal Bond Index is a
widely-recognized index of municipal bonds with maturities of at least one year.
Page 18 of 40
<PAGE>
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .45% .45%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .34% .34%
- -------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses .79% 1.04%
</TABLE>
* The Portfolio's total actual annual portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
OVB West Virginia Tax-Exempt Income Portfolio -Class A .72%
OVB West Virginia Tax-Exempt Income Portfolio -Class B .97%
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Portfolio Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares $81 $252 $439 $978
Class B Shares $106 $331 $574 $1,271
</TABLE>
Page 19 of 40
<PAGE>
PRIME OBLIGATIONS PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Preserve principal value and maintain a high degree
of liquidity while providing current income
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Investing in a broad range of short-term high
Strategy quality U.S. dollar-denominated debt securities
Investor Profile Conservative investors who want to receive current
income through a liquid investment
INVESTMENT STRATEGY
The Portfolio invests in a broad range of short-term U.S. dollar-denominated
securities that are rated in one of the two highest rating categories by
nationally recognized rating organizations, or unrated securities that the
Sub-Adviser determines are of comparable quality. The Portfolio invests in
short-term securities, including: (i) commercial paper and other short-term
corporate obligations of U.S. and foreign issuers (including asset-backed
securities); (ii) certificates of deposit, time deposits, bankers' acceptances,
bank notes and other obligations of U.S. and foreign savings and loan
institutions and commercial banks (including foreign branches of such banks)
that meet certain asset requirements; (iii) short-term obligations issued by
state and local governments; (iv) obligations of foreign governments (including
Canadian and Provincial Government and Crown Agency obligations); and (v) U.S.
Treasury obligations and obligations issued or guaranteed as to principal and
interest by agencies or instrumentalities of the U.S. government. The Portfolio
may also enter into fully-collateralized repurchase agreements.
The Adviser has engaged Wellington Management Company, LLP as sub-adviser
(Sub-Adviser) to manage the Portfolio on a day-to-day basis. Using top-down
strategy setting and bottom-up security selection, the Sub-Adviser seeks
securities with an acceptable maturity, that are marketable and liquid, that
offer competitive yields, and that are issued by issuers that are on a sound
financial footing. The Sub-Adviser also considers factors such as the
anticipated level of interest rates and the maturity of individual securities
relative to the maturity of the Portfolio as a whole. The Portfolio follows
strict SEC rules about credit quality, maturity and diversification of its
investments.
Page 20 of 40
<PAGE>
PRINCIPAL RISKS OF INVESTING
An investment in the Portfolio is subject to income risk, which is the
possibility that the Portfolio's yield will decline due to falling interest
rates. A Portfolio share is not a bank deposit and is not insured or guaranteed
by the FDIC or any government agency. In addition, although a money market
portfolio seeks to keep a constant price per share of $1.00, you may lose money
by investing in the Portfolio.
Although the Portfolio's U.S. government securities are considered to be among
the safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. government agencies are
backed by the U.S. Treasury, while others are backed solely by the ability of
the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Class A
Shares from year to year.*
<TABLE>
<S> <C>
1994 3.91%
1995 5.69%
1996 5.13%
1997 5.30%
1998 5.25%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
1.42% 0.72%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year. The
Portfolio's performance from 1/1/99 to 3/31/99 was 1.16%.
Call 1-800-808-4920 for the Portfolio's most current 7-day yield.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE IBC/FINANCIAL DATA FIRST TIER AVERAGE.
<TABLE>
<CAPTION>
SINCE
CLASS A SHARES 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OVB Prime Obligations Portfolio 5.25% 5.05% 5.02%*
IBC/Financial Data First Tier Average 4.96% 4.79% 4.79%**
</TABLE>
* Since 12/1/93
** Since 12/31/93
Page 21 of 40
<PAGE>
<TABLE>
<CAPTION>
SINCE
CLASS B SHARES 1 YEAR INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C>
OVB Prime Obligations Portfolio 4.99% 4.84%*
IBC/Financial Data First Tier Average 4.96% 4.87%**
</TABLE>
* Since 2/8/94
** Since 2/28/94
SIMPLY SPEAKING...
WHAT IS AN AVERAGE?
An average is a composite of mutual funds with similar investment goals. The
IBC/Financial Data First Tier Average is a widely-recognized average of money
market funds that invest solely in securities rated Prime-1 by Moody's or A-1 by
S&P.
PORTFOLIO FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)*
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .33% .33%
Distribution and Service (12b-1) Fees None .25%
Other Expenses .33% .33%
- -------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses .66% .91%
</TABLE>
* The Portfolio's total actual annual portfolio operating expenses for the most
recent fiscal year were less than the amount shown because the Adviser waived a
portion of the fees in order to keep total operating expenses at a specified
level. These fee waivers remain in place as of the date of this Prospectus, but
the Adviser may discontinue all or part of these waivers at any time. With these
fee waivers, the Portfolio's actual total operating expenses should be as
follows:
OVB Prime Obligations Portfolio -Class A .49%
OVB Prime Obligations Portfolio -Class B .74%
For more information about these fees, see "Investment Adviser and Sub-Adviser"
and "Distribution of Portfolio Shares."
Page 22 of 40
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return,
Portfolio operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares $67 $211 $368 $822
Class B Shares $93 $290 $504 $1,120
</TABLE>
Page 23 of 40
<PAGE>
MORE INFORMATION ABOUT RISK
EQUITY RISK - Equity securities include public OVB Equity Income Portfolio
and privately issued equity securities, common
and preferred stocks, warrants, rights to OVB Capital Apprreciation
subscribe to common stock and convertible Portfolio
securities, as well as instruments that
attempt to track the price movement of equity
indices. Investments in equity securities and
equity derivatives in general are subject to
market risks that may cause their prices to
fluctuate over time. The value of securities
convertible into equity securities, such as
warrants or convertible debt, 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 a mutual fund invests will cause a
Portfolio's net asset value to fluctuate. An
investment in a portfolio of equity securities
may be more suitable for long-term investors
who can bear the risk of these share price
fluctuations.
FIXED INCOME RISK - The market value of fixed OVB Government Securities
income investments change in response to Portfolio
interest rate changes and other factors. During
periods of falling interest rates, the values of OVB West Virginia
outstanding fixed income securities generally Tax-Exempt Portfolio
rise. 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. In
addition to these fundamental risks,
different types of fixed income securities
may be subject to the following additional
risks:
CALL RISK - During periods of falling
interest rates, certain debt obligations
with high interest rates may be prepaid (or
"called") by the issuer prior to maturity.
This may cause a Portfolio's average
weighted maturity to fluctuate, and may
require a Portfolio to invest the resulting
proceeds at lower interest rates.
CREDIT RISK - The possibility that an issuer
will be unable to make timely payments of
either principal or interest.
Page 24 of 40
<PAGE>
EVENT RISK - Securities may suffer declines
in credit quality and market value due to
issuer restructurings or other factors. This
risk should be reduced because of the
Portfolio's multiple holdings.
MUNICIPAL ISSUER RISK - There may be OVB West Virginia
economic or political changes that impact Tax-Exempt Income
the ability of municipal issuers to repay Portfolio
principal and to make interest payments on
municipal securities. Changes to the
financial condition or credit rating of
municipal issuers may also adversely affect
the value of the Portfolio's municipal
securities. Constitutional or legislative
limits on borrowing by municipal issuers may
result in reduced supplies of municipal
securities. Moreover, certain municipal
securities are backed only by a municipal
issuer's ability to levy and collect taxes.
In addition, the Portfolio's concentration
of investments in issuers located in a
single state makes the Portfolio more
susceptible to adverse political or economic
developments affecting that state. The
Portfolio also may be riskier than mutual
funds that buy securities of issuers in
numerous states.
YEAR 2000 RISK - The Portfolios depend on All Portfolios
the smooth functioning of computer systems
in almost every aspect of their business.
Like other mutual funds, businesses and
individuals around the world, the Portfolios
could be adversely affected if the computer
systems used by their service providers do
not properly process dates on and after
January 1, 2000, and distinguish between the
year 2000 and the year 1900. The Portfolios
have asked their service providers whether
they expect to have their computer systems
adjusted for the year 2000 transition, and
are seeking assurances from each service
provider that they are devoting significant
resources to prevent material adverse
consequences to the Portfolios. While it is
likely that such assurances will be
obtained, the Portfolios and their
shareholders may experience losses if these
assurances prove to be incorrect, or as a
result of year 2000 computer difficulties
experienced by issuers of portfolio
securities or third parties, such as
custodians, banks, broker-dealers or others
with which the Portfolios do business.
Page 25 of 40
<PAGE>
EACH PORTFOLIO'S OTHER INVESTMENTS
This prospectus describes the Portfolios' primary strategies, and the Portfolios
will normally invest in the types of securities described in this prospectus.
However, in addition to the investments and strategies described in this
prospectus, each Portfolio also may invest in other securities, use other
strategies and engage in other investment practices. These investments and
strategies, as well as those described in this prospectus, are described in
detail in our Statement of Additional Information.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, each Portfolio may invest up to
100% of its assets in cash or money market instruments that would not ordinarily
be consistent with a Portfolio's objectives (except the OVB Prime Obligations
Portfolio). A Portfolio will do so only if the Adviser or Sub-Adviser believes
that the risk of loss outweighs the opportunity for capital gains or higher
income. Of course, we cannot guarantee that any Portfolio will achieve its
investment goal.
INVESTMENT ADVISER AND SUB-ADVISER
The Investment Adviser makes investment decisions for each of the Portfolios,
other than the OVB Prime Obligations Portfolio, and continuously reviews,
supervises and administers the Portfolios' respective investment programs. The
Investment Adviser oversees the Sub-Adviser for the OVB Prime Obligations
Portfolio to ensure compliance with the Portfolio's investment policies and
guidelines, and monitors the Sub-Adviser's adherence to its investment style.
The Adviser pays the Sub-Adviser out of the Investment Advisory fees it receives
(described below). The Board of Trustees of The Arbor Fund supervises the
Adviser and Sub-Adviser and establishes policies that the Adviser and
Sub-Adviser must follow in their management activities.
