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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-29
THE SUB-ADVISERS...........................................................S-31
THE ADMINISTRATOR..........................................................S-33
THE DISTRIBUTOR............................................................S-35
THE TRANSFER AGENT.........................................................S-37
THE CUSTODIAN..............................................................S-37
LEGAL COUNSEL..............................................................S-37
May 31, 1999
as amended
November 29, 1999
GOK-F-013-02
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INDEPENDENT PUBLIC ACCOUNTANTS.............................................S-37
TRUSTEES AND OFFICERS OF THE TRUST.........................................S-38
COMPUTATION OF YIELD.......................................................S-41
CALCULATION OF TOTAL RETURN................................................S-43
PURCHASE AND REDEMPTION OF SHARES..........................................S-44
LETTER OF INTENT...........................................................S-45
DETERMINATION OF NET ASSET VALUE...........................................S-45
TAXES......................................................................S-46
TRADING PRACTICES AND BROKERAGE............................................S-51
DESCRIPTION OF SHARES......................................................S-55
SHAREHOLDER LIABILITY......................................................S-55
LIMITATION OF TRUSTEES' LIABILITY..........................................S-56
5% AND 25% SHAREHOLDERS....................................................S-56
EXPERTS....................................................................S-57
FINANCIAL STATEMENTS.......................................................S-57
DESCRIPTION OF RATINGS.....................................................A-1
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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 type described below. The Portfolio may invest
up to 10% of its net assets in American Depositary Receipts,
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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 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
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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 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.
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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; 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
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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 76.46%. 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 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
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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 four highest rating categories ("investment grade"); (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.
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.
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
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value of $1.00 per share. There is no assurance that the Portfolio will achieve
its investment objective or that it will be able to maintain a constant net
asset value of $1.00 per share on a continuous basis.
The Portfolio intends to comply with regulations of the Securities and Exchange
Commission applicable to money market funds using the amortized cost method for
calculating net asset value. These regulations impose certain quality, maturity
and diversification restraints on Portfolio investments. Under these
regulations, the Portfolio will invest in only United States dollar denominated
securities, will maintain an average maturity on a dollar-weighted basis of 90
days or less, and will acquire only "eligible securities" that present minimal
credit risks and have a maturity of 397 days or less. For a further discussion
of these rules, see "Description of Permitted Investments."
The Portfolio intends to invest exclusively in: (i) bills, notes, receipts and
bonds issued by the United States Treasury and 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
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AMERICAN DEPOSITARY RECEIPTS ("ADRs")
ADRs are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
may be available through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the underlying security.
Holders of unsponsored depositary receipts generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through, to the holders of the
receipts, voting rights with respect to the deposited securities.
ASSET-BACKED SECURITIES
Asset-backed securities are secured by non-mortgage assets such as company
receivables, truck and auto loans, leases and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain period by a letter of credit issued by a financial
institution (such as a bank or insurance company) unaffiliated with the issuers
of such securities. The purchase of asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. For example, there is a risk that another party could acquire an
interest in the obligations superior to that of the holders of the asset-backed
securities. There also is the possibility that recoveries on repossessed
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 portfolio securities will not affect cash
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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.
FUTURES CONTRACTS AND OPTIONS
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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 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.
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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 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.
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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 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
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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 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.
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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.
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
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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 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
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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.
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
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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 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.
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With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Portfolio's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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
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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 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
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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 15%,
15% and 10%, 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 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
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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 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;
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<PAGE>
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
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
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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 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
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<PAGE>
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 9 and 11 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,
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<PAGE>
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 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.
S-28
<PAGE>
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
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.
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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 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
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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
Golden Oak Prime Obligation Money Market $ 40 $ 34 $ 38 $468 $277 $273
Portfolio..............................................
- -----------------------
</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,
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<PAGE>
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>
Golden Oak Prime Obligation Money Market $127 $104 $104 $0 $0 $0
Portfolio..............................................
</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.
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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 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>
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<PAGE>
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 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.
S-34
<PAGE>
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
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
S-35
<PAGE>
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.
S-37
<PAGE>
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 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
S-38
<PAGE>
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, 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.
S-39
<PAGE>
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.
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.
S-40
<PAGE>
COMPENSATION TABLE
<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
S-41
<PAGE>
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 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.
S-42
<PAGE>
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>
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.
S-43
<PAGE>
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
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
S-44
<PAGE>
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 cost on the date
of purchase and thereafter (absent unusual circumstances) assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuations in general market rates of interest on the value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which a security's value, as determined by this method, is higher or
lower than the price the Portfolio would receive if it sold the instrument.