One Valley Bank, serves as the Adviser to the Portfolios. One Valley Bank,
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. As of January 31, 1999, One Valley Bank had
approximately $2.3 billion in assets under management. For the fiscal year ended
January 31, 1999, One Valley Bank received advisory fees (after waivers) as a
percentage of average daily net assets of:
<TABLE>
<CAPTION>
<S> <C>
OVB EQUITY INCOME PORTFOLIO .62%
OVB CAPITAL APPRECIATION PORTFOLIO .70%
OVB GOVERNMENT SECURITIES PORTFOLIO .47%
OVB WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO .38%
OVB PRIME OBLIGATIONS PORTFOLIO .15%
</TABLE>
Wellington Management Company, LLP (WMC) manages the OVB Prime Obligations
Portfolio on a day-to-day basis. WMC selects, buys and sells securities for the
Portfolio under the supervision of the Adviser and the Board of Trustees. WMC
and its predecessor organizations have provided investment advisory services to
investment companies since 1928 and investment counseling clients since 1960.
Page 26 of 40
<PAGE>
PORTFOLIO MANAGERS
J. Randy Valentine, Senior Vice President of the Adviser, has oversight
responsibilities of the portfolio managers of the Equity Income, Capital
Appreciation, Government and West Virginia Portfolios. Mr. Valentine has managed
various common trust and collective investment funds since 1976 prior to
assuming his supervisory duties. He has extensive investment management
experience.
Buel S. Sears, CFA serves as a Vice President of One Valley Bank. He has managed
the Equity Income Portfolio since June, 1997. He has more than 15 years of
investment experience. Prior to joining One Valley Bank in 1996, Mr. Sears
managed Huntington Banks West Virginia Trust Investment Group for 12 years.
David P. Nolan serves as a Vice President of One Valley Bank. He has managed the
OVB Capital Appreciation Portfolio since December, 1993. He has more than 18
years of investment experience. Prior to joining One Valley Bank in 1984, Mr.
Nolan served as an account executive with Alex. Brown & Sons incorporated.
James R. Thomas, III, CPA serves as a Vice President of One Valley Bank. He has
managed the OVB Government Securities Portfolio and OVB West Virginia Tax-Exempt
Income Portfolio since December, 1993. He has more than 14 years of investment
experience. Prior to joining One Valley Bank in 1988, Mr. Thomas served as a
financial analyst for Republic Bank, Dallas, Texas.
Page 27 of 40
<PAGE>
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES
This section tells you how to buy, sell (sometimes called "redeem") and exchange
Class A Shares and Class B Shares of the Portfolios.
The classes have different expenses and other characteristics.
CLASS A SHARES
- No sales charges
- No 12b-1 fees or shareholder fees
- $100,000 minimum initial investment
CLASS B SHARES
- No sales charge
- 12b-1 fees
- $1,000 minimum initial investment
For some investors the minimum initial investment for Class A Shares and Class B
Shares may be lower.
Class A and Class B Shares are for individual and institutional investors.
HOW TO PURCHASE PORTFOLIO SHARES
Class A Shares may be purchased only by wire transfer. You may purchase Class B
Shares directly by:
- - Mail
- - Telephone
- - Wire
- - Direct Deposit, or
- - Automated Clearing House (ACH).
To purchase shares directly from us, please call 1-800-808-4920. Unless you
arrange to pay by wire or through direct deposit or ACH, write your check,
payable in U.S. dollars, to "Arbor Fund - OVB ______________" and include the
name of the appropriate Portfolio(s) on the check. A Portfolio cannot accept
third-party checks, credit cards, credit card checks or cash.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Portfolio shares for their customers. If
you invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your institution may charge a fee for its services, in addition to the fees
charged by the Portfolio. You will also generally have to address your
correspondence or questions regarding a Portfolio to your institution.
Page 28 of 40
<PAGE>
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange and, for the
OVB Prime Obligations Portfolio, the Federal Reserve are open for business (a
Business Day). Shares cannot be purchased by Federal Reserve Wire on days when
either the New York Stock Exchange or the Federal Reserve is closed.
A Portfolio may reject any purchase order if it determines that accepting the
order would not be in the best interests of the Portfolio or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Portfolio receives your purchase order.
Each Portfolio (except the OVB Prime Obligations Portfolio) calculates its NAV
once each Business Day at the regularly-scheduled close of normal trading on the
New York Stock Exchange (normally, 4:00 p.m. Eastern time). So, for you to
receive the current Business Day's NAV, generally a Portfolio must receive your
purchase order before 4:00 p.m. Eastern time.
The OVB Prime Obligations Portfolio calculates its NAV once each Business Day at
12:00 noon Eastern time. So, for you to be eligible to receive dividends
declared on the day you submit your purchase order, generally the Portfolio must
receive your order before 12:00 noon Eastern time.
HOW WE CALCULATE NAV
NAV for one Portfolio share is the value of that share's portion of all of the
net assets in the Portfolio.
In calculating NAV, a Portfolio generally values its investment portfolio at
market price (except the OVB Prime Obligations Portfolio). If market prices are
unavailable or a Portfolio thinks that they are unreliable, fair value prices
may be determined in good faith using methods approved by the Board of Trustees.
In calculating NAV for the OVB Prime Obligations Portfolio, we generally value
the Portfolio's investment portfolio using the amortized cost valuation method,
which is described in detail in our Statement of Additional Information. If this
method is determined to be unreliable during certain market conditions or for
other reason, the Portfolio may value its securities at market price or fair
value prices may be determined in good faith using methods approved by the Board
of Trustees.
MINIMUM PURCHASES
To purchase shares for the first time, you must invest in any Portfolio at
least:
<TABLE>
<CAPTION>
CLASS DOLLAR AMOUNT
<S> <C>
Class A Shares $100,000
Class B Shares $1,000
</TABLE>
Your subsequent investments in any Portfolio must be made in amounts of at least
$50, except purchases through the automatic investment plan which must be made
in amounts of at least $100.
A Portfolio may accept investments of smaller amounts for either class of shares
at our discretion.
Page 29 of 40
<PAGE>
AUTOMATIC INVESTMENT PLAN (CLASS B ONLY)
If you have a checking or savings account with a bank, you may purchase Class B
Shares automatically through regular deductions from your account in amounts of
at least $100 per month.
HOW TO SELL YOUR PORTFOLIO SHARES
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.
If you own your shares directly, you may sell your shares on any Business Day by
contacting a Portfolio directly by mail or telephone at 1-800-808-4920.
If you would like to sell $50,000 or more of your shares, or have your sale
proceeds sent to a third party or an address other than your own, please notify
the Portfolio in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
The sale price of each share will be the next NAV determined after the Portfolio
receives your request.
SYSTEMATIC WITHDRAWAL PLAN
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals of at least $50 from any Portfolio. The proceeds
of each withdrawal will be mailed to you by check or, if you have a checking or
savings account with a bank, electronically transferred to your account.
CHECK WRITING SERVICE (PRIME OBLIGATIONS PORTFOLIO -- CLASS B ONLY)
If you own Class B Shares of the Prime Obligations Portfolio you may redeem
shares 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.
The check may be made payable to any person, and 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) for 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 your
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.
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within seven days after we receive
your request. Your proceeds can be wired to your bank account (subject to a $10
fee) or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK OR
THROUGH ACH, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS
CLEARED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise (and for the protection of the
Portfolio's remaining shareholders) we might pay all or part of your redemption
proceeds in liquid securities with a market value equal to the redemption price
(redemption in kind). It is highly unlikely that your shares would ever be
redeemed in kind, but if they were you would probably have to pay transaction
costs to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption.
Page 30 of 40
<PAGE>
INVOLUNTARY REDEMPTION OF YOUR SHARES
If your account balance drops below the required minimum, the Portfolio may
redeem your shares. The account balance minimums are:
<TABLE>
<CAPTION>
CLASS DOLLAR AMOUNT
<S> <C>
Class A Shares $100,000
Class B Shares $1,000
</TABLE>
But, the Portfolio will always give you at least 60 days' written notice to give
you time to add to your account and avoid the involuntary redemption of your
shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Portfolio may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in our Statement of Additional Information.
HOW TO EXCHANGE YOUR SHARES
You may exchange your shares on any Business Day by contacting us directly by
mail or telephone.
You may also exchange shares through your financial institution by mail or
telephone.
IF YOU RECENTLY PURCHASED SHARES BY CHECK OR THROUGH ACH, YOU MAY NOT BE ABLE TO
EXCHANGE YOUR SHARES UNTIL YOUR CHECK HAS CLEARED (WHICH MAY TAKE UP TO 15 DAYS
FROM YOUR DATE OF PURCHASE). This exchange privilege may be changed or canceled
at any time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Portfolio shares. So, your sale price and purchase price will be based on the
NAV next calculated after the Portfolio receives your exchange request.
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Portfolio shares over the telephone is
extremely convenient, but not without risk. Although the Portfolio has certain
safeguards and procedures to confirm the identity of callers and the
authenticity of instructions, the Portfolio is not responsible for any losses or
costs incurred by following telephone instructions we reasonably believe to be
genuine. If you or your financial institution transact with the Portfolio over
the telephone, you will generally bear the risk of any loss.
Page 31 of 40
<PAGE>
DISTRIBUTION OF PORTFOLIO SHARES
Each Portfolio has adopted a distribution plan that allows the Portfolio to pay
distribution and service fees for the sale and distribution of Class B Shares,
and for services provided to Class B shareholders. Because these fees are paid
out of a Portfolio's assets continuously, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
Distribution fees, as a percentage of average daily net assets are .25% for
Class B Shares.
The Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs for dealers, which will be paid for by the
Distributor from any sales charge it receives or from any other source available
to it. Under any such program, the Distributor may provide incentives, in the
form of cash or other compensation, including merchandise, airline vouchers,
trips and vacation packages, to dealers selling shares of a Portfolio.
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio distributes its income as follows:
OVB Equity Income Portfolio Quarterly
OVB Capital Appreciation Portfolio Quarterly
OVB Government Securities Portfolio Monthly
OVB West Virginia Tax-Exempt Income Portfolio Monthly
OVB Prime Obligations Portfolio Monthly
Each Portfolio makes distributions of capital gains, if any, at least annually.
If you own Portfolio shares on a Portfolio's record date, you will be entitled
to receive the distribution.
You will receive dividends and distributions in the form of additional Portfolio
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Portfolio in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the
Portfolio receives your written notice. To cancel your election, simply send the
Portfolio written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax issues
that affect the Portfolios and their shareholders. This summary is based on
current tax laws, which may change.
Each Portfolio will distribute substantially all of its income and capital
gains, if any. The dividends and distributions you receive may be subject to
federal, state and local taxation, depending upon your tax situation. Income
distributions are generally taxable at ordinary income tax rates. Capital gains
distributions are generally taxable at the rates applicable to long-term capital
gains. EACH SALE OR EXCHANGE OF PORTFOLIO SHARES IS A TAXABLE EVENT.
Page 32 of 40
<PAGE>
The OVB West Virginia Tax-Exempt Income Portfolio intends to distribute income
that is exempt from both federal taxes and West Virginia state taxes. The
Portfolio may invest a portion of its assets in securities that generate taxable
income for federal or state income taxes. Any capital gains distributed by the
Portfolio may be taxable.
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.
Page 33 of 40
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about Class A Shares and
Class B Shares of each Portfolio. This information is intended to help you
understand each Portfolio's financial performance for the past five years, or,
if shorter, the period of the Portfolio's operations. Some of this information
reflects financial information for a single Portfolio share. The total returns
in the tables represent the rate that you would have earned (or lost) on an
investment in a Portfolio, assuming you reinvested all of your dividends and
distributions. This information has been audited by PricewaterhouseCoopers LLP,
independent public accountants. Their report, along with each Portfolio's
financial statements, appears in the annual report that accompanies our
Statement of Additional Information. You can obtain the annual report, which
contains more performance information, at no charge by calling 1-800-545-6331.
Page 34 of 40
<PAGE>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ENDED JANUARY 31,
<TABLE>
<CAPTION>
NET
REALIZED
AND
UNREALIZED
NET ASSET GAINS DISTRIBUTIONS DISTRIBUTIONS NET ASSET
VALUE, NET (LOSSES) FROM NET FROM VALUE,
BEGINNING INVESTMENT ON INVESTMENT REALIZED END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
PRIME OBLIGATIONS PORTFOLIO
CLASS A
1999 $ 1.00 $0.05 $ 0.00 $(0.05) $ 0.00 $ 1.00 5.20%
1998 1.00 0.05 0.00 (0.05) 0.00 1.00 5.33
1997 1.00 0.05 0.00 (0.05) 0.00 1.00 5.11
1996 1.00 0.06 0.00 (0.06) 0.00 1.00 5.65
1995 1.00 0.04 0.00 (0.04) 0.00 1.00 4.15
CLASS B
1999 $ 1.00 $0.05 $ 0.00 $(0.05) $ 0.00 $ 1.00 4.94%
1998 1.00 0.05 0.00 (0.05) 0.00 1.00 5.07
1997 1.00 0.05 0.00 (0.05) 0.00 1.00 4.85
1996 1.00 0.05 0.00 (0.05) 0.00 1.00 5.39
1995 (1) 1.00 0.04 0.00 (0.04) 0.00 1.00 3.95
WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
CLASS A
1999 $10.32 $0.49 $ 0.06 $(0.49) $(0.11) $10.27 5.47%
1998 9.95 0.50 0.42 (0.50) (0.05) 10.32 9.55
1997 10.12 0.49 (0.17) (0.49) 0.00 9.95 3.35
1996 9.36 0.49 0.76 (0.49) 0.00 10.12 13.66
1995 10.17 0.46 (0.81) (0.46) 0.00 9.36 (3.38)
<CAPTION>
RATIO OF
NET
RATIO OF RATIO OF INVESTMENT
NET EXPENSES INCOME
RATIO OF INVESTMENT TO TO
NET EXPENSES INCOME AVERAGE AVERAGE
ASSETS, TO TO NET NET
END OF AVERAGE AVERAGE ASSETS ASSETS PORTFOLIO
PERIOD NET NET (EXCLUDING (EXCLUDING TURNOVER
(000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C>
PRIME OBLIGATIONS PORTFOLIO
CLASS A
1999 $61,465 0.49% 5.06% 0.66% 4.89% N/A
1998 52,177 0.49 5.21 0.65 5.05 N/A
1997 90,301 0.49 5.00 0.66 4.83 N/A
1996 84,660 0.49 5.50 0.64 5.35 N/A
1995 77,295 0.49 4.08 0.69 3.88 N/A
CLASS B
1999 $4,137 0.74% 4.82% 0.91% 4.65% N/A
1998 6,550 0.74 4.96 0.90 4.80 N/A
1997 7,501 0.74 4.75 0.91 4.58 N/A
1996 6,154 0.74 5.15 0.89 5.00 N/A
1995 (1) 669 0.74 4.33 0.93 4.14 N/A
WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
CLASS A
1999 $90,228 0.72% 4.77% 0.79% 4.70% 14%
1998 85,043 0.75 5.00 0.80 4.96 17
1997 92,619 0.75 5.01 0.85 4.91 26
1996 36,611 0.75 5.02 0.89 4.88 43
1995 26,096 0.75 4.88 1.09 4.54 28
Page 35 of 40
<PAGE>
NET
REALIZED
AND
UNREALIZED
NET ASSET GAINS DISTRIBUTIONS DISTRIBUTIONS NET ASSET
VALUE, NET (LOSSES) FROM NET FROM VALUE,
BEGINNING INVESTMENT ON INVESTMENT REALIZED END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
1999 $10.32 $0.47 $ 0.05 $(0.47) $(0.11) $10.26 5.11%
1998 9.95 0.48 0.42 (0.48) (0.05) 10.32 9.28
1997 10.11 0.47 (0.16) (0.47) 0.00 9.95 3.19
1996 9.36 0.47 0.75 (0.47) 0.00 10.11 13.26
1995 10.17 0.43 (0.81) (0.43) 0.00 9.36 (3.62)
GOVERNMENT SECURITIES PORTFOLIO
CLASS A
1999 $10.17 $0.56 $ 0.17 $(0.56) $(0.16) $10.18 7.39%
1998 9.76 0.57 0.42 (0.57) (0.01) 10.17 10.44
1997 10.15 0.56 (0.39) (0.56) 0.00 9.76 1.83
1996 9.09 0.55 1.06 (0.55) 0.00 10.15 18.14
1995 10.06 0.51 (0.97) (0.51) 0.00 9.09 (4.48)
CLASS B
1999 $10.18 $0.54 $ 0.17 $(0.54) $(0.16) $10.19 7.12%
1998 9.77 0.54 0.42 (0.54) (0.01) 10.18 10.16
1997 10.15 0.53 (0.38) (0.53) 0.00 9.77 1.69
1996 9.10 0.53 1.05 (0.53) 0.00 10.15 17.72
1995 10.06 0.49 (0.96) (0.49) 0.00 9.10 (4.62)
<CAPTION>
RATIO OF
NET
RATIO OF RATIO OF INVESTMENT
NET EXPENSES INCOME
RATIO OF INVESTMENT TO TO
NET EXPENSES INCOME AVERAGE AVERAGE
ASSETS, TO TO NET NET
END OF AVERAGE AVERAGE ASSETS ASSETS PORTFOLIO
PERIOD NET NET (EXCLUDING (EXCLUDING TURNOVER
(000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C>
CLASS B
1999 $9,477 0.97% 4.52% 1.04% 4.45% 14%
1998 7,658 1.00 4.74 1.05 4.70 17
1997 6,191 1.00 4.76 1.10 4.66 26
1996 4,312 1.00 4.78 1.14 4.64 43
1995 2,263 1.00 4.68 1.34 4.34 28
GOVERNMENT SECURITIES PORTFOLIO
CLASS A
1999 $51,614 0.83% 5.54% 1.11% 5.26% 11%
1998 50,100 0.83 5.77 1.05 5.55 21
1997 59,014 0.83 5.75 1.16 5.42 46
1996 60,228 0.83 5.68 1.11 5.40 28
1995 61,067 0.83 5.61 1.17 5.27 13
CLASS B
1999 $2,063 1.08% 5.28% 1.36% 5.00% 11%
1998 1,519 1.08 5.52 1.30 5.30 21
1997 1,830 1.08 5.50 1.41 5.17 46
1996 1,167 1.08 5.39 1.36 5.11 28
1995 457 1.08 5.34 1.42 5.00 13
</TABLE>
Page 36 of 40
<PAGE>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ENDED JANUARY 31,
<TABLE>
<CAPTION>
NET
REALIZED
AND
UNREALIZED NET
NET ASSET GAINS DISTRIBUTION DISTRIBUTION ASSET
VALUE, NET (LOSSES) FROM NET FROM VALUE,
BEGINNING INVESTMENT ON INVESTMENT REALIZED END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION PORTFOLIO
CLASS A
1999 $14.05 $(0.02) $5.52 $ 0.00 $(1.66) $17.89 42.72%
1998 15.38 0.03 2.52 (0.01) (3.87) 14.05 17.12
1997 13.31 0.00 2.86 (0.01) (0.78) 15.38 22.06
1996 9.57 0.01 3.93 (0.01) (0.19) 13.31 41.31
1995 10.53 0.03 (0.96) (0.03) 0.00 9.57 (8.84)
CLASS B
1999 $13.89 $(0.01) $5.39 $ 0.00 $(1.66) $17.61 42.34%
1998 15.28 0.02 2.46 0.00 (3.87) 13.89 16.76
1997 13.25 (0.03) 2.84 0.00 (0.78) 15.28 21.81
1996 9.55 (0.01) 3.90 0.00 (0.19) 13.25 40.88
1995 10.52 0.01 (0.97) (0.01) 0.00 9.55 (9.11)
<CAPTION>
RATIO OF
NET
RATIO OF RATIO OF INVESTMENT
NET EXPENSES INCOME
RATIO OF INVESTMENT TO TO
NET EXPENSES INCOME AVERAGE AVERAGE
ASSETS, TO TO NET NET
END OF AVERAGE AVERAGE ASSETS ASSETS PORTFOLIO
PERIOD NET NET (EXCLUDING (EXCLUDING TURNOVER
(000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION PORTFOLIO
CLASS A
1999 $138,624 1.02% (0.05)% 1.28% (0.31)% 74%
1998 113,048 1.02 0.09 1.28 (0.17) 118
1997 118,873 1.02 (0.01) 1.28 (0.27) 90
1996 99,612 1.02 0.08 1.27 (0.17) 119
1995 70,502 1.02 0.28 1.33 (0.03) 107
CLASS B
1999 $ 17,872 1.27% (0.28)% 1.53% (0.54)% 74%
1998 6,021 1.27 (0.16) 1.53 (0.42) 118
1997 4,482 1.27 (0.27) 1.53 (0.53) 90
1996 2,233 1.27 (0.16) 1.52 (0.41) 119
1995 505 1.27 0.02 1.58 (0.29) 107
Page 37 of 40
<PAGE>
NET
REALIZED
AND
UNREALIZED NET
NET ASSET GAINS DISTRIBUTION DISTRIBUTION ASSET
VALUE, NET (LOSSES) FROM NET FROM VALUE,
BEGINNING INVESTMENT ON INVESTMENT REALIZED END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO
CLASS A
1999 $12.62 $0.27 $1.52 $(0.27) $(0.70) $13.44 14.69%
1998 11.23 0.27 1.78 (0.27) (0.39) 12.62 18.44
1997 (2) 10.00 0.16 1.23 (0.16) 0.00 11.23 13.98
CLASS B
1999 $12.62 $0.22 $1.54 $(0.24) $(0.70) $13.44 14.43%
1998 11.24 0.23 1.79 (0.25) (0.39) 12.62 18.07
1997 (2) 10.00 0.15 1.24 (0.15) 0.00 11.24 13.98
<CAPTION>
RATIO OF
NET
RATIO OF RATIO OF INVESTMENT
NET EXPENSES INCOME
RATIO OF INVESTMENT TO TO
NET EXPENSES INCOME AVERAGE AVERAGE
ASSETS, TO TO NET NET
END OF AVERAGE AVERAGE ASSETS ASSETS PORTFOLIO
PERIOD NET NET (EXCLUDING (EXCLUDING TURNOVER
(000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
<S> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO
CLASS A
1999 $ 52,095 0.96% 1.97% 1.09% 1.84% 47%
1998 48,076 1.11 2.26 1.15 2.22 68
1997 (2) 41,580 1.20 3.27 1.25 3.22 10
CLASS B
1999 $ 6,206 1.21% 1.72% 1.34% 1.59% 47%
1998 3,678 1.36 2.01 1.40 1.97 68
1997 (2) 1,504 1.45 3.02 1.50 2.97 10
</TABLE>
(1) Commenced operations on February 7, 1994. All ratios for the period
have been annualized.