During periods of declining interest rates, the daily yield of the Portfolio may
tend to be higher than a like computation made by a company with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio securities. Thus, if the use
of amortized cost by the Portfolio resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in the Portfolio would be able to
obtain a somewhat higher yield than would result from investment in a company
utilizing solely market values, and existing investors in the Portfolio would
experience a lower yield. The converse would apply in a period of rising
interest rates.
The Portfolio's use of amortized cost and the maintenance of the Portfolio's net
asset value at $1.00 are permitted by Rule 2a-7 promulgated under the 1940 Act,
provided that certain conditions are met. The regulations also require the
Trustees to establish procedures that are reasonably designed to stabilize the
net asset value per share at $1.00 for the Portfolio. Such procedures include
the determination of the extent of deviation, if any, of the Portfolio's current
net asset value per share
S-45
<PAGE>
calculated using available market quotations from the Portfolio's amortized cost
price per share at such intervals as the Trustees deem appropriate and
reasonable in light of market conditions and periodic reviews of the amount of
the deviation and the methods used to calculate such deviation. In the event
that such deviation exceeds 1/2 of 1%, the Trustees are required to consider
promptly what action, if any, should be initiated, and, if the Trustees believe
that the extent of any deviation may result in material dilution or other unfair
results to shareholders, the Trustees are required to take such corrective
action as they deem appropriate to eliminate or reduce such dilution or unfair
results to the extent reasonably practicable. Such actions may include the sale
of portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity; withholding dividends; redeeming shares
in kind; or establishing a net asset value per share by using available market
quotations. In addition, if the Portfolio incurs a significant loss or
liability, the Trustees have the authority to reduce pro rata the number of
shares of the Portfolio in each shareholder's account and to offset each
shareholder's pro rata portion of such loss or liability from the shareholder's
accrued but unpaid dividends or from future dividends while each other Portfolio
must annually distribute at least 90% of its investment company taxable income.
The securities of the 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 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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 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
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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.
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
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<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
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 Total Brokerage
% of Total Brokerage Commissions
Total $ Amount Brokerage Transactions Paid to SIDC in
of Brokerage Commissions Effected Connection With
Total $ Amount of Commission Paid to Through Repurchase
Brokerage Paid to Affiliated Affiliated Agreement
Commissions Paid Affiliates Brokers Brokers Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999
- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak $98,901 $52,495 $0 $20,430 0% 39.91% 0% 41.77% $985 $1,308
Growth
Portfolio........
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak N/A $3,410 $0 $0 0% 0% 0% 0% $2,854 $3,410
Intermediate-
Term Income
Portfolio........
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak N/A $0 $0 $0 0% 0% 0% 0% N/A $0
Michigan Tax
Free Bond
Portfolio.......
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak N/A $0 $0 $0 0% 0% 0% 0% N/A $0
Prime
Obligation
Money Market
Portfolio.......
- -----------------------------------------------------------------------------------------------------------------------------------
Golden Oak $39,007 $141,248 $0 $62,129 0% 44.12% 0% 37.34% N/A $438
Value
Portfolio.......
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------
Total $ Amount of
Brokerage
Commissions Paid
for Research
- -----------------------------------------
Portfolio 1998 1999
- --------- ---- ----
<S> <C> <C>
- -----------------------------------------
Golden Oak $17,844 $39,308
Growth
Portfolio........
- -----------------------------------------
Golden Oak $0 $0
Intermediate-
Term Income
Portfolio........
- -----------------------------------------
Golden Oak $0 $0
Michigan Tax
Free Bond
Portfolio.......
- -----------------------------------------
Golden Oak $0 $0
Prime
Obligation
Money Market
Portfolio.......
- -----------------------------------------
Golden Oak $36,715 $66,900
Value
Portfolio.......
- -----------------------------------------
</TABLE>
- -------------------------
* Had not commenced operations as of the end of the fiscal year.
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<PAGE>
For the fiscal year ended January 31, 1997, the Portfolios paid the following
brokerage commissions with respect to portfolio transactions:
<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
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<PAGE>
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 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
Amount at
PORTFOLIO Name of Type of Security Held FYE
- --------- Broker/Dealer --------------------- ---
-------------
- ---------------------------------------------------------------------------------------------------------------------
<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
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<PAGE>
liability for obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by or on behalf of the Trust or the Trustees, and because the
Declaration of Trust provides for indemnification out of the Trust property for
any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or
her own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust 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%.
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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 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-57
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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. Paper rated
A-1
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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 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
A-2
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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 class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and
A-3
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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
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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 risk. Capacity for timely repayment
A-5
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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