(2) Commence operations on August 2, 1996. All ratios for the period
have been annualized.
Page 38 of 40
<PAGE>
THE ARBOR FUND
OVB FAMILY OF FUNDS
INVESTMENT ADVISER
One Valley Bank
One Valley Square
P.O. Box 1793
Charleston, West Virginia 25326
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, DC 20036
More information about the OVB Family of Funds is available without charge
through the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated May 31, 1999, includes detailed information about the OVB Family
of Funds. The SAI is on file with the SEC and is incorporated by reference into
this prospectus. This means that the SAI, for legal purposes, is a part of this
prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list each Portfolio's holdings and contain information from the
Portfolio's managers about strategies, and recent market conditions and trends
and their impact on Portfolio performance. The reports also contain detailed
financial information about the Portfolios.
TO OBTAIN MORE INFORMATION:
BY TELEPHONE: Call 1-800-545-6331
BY MAIL: Write to us
The OVB Family of Funds
c/o The Arbor Fund
P.O. Box 419947
Kansas City, Missouri 64141-6947
Page 39 of 40
<PAGE>
BY INTERNET: WWW.ONEVALLEY.COM
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about The Arbor Fund, from the SEC's website
("HTTP://WWW.SEC.GOV"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information call 1-800-SEC-0330). You may
request documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section,
Washington, DC 20549-6009. The Arbor Fund's Investment Company Act registration
number is 811-7102.
Page 40 of 40
<PAGE>
OVB FAMILY OF FUNDS
Trust: THE ARBOR FUND
Portfolios: OVB EQUITY INCOME PORTFOLIO
OVB CAPITAL APPRECIATION PORTFOLIO
OVB GOVERNMENT SECURITIES PORTFOLIO
OVB WEST VIRGINIA TAX-EXEMPT INCOME PORTFOLIO
OVB PRIME OBLIGATIONS 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, 1999. A Prospectus may be
obtained by calling 1-800-545-6331.
TABLE OF CONTENTS
THE FUNDS AND THE TRUST S-3
INVESTMENT OBJECTIVES S-3
INVESTMENT POLICIES AND INFORMATION S-4
GENERAL INVESTMENT POLICIES AND RISK FACTORS S-8
DESCRIPTION OF PERMITTED INVESTMENTS S-11
INVESTMENT LIMITATIONS S-27
THE ADVISER S-30
THE SUB-ADVISER S-32
THE ADMINISTRATOR S-32
THE DISTRIBUTOR S-34
THE TRANSFER AGENT S-35
THE CUSTODIAN S-36
INDEPENDENT ACCOUNTANTS S-36
LEGAL COUNSEL S-36
TRUSTEES AND OFFICERS OF THE TRUST S-36
PERFORMANCE INFORMATION S-39
COMPUTATION OF YIELD S-39
May 31, 1999
OVB-F-003-07
S-1
<PAGE>
CALCULATION OF TOTAL RETURN S-41
PURCHASE AND REDEMPTION OF SHARES S-42
DETERMINATION OF NET ASSET VALUE S-43
TAXES S-44
PORTFOLIO TRANSACTIONS S-49
TRADING PRACTICES AND BROKERAGE S-49
DESCRIPTION OF SHARES S-53
SHAREHOLDER LIABILITY S-53
LIMITATION OF TRUSTEES' LIABILITY S-53
5% AND 25% SHAREHOLDERS S-54
EXPERTS S-55
FINANCIAL STATEMENTS S-55
DESCRIPTION OF RATINGS A-1
S-2
<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 Equity
Income Portfolio, the OVB Capital Appreciation Portfolio, the OVB Government
Securities Portfolio (the "Government Portfolio"), the OVB West Virginia
Tax-Exempt Income Portfolio (the "West Virginia Portfolio") and the OVB Prime
Obligations Portfolio (the "Prime Obligations Portfolio") (each, a
"Portfolio," and collectively the "Portfolios"). The Portfolios may also be
referred to as follows: the Equity Income and Capital Appreciation
Portfolios as the "Equity Portfolios," the Government and West Virginia
Portfolios as the "Fixed Income Portfolios" and the Prime Obligations
Portfolio as the "Money Market Portfolio." For ease of reference, the letters
"OVB" have been omitted from the Portfolios' names throughout this Statement
of Additional Information. 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.
Each Portfolio 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.
INVESTMENT OBJECTIVES
The EQUITY INCOME PORTFOLIO -- The investment objective of the Equity Income
Portfolio is current income, with the secondary goal of moderate capital
appreciation.
The CAPITAL APPRECIATION PORTFOLIO --The investment objective of each of the
Capital Appreciation Portfolio is long-term growth of capital.
The GOVERNMENT PORTFOLIO -- The investment objective of the Government Portfolio
is current income consistent with the preservation of capital.
S-3
<PAGE>
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.
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
alternative minimum tax 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. There can be no
assurance that any Portfolio will be able to achieve its investment objective.
INVESTMENT POLICIES AND INFORMATION
OVB EQUITY INCOME PORTFOLIO
The EQUITY INCOME PORTFOLIO will, under normal market conditions, invest at
least 65% of its total assets in dividend-paying common stocks, preferred
stocks, and preferred stocks and debt securities convertible into common stock
of U.S. and foreign issuers. These equity securities may include American
Depositary Receipts ("ADRs") and interests of investment trusts, such as
"Diamonds" and "SPDRs."
Any remaining 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 (an "NRSRO") or is of
comparable quality as determined by the Adviser: (i) U.S. Government securities
(ii) mortgage-backed securities rated in one of the four highest rating
categories, (iii) asset-backed securities rated in one of the four highest
rating categories, (iv) corporate bonds and notes and bank obligations rated in
one of the four highest rating categories, (v) money market instruments, (vi)
warrants and rights to purchase common stocks and (vii) shares of other
investment companies.
The Portfolio may purchase securities that do not pay current dividends but
which offer prospects for growth of capital and future income. The Portfolio is
not subject to any maturity restrictions on its investment in non-money market
instruments.
The Adviser will generally select for the Portfolio, securities of companies
with market capitalizations in excess of $5 billion that provide a level of
income which is greater than the average income provided by the Standard &
Poor's 500 Composite Index (the "S&P 500 Index"). The Adviser also intends to
maintain for the Portfolio an aggregate beta (a measure of a stock's
S-4
<PAGE>
volatility in relation to the S&P 500 Index) and price/earnings ratio less than
the S&P 500 Index average.
All of the equity securities in which the 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.
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, preferred stocks
convertible to common stocks and interests in investment trusts, such as
Diamonds and SPDRs (together, "Equity Securities") of U.S. and foreign issuers.
Equity Securities of foreign issuers may include ADRs. Any assets not invested
in Equity Securities may be invested in money market instruments.
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 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.
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"), including 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."
S-5
<PAGE>
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 an 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, including STRIPs ("Receipts");
(v) repurchase agreements involving any of the foregoing securities; (vi)
investment quality guaranteed investment contracts; (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.
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
and is not a preference item for purposes of the federal alternative minimum tax
("Municipal Securities"). 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 a preference item
for federal alternative minimum tax purposes 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 this Statement of Additional Information.
The West Virginia Portfolio may purchase the following types of Municipal
Securities (including
S-6
<PAGE>
West Virginia Municipal Securities) only if such securities, at the time of
purchase, either have the requisite rating from an 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 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 that 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").
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
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interest and principal component parts of the U.S. Government obligations;
(iv) commercial paper of United States or foreign issuers, including
asset-backed securities 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. and foreign savings and loan institutions
and commercial banks (including foreign branches of such banks) that have
total assets of $1 billion or more as shown on their most recently published
financial statements; (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 and
foreign 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) 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. 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.
GENERAL INVESTMENT POLICIES AND RISK FACTORS
The Equity Income Portfolio and the Government and West Virginia Portfolios
("Fixed Income Portfolios") may purchase mortgage-backed securities ("MBSs").
These Portfolios may purchase MBSs that are U.S. Government securities, and the
Government Portfolio may also invest in privately issued collateralized mortgage
obligations ("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 Equity Income Portfolio may also invest in
privately
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issued CMOs and REMICs that are rated by an NRSRO in one of the four 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."
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 Equity Income, 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 Income Portfolio may also engage in forward
commitments. The Equity Portfolios and the Government Portfolio may engage in
options transactions, and the Equity Income and Government Portfolios 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 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; 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
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 this Statement of Additional Information. In addition, for
temporary defensive purposes when the Adviser determines that market conditions
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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" in this 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 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 any of these
Portfolios may be more suitable for long-term investors who can bear the risk of
short-term principal fluctuations.
The Capital Appreciation and Equity Income Portfolios will invest primarily in
securities of large- and medium-sized 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 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 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
medium-sized companies are likely to be less liquid, and subject to more abrupt
or erratic market movements, than securities of larger, more established
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
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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 Portfolio or the 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 different
accounting treatment than are those in the United States. ADRs, 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 Equity Income Portfolio and
the Fixed Income Portfolios 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 guarantee 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.
DESCRIPTION OF PERMITTED INVESTMENTS
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
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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 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 passthrough 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.
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.
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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 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 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 of 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.
DERIVATIVES
Derivatives are securities that derive their value from other securities. The
following are considered derivative securities: options on futures, futures,
options (E.G., puts and calls), swap agreements, mortgage-backed securities
(CMOs, REMICs, IOs and POs), when-issued securities and forward commitments,
floating and variable rate securities, convertible securities, "stripped" U.S.
Treasury securities (E.G., Receipts and STRIPs), privately issued stripped
securities (E.G., TGRs, TRs and CATS). See elsewhere in this "Description of
Permitted Investments" and "General Investment Policies and Risk Factors" for
discussions of these various instruments.
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
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Portfolio may use futures 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 accurately 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 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.
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
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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, 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, INCLUDING DIAMONDS AND SPDRS
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 a portfolio 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
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investments in the underlying securities.
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."
A Portfolio may purchase Dow Jones Industrial Average Model New Depositary
Shares ("Diamonds") and Standard & Poor's Depositary Receipts ("SPDRs").
Diamonds and SPDRs are securities that represent ownership in long-term unit
investment trusts ("UITs") that hold a portfolio of common stocks designed to
track the performance of the Dow Jones Industrial Average and Standard & Poor's
500 Composite Stock Price Index, respectively. The Portfolios' investments in
Diamonds and SPDRs are subject to limitations on investment in other investment
companies.
The prices of Diamonds and SPDRs are derived and based upon the securities held
by the particular UIT. Accordingly, the level of risk involved in the purchase
or sale of an SPDR is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism for
Diamonds and SPDRs is based on a basket of stocks. Disruptions in the markets
for the securities underlying Diamonds and SPDRs purchased or sold by a
Portfolio could result in losses. Trading in Diamonds and SPDRs involves risks
similar to those risks, described above under "Options," involved in the writing
of options on securities.
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, Fannie Mae and FHLMC. Fannie Mae and FHLMC obligations are
not backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but Fannie Mae and FHLMC securities are supported by the
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instrumentalities' right to borrow from the U.S. Treasury. GNMA, Fannie Mae and
FHLMC each guarantees timely distributions of interest to certificate holders.
GNMA and Fannie Mae 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"). 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
Fannie Mae, FHLMC or GNMA represent beneficial ownership interests in a REMIC
trust consisting principally of mortgage loans or Fannie Mae, 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. Fannie Mae REMIC Certificates
are issued and guaranteed as to timely distribution of principal and interest by
Fannie Mae. GNMA REMIC Certificates are backed by the full faith and credit of
the U.S. Government.
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
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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.
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.
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.
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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
including the risks of the West Virginia economy.
In 1994, the state established a rainy day reserve fund into which 50% of annual
surplus general fund revenues will be deposited until the reserve fund balance
reaches 5% of general fund appropriations. At June 30, 1998, the estimated
balance in the fund was $64.6 million. The state has upgraded its financial
management and reporting practices through its conversion to GAAP-based
accounting. The state also adopted policies to amortize large unfunded accrued
liabilities in its workers' compensation and teachers retirement funds over 40
years.
Based on a 1990 task force report indicating potential fiscal problems for the
state, the state took a number of actions designed to eliminate the projected
deficit, including revenue enhancement measures, such as changes to the Consumer
Sales and Service tax, and reductions in state spending. A General Fund
operating surplus of $53.4 million brought the ending fiscal year 1996 fund
balance to $393.7 million. The unreserved fund balance was $157.1 million.
The Business and Occupation Tax, the Personal Income Tax, the Consumer Sales and
Service Tax, the Minerals Severance Tax, the Corporate Net Income Tax and the
Business Franchise Tax together provided nearly 90% of the revenue for the
General Revenue Fund in the fiscal year ended June 30, 1996. The amounts
collected pursuant to the business registration, cigarette, insurance,
telecommunications, inheritance, other taxes, liquor profits and racing fees
constitute the remainder of the General Revenue Fund.
The federal programs administered in West Virginia are a substantial part of the
operation of state government. Historically, federal grants have either been
part of an ongoing program, limited to a specific project or structured to
institute immediate state action. In all cases, they become due either
temporarily or permanently and are a significant feature of state services and
the budget process.
Since September of 1997, the number of payroll jobs in West Virginia has
increased by 8,300, with the greatest number of new jobs in the service sector.
Small gains were made in manufacturing and construction, although these were not
enough to offset losses in the goods-producing sector and the beleaguered mining
industry. The unemployment rate remained steady at 6.8% in September 1998,
unchanged from a year earlier.
A controversial ballot question, which would have allowed local governments to
issue municipal bonds to help pay for economic development projects, was
defeated in the November elections. The proposal faced opposition from labor
groups, who claimed it would not benefit West
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Virginia's workforce.
Another controversial topic is strip mining, the hotly debated practice that
accounts for one-third of the state's coal production. Mine operators are doing
battle with both government regulators and environmental activists.
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
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.
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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
A put option gives the purchaser of the option the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price 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 the exercise price 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
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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.
Options purchased by a 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.
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 liquid assets 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 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.
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All options written on indices must be covered. When a Portfolio writes an
option on an index, it will establish a segregated account containing liquid
assets 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.
RECEIPTS
Receipts are sold as zero coupon securities which means that they are sold at a
substantial discount and redeemed at face value at 34 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.
A Portfolio will have actual or constructive possession of the security as
collateral for the repurchase agreement. A 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 realizes a loss on the sale of the collateral securities. A
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 SEC. Under these regulations, money market funds may
only acquire 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. A money market fund may invest up to
25% of its assets in "first tier" securities of a single issuer for a period of
up to three business days. The securities that money market funds may acquire
may be supported by credit enhancements, such as demand features or guarantees.
The SEC regulations limit the percentage of securities
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that a money market fund may hold for which a single issuer provides credit
enhancements.
RESTRICTED SECURITIES
The Prime Obligations 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
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
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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.
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 Prime Obligations Portfolio only those
STRIPS that have a remaining maturity of 397 days or less; therefore, the Prime
Obligations 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 Prime Obligations Portfolio.
SHORT-TERM OBLIGATIONS OF STATE AND LOCAL GOVERNMENT ISSUERS
The Prime Obligations Portfolio may, when deemed appropriate by the Adviser or
the Sub-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.
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 DEPOSITS
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
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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, FHLMC, 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, others are supported by the right of the issuer to borrow from the
Treasury, while still others are supported only by the credit of the
instrumentality. 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.
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.
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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 assets 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."
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.
Pursuant to these investment restrictions, no Portfolio will:
1. Purchase securities of any issuer (except securities issued or guaranteed
by the United
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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 Equity Income, Capital Appreciation, 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.
.
4. Invest in companies for the purpose of exercising control.
5. 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
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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.
6. 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.
7. 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.
8. 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."
9. 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.
10. Purchase securities of other investment companies except as permitted by
the 1940 Act, and the rules and regulations thereunder.
11. 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.
None of the Equity Income, Capital Appreciation, 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 Prime Obligations
Portfolio may not invest in illiquid securities in an amount exceeding, in the
aggregate, 10% of its net assets.
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 invest its assets in securities of any investment company,
except as permitted
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by the 1940 Act or pursuant to an order of exemption therefrom.
The foregoing percentages, except with respect to borrowings and illiquid
securities, 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
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. Also, 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 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
is independent of SEI Investments Mutual Funds Services (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, LLP 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."
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.
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, Inc., a multi-bank holding company. One
Valley is the largest holding company headquartered in West
S-30
<PAGE>
Virginia, and provides a wide variety of financial services in multiple
locations throughout West Virginia and Virginia. The Adviser has provided
investment advisory services to investment companies since 1993.
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
investment management accounts, employee benefit funds and personal trust
accounts, managing assets in money market, equity, and fixed income portfolios.
As of December 31, 1998, One Valley's Investment Asset Management Group had
assets under management of approximately $2.3 billion, and currently manages
$431.8 million of assets in 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: Equity Income Portfolio--.74%, Capital Appreciation
Portfolio--.95%, Government Portfolio--.75%, West Virginia Portfolio--.45% and
Prime Obligations Portfolio--.25%. 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 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): Equity Income Portfolio--1.20%,
Capital Appreciation Portfolio--1.02%, 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,
1999, the Portfolio paid the Adviser an advisory fee as a percentage of average
daily net assets of each Portfolio as follows: Equity Income Portfolio--.62%,
Capital Appreciation Portfolio--.70%, Government Portfolio--.47%, West Virginia
Portfolio--.38% and Prime Obligations Portfolio--.15%.
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.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, the Portfolios paid the following advisory fees:
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers (000)
--------------- -------------------
- ----------------------------------------------------------------------------------
Portfolio 1997 1998 1999 1997 1998 1999
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Income Portfolio $112 $346 $ 405 $ 8 $ 18 $ 68
- ----------------------------------------------------------------------------------
Capital Appreciation Portfolio $723 $806 $1,228 $270 $295 $326
- ----------------------------------------------------------------------------------
Government Portfolio $243 $283 $ 394 $183 $119 $148
- ----------------------------------------------------------------------------------
West Virginia Portfolio $200 $378 $ 441 $ 47 $ 43 $ 65
- ----------------------------------------------------------------------------------
Prime Obligations Portfolio $ 82 $ 80 $ 157 $158 $142 $108
- ----------------------------------------------------------------------------------
</TABLE>
S-31
<PAGE>
THE SUB-ADVISER
Wellington Management Company, LLP ("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 April 30, 1999,
Wellington Management had discretionary management authority with respect to
approximately $221 billion of assets. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1928 and to investment counseling clients since 1960. Wellington
Management, 75 State Street, Boston, MA 02109, is a Massachusetts limited
liability 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 by the Adviser, 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 Adviser is based on its
proportionate share of "managed assets." For the fiscal year ended January
31, 1999, the Adviser paid the Sub-Adviser an advisory fee, as a percentage
of average daily net assets, of 0.75%.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, the Adviser paid the Sub-Adviser the following sub-advisory fees:
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers (000)
----------------------------- ---------------------------
Portfolio 1997 1998 1999 1997 1998 1999
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Prime Obligations Portfolio................. $72 $66 $47 $ 0 $ 0 $ 0
</TABLE>
THE ADMINISTRATOR
SEI Investments Mutual Funds Services (the "Administrator"), Oaks, Pennsylvania
19456, provides each Portfolio with administrative services, other than
investment advisory services, including all regulatory reporting, necessary
office space, equipment, personnel and facilities
S-32
<PAGE>
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.
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.
For its services, the Administrator is entitled to a fee, which is calculated
daily and paid monthly, at an annual rate of: (i) .20% of the average daily
net assets of the Portfolios' assets up to $500 million; (ii) .18% of the
average daily net assets of the Portfolios' assets from $500 million to $750
million; (iii) .16% of the average daily net assets of the Portfolios' assets
from $750 million to $1 billion; and .15% of the average daily net assets of
the Portfolios' assets above $1 billion. There is a minimum annual fee of
$75,000 payable to the Administrator by each Portfolio. For the fiscal year
ended January 31, 1999, the Portfolios paid the Administrator the following
administration fees (shown as a percentage of average daily net assets):
Equity Income Portfolio, .20%; Capital Appreciation Portfolio, .20%;
Government Portfolio, .20%; West Virginia Portfolio, .20%; and Prime
Obligations Portfolio, .20%.
The Administrator, a Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interest in the Administrator.
SEI Investments and its subsidiaries and affiliates, including the
Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator
and its affiliates also serve as administrator or sub-administrator to the
following other mutual funds: The Achievement Funds Trust, The Advisors'
Inner Circle Fund, Alpha Select Funds, ARK Funds, Armada Funds, Bishop Street
Funds, Boston 1784 Funds-Registered Trademark-, CNI Charter Funds,
CrestFunds, Inc., CUFUND, The Expedition Funds, First American Funds, Inc.,
First American Investment Funds, Inc., First American Strategy Funds, Inc.,
HighMark Funds, Huntington Funds, The Nevis Fund, Inc., Oak Associates Funds,
The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI
Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
STI Classic Funds, STI Classic Variable Trust, TIP Funds and UAM Funds, Inc.
II.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, the Portfolios paid the following administrative fees:
S-33
<PAGE>
<TABLE>
<CAPTION>
Fees Paid (000) Fee Waivers(000)
--------------- ----------------
- --------------------------------------------------------------------------------
Portfolio 1997 1998 1999 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Equity Income Portfolio $ 33 $119 $109 $0 $0 $ 0
- --------------------------------------------------------------------------------
Capital Appreciation Portfolio $209 $232 $258 $0 $0 $ 0
- --------------------------------------------------------------------------------
Government Portfolio $114 $107 $105 $0 $0 $ 0
- --------------------------------------------------------------------------------
West Virginia Portfolio $110 $187 $196 $0 $0 $ 0
- --------------------------------------------------------------------------------
Prime Obligations Portfolio $192 $177 $126 $0 $0 $ 0
- --------------------------------------------------------------------------------
</TABLE>
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor" OR "SIDC"), Oaks,
Pennsylvania 19456, a wholly-owned subsidiary of SEI Investments Company and an
affiliate of the Administrator, 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 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 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
S-34
<PAGE>
Distributor a fee of .25% of its 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.
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.
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.
For the fiscal years ended January 31, 1997, January 31, 1998 and January 31,
1999, the Class B Portfolios paid the Distributor the following distribution
fees:
<TABLE>
<CAPTION>
Distribution Fees Paid
----------------------
- --------------------------------------------------------------------------------
Portfolio 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income Portfolio $ 1,020 $ 6,995 $12,709
- --------------------------------------------------------------------------------
Capital Appreciation Portfolio $ 8,170 $12,894 $23,096
- --------------------------------------------------------------------------------
Government Portfolio $ 4,017 $ 3,838 $ 4,762
- --------------------------------------------------------------------------------
West Virginia Portfolio $12,693 $17,212 $22,060
- --------------------------------------------------------------------------------
Prime Obligations Portfolio $17,317 $16,933 $16,797
- --------------------------------------------------------------------------------
</TABLE>
THE TRANSFER AGENT
DST Systems, Inc., 330 W. 9th Street, Kansas City, Missouri 64105 (the "Transfer
Agent") serves as the transfer agent and dividend disbursing agent for the
Portfolios under a transfer agency
S-35
<PAGE>
agreement with the Trust.
CUSTODIAN
First Union National Bank, 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.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the independent accountants of the Trust.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during
that period. Unless otherwise noted, the business address of each Trustee
and each Executive Officer is SEI Investments Company, Oaks, Pennsylvania
19456. Certain officers of the Trust also serve as officers of some or all
of the following: The Achievement Funds Trust, The Advisors' Inner Circle
Fund, Alpha Select Funds, ARK Funds, Armada Funds, Bishop Street Funds,
Boston 1784 Funds-Registered Trademark-, CNI Charter Funds, CrestFunds, Inc.,
CUFUND, The Expedition Funds, First American Funds, Inc., First American
Investment Funds, Inc., First American Strategy Funds, Inc., HighMark Funds,
Huntington Funds, The Nevis Fund, Inc., Oak Associates Funds, The Parkstone
Group of Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The
Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax
Exempt Trust, STI Classic Funds, STI Classic Variable Trust and TIP Funds,
each of which is an open-end management investment company managed by SEI
Investments Mutual Funds Services or its affiliates and distributed by SEI
Investments Distribution Co.
ROBERT A. NESHER (DOB 08/17/46) -- Chairman of the Board of Trustees* --
Currently performs various services on behalf of SEI Investments for which
Mr. Nesher is compensated. Executive Vice President of SEI Investments,
1986-1994. Director and Executive Vice President of the Administrator and
the Distributor, 1981-1994. Trustee of The Advisors' Inner Circle Fund,
Bishop Street Funds, Boston 1784 Funds-Registered Trademark-, The Expedition
Funds, Oak Associates Funds, Pillar Funds, SEI Asset Allocation Trust, SEI
Daily Income Trust, SEI Index Funds, SEI Institutional International Trust,
SEI Institutional Investments
S-36
<PAGE>
Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust and SEI Tax
Exempt Trust.
JOHN T. COONEY (DOB 01/20/27) -- Trustee** -- Vice Chairman of Ameritrust
Texas N.A., 1989-1992, and MTrust Corp., 1985-1989. Trustee of The Advisors'
Inner Circle Fund, The Expedition Funds and Oak Associates Funds.
WILLIAM M. DORAN (DOB 05/26/40) -- Trustee* -- 1701 Market Street,
Philadelphia, PA 19103. Partner, Morgan, Lewis & Bockius LLP (law firm),
counsel to the Trust, SEI Investments, the Administrator and the Distributor.
Director of SEI Investments since 1974; Secretary of SEI Investments
since 1978. Trustee of The Advisors' Inner Circle Fund, The Expedition
Funds, Oak Associates Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI Liquid
Asset Trust and SEI Tax Exempt Trust.
ROBERT A. PATTERSON (DOB 11/05/27) -- Trustee** -- Pennsylvania State
University, Senior Vice President, Treasurer (Emeritus); Financial and
Investment Consultant, Professor of Transportation since 1984; Vice
President-Investments, Treasurer, Senior Vice President (Emeritus),
1982-1984. Director, Pennsylvania Research Corp.; Member and Treasurer,
Board of Trustees of Grove City College. Trustee of The Advisors' Inner
Circle Fund, The Expedition Funds and Oak Associates Funds.
EUGENE B. PETERS (DOB 06/03/29) -- Trustee** -- 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. Trustee of The
Advisors' Inner Circle Fund, The Expedition Funds and Oak Associates Funds.
JAMES M. STOREY (DOB 04/12/31) -- Trustee** -- Partner, Dechert Price &
Rhoads, September 1987 - December 1993; Trustee of The Advisors' Inner Circle
Fund, The Expedition Funds, Oak Associates Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Index Funds, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI Institutional Managed Trust,
SEI Liquid Asset Trust and SEI Tax Exempt Trust.
GEORGE J. SULLIVAN, JR. (DOB 11/13/42) -- Trustee** -- Chief Executive
Officer, Newfound Consultants Inc. since April 1997. General Partner, Teton
Partners, L.P., June 1991-December 1996; Chief Financial Officer, Noble
Partners, L.P., March 1991-December 1996; Treasurer and Clerk, Peak Asset
Management, Inc., since 1991; Trustee, Navigator Securities Lending Trust,
since 1995. Trustee of The Advisors' Inner Circle Fund, The Expedition
Funds, Oak Associates Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust,
S-37
<PAGE>
SEI Liquid Asset Trust and SEI Tax Exempt Trust.
MARK E. NAGLE (DOB 10/20/59) -- President, Chief Executive Officer, Controller
and Chief Financial Officer -- President and Senior Vice President of Fund
Accounting and Administration of the Administrator since 1998. Vice President
of Fund Accounting and Administration of the Administrator 1996-1998. Vice
President of the Distributor since December 1997. Vice President, Fund
Accounting, BISYS Fund Services, September 1995 - November 1996. Senior Vice
President and Site Manager, Fidelity Investments, 1981 - September 1995.
TODD B. CIPPERMAN (DOB 02/14/66) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator
and the Distributor since 1995. Associate, Dewey Ballantine (law firm),
1994-1995. Associate, Winston & Strawn (law firm) 1991-1994.
JAMES R. FOGGO (DOB 06/30/64) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments since 1998.
Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998. Associate,
Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler L.L.P.
(law firm), 1993-1995. Operations Manager, The Shareholder Services Group,
Inc., 1986-1990.
LYDIA A. GAVALIS (DOB 06/05/64) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator
and the Distributor since 1998. Assistant General Counsel and Director of
Arbitration, Philadelphia Stock Exchange, 1989-1998.
KATHY HEILIG (DOB 12/21/58) -- Vice President and Assistant Secretary --
Treasurer of SEI Investments since 1997; Vice President of SEI Investments since
1991. Vice President and Treasurer of the Administrator since 1997.
Assistant Controller of SEI Investments and Vice President of the Distributor
since 1995; Director of Taxes of SEI Investments, 1987 to 1991. Tax Manager,
Arthur Andersen LLP prior to 1987.
JOSEPH M. O'DONNELL (DOB 11/13/54) -- Vice President and Assistant Secretary
- -- Vice President and Assistant Secretary of SEI Investments, the Administrator
and the Distributor since 1998. Vice President and General Counsel, FPS
Services, Inc., 1993-1997. Staff Counsel and Secretary, Provident Mutual Family
of Funds, 1990-1993.
KEVIN P. ROBINS (DOB 04/15/61) -- Vice President and Assistant Secretary --
Senior Vice President and General Counsel of SEI Investments, the
Administrator and the Distributor since 1994. Assistant Secretary of SEI
Investments since 1992; Secretary of the Administrator since 1994. Vice
President, General Counsel and Assistant Secretary of the Administrator and
the Distributor, 1992-1994. Associate, Morgan, Lewis & Bockius LLP (law
firm), 1988-1992.
LYNDA J. STRIEGEL (DOB 10/30/48) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI Investments, the Administrator
and the Distributor since 1998. Senior Asset Management Counsel, Barnett Banks,
Inc., 1997-1998. Partner, Groom and Nordberg, Chartered, 1996-1997. Associate
General Counsel, Riggs Bank, N.A., 1991-1995.
S-38
<PAGE>
JOHN H. GRADY, JR. (DOB 06/01/61) -- Secretary -- 1701 Market Street,
Philadelphia, PA 19103, Partner since 1995, Morgan, Lewis & Bockius LLP
(law firm), counsel to the Trust, SEI Investments, the Administrator and
the Distributor.
- --------------------
*Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Trust as that term is defined in the 1940 Act.
**Messrs. Cooney, Patterson, Peters, Storey and Sullivan serve as members of 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, 1999, the Trust paid the unaffiliated Trustees
aggregate fees of approximately $22,414.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Total Compensation
From Registrant and
Pension or Fund Complex Paid to
Aggregate Retirement Benefits Estimated Annual Trustees for the Fiscal
Compensation From Accrued as Part of Benefits Upon Year Ended January 31,
Name of Person, Position Registrant Fund Expenses Retirement 1999(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney, Trustee $4,618 N/A N/A $28,250
- ------------------------------------------------------------------------------------------------------------------------------
(2) Frank E. Morris, Trustee $3,504 N/A N/A $21,500
- ------------------------------------------------------------------------------------------------------------------------------
Robert Patterson, Trustee $4,764 N/A N/A $29,250
- ------------------------------------------------------------------------------------------------------------------------------
Eugene B. Peters, Trustee $4,764 N/A N/A $29,250
- ------------------------------------------------------------------------------------------------------------------------------
James M. Storey, Trustee $4,764 N/A N/A $29,250
- ------------------------------------------------------------------------------------------------------------------------------
William M. Doran, Trustee* $0 N/A N/A $0
- ------------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, Trustee* $0 N/A N/A $0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
(1) Total Compensation for service on one board.
(2) Mr. Morris retired from service effective 12/31/98. Mr. Sullivan was
elected as a trustee on 2/22/99.
* A Trustee who is an "interested person" as defined by the 1940 Act.
PERFORMANCE INFORMATION
The Portfolios may periodically compare their performance to other mutual funds
tracked by mutual fund rating services, to broad groups of comparable mutual
funds, or to unmanaged indices. These comparisons may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
COMPUTATION OF YIELD
S-39
<PAGE>
PRIME OBLIGATIONS PORTFOLIO -- From time to time the Prime Obligations Portfolio
may advertise its "current yield" and "effective yield." Both yield figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" of the 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 Prime Obligations 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:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1.
The current and the effective yields reflect the reinvestment of net income
earned daily on portfolio assets.
The yield of the Prime Obligations 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 Prime Obligations
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, 1999, the Prime Obligations Portfolio
had a current yield of 4.47% and an effective yield of 4.57% for Class A and a
current yield of 4.72% and an
S-40
<PAGE>
effective yield of 4.84% for Class B.
EQUITY INCOME, CAPITAL APPRECIATION, 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 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 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:
6
Yield = 2([(a-b)/(cd) + 1] - 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, 1999, the Class A Portfolios' yields
were 1.73% for the Equity Income Portfolio, 4.92% for the Government Portfolio
and 4.54% for the West Virginia Portfolio.
For the same 30-day period, the Class B Portfolios' yields were 1.50% for the
Equity Income Portfolio, 4.67% for the Government Portfolio and 4.29% 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, 1999, the West Virginia Portfolio's
tax-equivalent yield was 8.42% for Class A and 7.96% for Class B assuming a
combined West Virginia and federal income tax rate of 46.10%.
CALCULATION OF TOTAL RETURN
From time to time, the Equity Income, Capital Appreciation, 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
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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:
n
P (1 + T) = 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 Portfolios from
inception through January 31, 1999 and for the one, five and ten year periods
ended January 31, 1999 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
One Five Ten Since
Portfolio Class Year Year Year Inception
- --------- ----- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Equity Income Portfolio Class A 14.69% N/A N/A 19.10%
Class B (with 12b-1) 14.43 N/A N/A 18.84
Capital Appreciation Portfolio Class A 42.72 21.32 N/A 21.78
Class B (with 12b-1) 42.34 20.98 N/A 21.07
Government Portfolio Class A 7.39 6.39 N/A 6.46
Class B (with 12b-1) 7.12 6.15 N/A 6.24
West Virginia Portfolio Class A 5.47 5.57 N/A 5.87
Class B (with 12b-1) 5.11 5.29 N/A 5.46
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Distributor on a day on which
the New York Stock Exchange is open for business. Shares of the Funds are
offered on a continuous basis. Currently, the holidays observed by the Trust and
the New York Stock Exchange are as follows: New Year's Day, Presidents' Day,
Martin Luther King Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
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
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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
PRIME OBLIGATIONS PORTFOLIO -- The net asset value per share of the Prime
Obligations 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 Prime Obligations 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
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<PAGE>
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.
EQUITY INCOME, CAPITAL APPRECIATION, 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.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Portfolios' prospectus. 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. Shareholders are urged to
consult with their tax advisors with specific reference to their own tax
situation, including their state and local tax liabilities.
FEDERAL INCOME TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following general discussion of certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (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.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Portfolio intends to qualify and elect to be treated as a "regulated
investment company" ("RIC") as defined under Subchapter M of the Code. By
following such a policy, each Portfolio expects to eliminate or reduce to a
nominal amount the federal taxes to which they may be subject.
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In order to qualify as a RIC, a Portfolio must distribute at least 90% of its
net investment income (that generally includes dividends, taxable interest, and
the excess of net short-term capital gains over net long-term capital losses
less operating expenses) and at least 90% of its net tax exempt interest income,
for each tax year, if any, to its shareholders and also must meet several
additional requirements. Included 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) 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 (iii) 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.
Each Portfolio may make investments in securities (such as STRIPS) that bear
"original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the Portfolios must distribute to satisfy
the Distribution Requirement. In some cases, the Portfolios may have to borrow
money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.
Although each Portfolio intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year,
each Portfolio will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If the Portfolios fail to qualify for any taxable year as a RIC, all of their
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
a Portfolio's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
PORTFOLIO DISTRIBUTIONS
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional
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<PAGE>
Shares, to the extent of a Portfolio's earnings and profits. Each Portfolio
anticipates that it will distribute substantially all of its investment company
taxable income for each taxable year.
Each Portfolio intends to distribute to shareholders its excess of net long-term
capital gains over net short-term capital losses ("net capital gains"). Such
distributions are taxable to shareholders who are individuals at a maximum rate
of 20%, regardless of the length of time the shareholder has held their
Portfolio Shares. If any such gains are retained, however, a Portfolio will pay
federal income tax thereon.
In the case of corporate shareholders, distributions (other than capital gains
distributions) from a RIC generally qualify for the dividends-received deduction
to the extent of the gross amount of qualifying dividends received by a
Portfolio for the year. Generally, and subject to certain limitations, a
dividend will be treated as a qualifying dividend if it has been received from a
domestic corporation. Accordingly, it is not expected that any OVB Government
Securities Portfolio, OVB West Virginia Tax-Exempt Income Portfolio or OVB Prime
Obligations Portfolio distribution will qualify for the corporate
dividends-received deduction. Conversely, distributions from the OVB Equity
Income Portfolio and the OVB Capital Appreciation Portfolio generally will
qualify for the corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
October, November, or December of one year, but paid in January of the following
year, will be deemed for tax purposes to have been received by the shareholder
and paid by the Portfolio in the year in which the dividends were declared.
In certain cases, a Portfolio will be required to withhold, and remit to the
United States Treasury, 31% of any distributions paid to a shareholder who (1)
has failed to provide a correct taxpayer identification number, (2) is subject
to backup withholding by the Internal Revenue Service, or (3) has failed to
certify to the Portfolio that such shareholder is not subject to backup
withholding.
Each Portfolio will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Portfolio
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
SALE OR EXCHANGE OF PORTFOLIO SHARES
Generally, gain or loss on the sale or exchange of a Portfolio Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months and otherwise will be short-term. For individuals, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. However, if a
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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 that 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). This loss disallowance
rule will apply to Shares received through the reinvestment of dividends during
the 61-day period.
FEDERAL EXCISE TAX
If a Portfolio fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Portfolio will be subject to a nondeductible
4% Federal excise tax on the undistributed amounts. Each Portfolio intends to
make sufficient distributions to avoid imposition of this tax, or to retain, at
most its net capital gains and pay tax thereon.
STATE AND LOCAL 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. Depending upon state and
local law, distributions by the Portfolios to shareholders and the ownership of
Shares may be subject to state and local taxes. Shareholders are urged to
consult their tax advisors as to the consequences of these and other state and
local tax rules affecting an investment in the Portfolios.
ADDITIONAL TAX INFORMATION CONCERNING THE WEST VIRGINIA TAX-EXEMPT INCOME
PORTFOLIO
The Portfolio intends to qualify to pay "exempt interest dividends" to its
shareholders by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consist of obligations the interest on which is exempt from federal income tax.
As long as this and certain other requirements are met, dividends derived from
the Portfolio's net tax-exempt interest income will be "exempt interest
dividends" that are excluded from your gross income for federal income tax
purposes. Exempt interest dividends may, however, have collateral federal
income tax consequences, including alternative minimum tax consequences, as
discussed below.
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<PAGE>
The percentage of income that constitutes "exempt-interest dividends" will be
determined for each year for the Portfolio and will be applied uniformly to all
dividends declared with respect to the Portfolio during that year. This
percentage may differ from the actual percentage for any particular day.
Exempt-interest dividends may be subject to the alternative minimum tax imposed
by Section 55 of the Code (the "Alternative Minimum Tax"). The Alternative
Minimum Tax is imposed at a rate of up to 28% in the case of non-corporate
taxpayers and at the rate of 20% in the case of corporate taxpayers, to the
extent it exceeds the taxpayer's regular tax liability. The Alternative Minimum
Tax may be affected by the receipt of exempt-interest dividends 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.
The Portfolio intends, when possible, to avoid investing in private activity
bonds. Second, in the case of exempt-interest dividends received by corporate
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they are derived from private
activity bonds, will be included in the corporation's "adjusted current
earnings," as defined in Section 56(g) of the Code, in calculating the
corporation's alternative minimum taxable income for purposes of determining the
Alternative Minimum Tax.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry Shares of the Portfolio will not be deductible for federal income tax
purposes. The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Foreign corporations engaged in a trade or business in the United States will be
subject to a "branch profits tax" on their "dividend equivalent amount" for the
taxable year, which will include exempt-interest dividends. Certain Subchapter
S corporations may also be subject to taxes on their "passive investment
income," which could include exempt-interest dividends. Up to 85% of the Social
Security benefits or railroad retirement benefits received by an individual
during any taxable year will be included in the gross income of such individual
if the individual's "modified adjusted gross income" (which includes
exempt-interest dividends) plus one-half of the Social Security benefits or
railroad retirement benefits received by such individual during that taxable
year exceeds the base amount described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
Shares. "Substantial user" is defined generally as including a "non-exempt
person" who regularly uses in trade or business a part of such a facility.
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.
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<PAGE>
Issuers of bonds purchased by the 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 such covenants.
The Portfolio may not be a suitable investment for tax-exempt shareholders and
plans because such shareholders and plans would not gain any additional benefit
from the receipt of exempt-interest dividends.
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
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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 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.
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
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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 Conduct Rules 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
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 years ended January 31, 1998 and January 31, 1999, the Portfolios
paid the following brokerage commissions with respect to portfolio transactions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Total Brokerage
% of Total Commissions Paid
Brokerage to SIDC in
Total $ Amount of Commission % of Total Connection with Total $ Amount
Total $ Amount of Brokerage Paid to Brokerage Repurchase of Brokerage
Brokerage Commissions Paid Affiliated Commission Paid to Agreement Commission Paid
Commissions paid to Affiliates Brokers Affiliated Brokers Transaction for Research
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity
Income $95,883 $65,904 N/A $3,480 0% 5.28% 0% 5.28% $645 $796 $68,795 $265,086
Portfolio
Capital
Appreciation 395,913 286,876 $33,061 197,235 8.35 68.75 10.47 68.75 1,658 2,433 198,300 221,941
Portfolio
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Government
Portfolio 1,936 0 N/A 0 0 0 0 0 766 788 1,936 N/A
West
Virginia N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio
Prime
Obligations N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio
</TABLE>
For the fiscal year ended January 31, 1997, the Portfolios paid the following
brokerage commissions with respect to portfolio transactions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total $ Amount
Total $ Amount of of Brokerage
Brokerage Commission
Commission Paid Paid to Affiliates
Portfolio 1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity Income Portfolio $67,999 $19,110
- --------------------------------------------------------------------------------
Capital Appreciation Portfolio 216,593 51,252
- --------------------------------------------------------------------------------
Government Portfolio N/A N/A
- --------------------------------------------------------------------------------
West Virginia Portfolio N/A N/A
- --------------------------------------------------------------------------------
Prime Obligations Portfolio N/A N/A
- --------------------------------------------------------------------------------
</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. As of January 31, 1999, the following Portfolios held securities
of the Trust's "regular brokers or dealers" as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Dollar
Amount at
Portfolio Name of Broker/Dealer Type of Security Held FYE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Portfolio ................ Morgan Stanley Repurchase Agreement $2,582,000
- --------------------------------------------------------------------------------------------------------------------
West Virginia Portfolio ............. N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Equity Income Portfolio ............. N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio ...... N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Prime Obligations Portfolio ......... Lehman Brothers Repurchase Agreement $232,092
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
S-52
<PAGE>
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
S-53
<PAGE>
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% AND 25% SHAREHOLDERS
As of May 5, 1999, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% and
25% or more of the shares of the Portfolios. Persons who owned of record or
beneficially more than 25% of a Portfolio's outstanding shares may be deemed
to control that Portfolio within the meaning of the Act. 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.
CAPITAL APPRECIATION PORTFOLIO -- Class A: Kaw & Co., Attn: Securities Cage,
P.O. Box 1793, Charleston, WV 25326-1793, 100.00%.
CAPITAL APPRECIATION PORTFOLIO -- Class B: Aganam Fund Corporation, Windermere
House, P.O. Box 556639, Nausau, Bahamas, 40.00%.
GOVERNMENT PORTFOLIO -- Class A: Kaw & Co., Attn: Securities Cage, P.O. Box
1793, Charleston, WV 25326-1793, 99.93%.
GOVERNMENT PORTFOLIO--Class B: Donaldson Lufkin & Jenrette, Mutual Fund, One
Pershing Plaza, Jersey City, NJ 07399-0001, 6.69%; SEI Trust Company Cust.
IRA a/c Valerie D. Fabry, 87 Mountain Meadow Drive, Morgantown, WV
26508-1710, 5.05%.
WEST VIRGINIA PORTFOLIO -- Class A: Kaw & Co., Attn: Securities Cage, P.O. Box
1793, Charleston, WV 25326-1793, 100.00%.
WEST VIRGINIA PORTFOLIO -- Class B: Willam A. Rice Jr. & Ellen Crites Rice, c/o
One Valley Bank, Attn: Teresa Lightner, P.O. Box 1793, Charleston, WV
25326-1793, 5.56%; Donaldson Lufkin & Jenrette, Mutual Fund, One Pershing
Plaza, Jersey City, NJ 07399-0001, 19.81%.
EQUITY INCOME PORTFOLIO -- Class A: Kaw & Co., Attn: Securities Cage, P.O. Box
1793, Charleston, WV 25326-1793, 99.97%.
EQUITY INCOME PORTFOLIO -- Class B: Donaldson Lufkin & Jenrette, Mutual Fund,
One Pershing Plaza, Jersey City, NJ 07399-0001, 8.64%; James Patrick Shinn,
Estate of Perry Shinn, c/o Susan Singletary, One Valley Bank, P.O. Box 1793,
Charleston, WV 25326-1793, 13.58%.
PRIME OBLIGATIONS PORTFOLIO -- Class A: Kaw & Co., Attn: Securities Cage, P.O.
Box 1793, Charleston, WV 25326-1793, 100.00%.
PRIME OBLIGATIONS PORTFOLIO -- Class B: One Valley Bank, Gain Accounts,
Attn: P. Taylor, P.O. Box 1793, Charleston, WV 25326-1793, 46.49%.
S-54
<PAGE>
EXPERTS
The financial statements incorporated by reference into Statement of Additional
Information have been incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
The audited financial statements of the Portfolios for the fiscal year ended
January 31, 1999, and the Report of Independent Accountants of
PricewaterhouseCoopers LLP dated March 15, 1999, relating to the financial
statements, including the financial highlights of the Portfolios are
incorporated herein by reference.
S-55
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
The following descriptions are summaries of published ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 This is the highest category and indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories.
PRIME-1 Issues rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
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
A-1
<PAGE>
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, 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 form 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:
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- 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.
A-2
<PAGE>
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.
A-3
<PAGE>
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.
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
A-4
<PAGE>
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.
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
A-5
<PAGE>
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.
A-6
